Given all the fanciful prognostications about how China is poised to eat America’s lunch, it might sound odd that the country’s new leader, Xi Jinping, is sloganeering about the need for national “rejuvenation” and “revival.” He is, of course, attempting to harness patriotic sentiments in order to boost the Communist Party’s eroding legitimacy. But his words might well have been an acknowledgement of the daunting array of challenges China now faces.
A regular theme in this blog has been that America’s strategic prospects are being revived by the dynamism of its private sector even as China faces a more problematic future. As earlier posts (here, here and here) have outlined, the marked surge in U.S. oil and natural gas production that has transformed the country’s energy outlook over the last few years promises to have far-reaching economic and geopolitical ramifications. The bonanza of low-cost energy, which the Wall Street Journal dubs “Saudi America,” has also given the U.S. manufacturing sector a significant competitive advantage.
Separate from the energy boom but fortifying its manufacturing effects are America’s innate advantages in what is becoming known as the “third industrial revolution” – one that is powered by high-skill labor as well as seminal progress in the areas of artificial intelligence, robotics, nanotechnology, composite materials, and “additive manufacturing” or three-dimensional computerized manufacturing.
The net effect of these two developments is that U.S. companies are beginning to relocate production capacity back to the United States, a pattern that is reversing some of the outsourcing of the last two decades.
These points have been amplified by a number of developments and observations over the last few weeks:
All of this evidence bolsters the case for America’s strategic future. But what is the argument for believing that the conventional wisdom overrates China’s prospects?
First, it is questionable whether China will be able to replicate the U.S. energy renaissance. China does possess vast shale reserves – thought to be much larger than America’s – and Beijing is making a big push to increase its shale gas output. But the huge Tarim Basin, for example, is located in the country’s remote and rugged northwest, far away from the pipeline networks necessary to carry the fuel to industrial areas as well as the copious water supplies needed for new hydraulic fracturing (“fracking”) drilling techniques. (On China’s serious deficiencies in water resources, see here.) The Wall Street Journal reports that no meaningful exploration has begun in the basin due to its rough terrain and lack of water.
The Sichuan Basin, in the heavily-populated southwest, is the country’s main gas-producing region and is close to the Yangtze River. But while China’s largest energy company has done some exploration work there related to shale gas, according to the Journal it has been reluctant to prioritize these efforts due to the high costs and a lack of access to fracking technology. (Also see this analysis in today’s South China Morning Post.)
There also are sharp institutional constraints at play. Despite increasing efforts to tie up with Western firms, China’s energy sector is dominated by lumbering state-run behemoths that cannot effectively utilize innovative drilling technologies or resolve the daunting problems caused by the country’s complex geology. Government ownership of mineral rights is another inhibiting factor. As the Journal explains in another article this week, the shale energy revolution in North America was brought about “by small, independent companies willing to take enormous financial risks, and helped along by landowners who owned their mineral rights and were ready to sell for a share of the profits.” Because this entrepreneurial model does not exist in many other nations, the article argues that the United States and Canada “could remain the main countries to reap the economic advantages of shale development for some time.”
Just as some expect (here and here) that greater U.S. energy self-sufficiency will result in a general American disengagement from the Middle East, China’s poor prospects for shale energy production may explain its growing involvement in the Persian Gulf as well as its increasingly assertive behavior in the potentially resource-rich waters of the South China Sea.
Turning to broader economic challenges, China is in danger of losing its status as the hub of global production – its main claim to fame – as labor-intensive manufacturing capacity increasingly migrates to lower-wage countries in Southeast Asia (see here, here and here). Many in Beijing are certainly aware the growth model that made the People’s Republic the world’s envy is now sputtering and in need of major overhaul. Six years, Premier Wen Jiabao acknowledged that the Chinese economy was “unstable, unbalanced, uncoordinated and ultimately unsustainable.” But it is an open question whether the requisite political will can be mustered to reform the state-centric model of economic management, especially since the country’s 145,000 state-run companies are not only a key source of wealth and privilege for rent-seeking Communist Party elites but also generate important revenues for all levels of government.
Consider, for example, the reaction to a new World Bank report prepared jointly with the Development Research Center, a high-level think tank in Beijing that is attached to the State Council, China’s top executive body. The report warns that the country’s economic trajectory will be derailed by 2030 if the dominance of clunky state-run enterprises in the national economy is allowed to continue. Highlighting the glaring absence of a vibrant private sector capable of sparking creativity, it bluntly argues that “Innovation is not something that can be achieved through government planning.”
But this message is sharply at odds with the policies pursued for the last decade under Hu Jintao, the departing president, who oversaw a large increase in the reach of state-run companies while blocking the entry of private firms from key industrial sectors, like energy production, power generation, banking and telecommunications. At last month’s party congress, he urged the incoming leadership to “unwaveringly consolidate and develop the public sector of the economy” and to “invest more state capital in major industries in key fields that comprise the lifeline of the economy and are vital to national security.” The top official in charge of state conglomerates underscored this theme and in a rebuke to the World Bank report argued that “Scholars may have different views, but that’s the development need of the enterprises and the state.” (Quotations taken from here and here.) It is doubtful that the new crop of leaders sees things differently.
All of these factors make it very unlikely that China will be able to capitalize on the technological innovations that will power the new era in U.S. manufacturing. Indeed, a counter-narrative is starting to emerge to the “China rising” saga:
This commentary was originally posted on Monsters Abroad. I invite you to connect with me via Facebook and Twitter.
