China is #2: What does that mean for us?
It鈥檚 official. China is now #2. Its economy (measured in nominal GDP for the second quarter) is now bigger than Japan鈥檚 (according to numbers released today from the Japanese government). And at the rate it鈥檚 growing, China could be the world鈥檚 biggest economy in a little more than a decade (Goldman Sachs says by 2027, PricewaterhouseCoopers says by 2020).
Don鈥檛 be misled by these numbers. The important thing isn鈥檛 China鈥檚 ranking, nor the total value of China鈥檚 production, nor even the extraordinary speed by which China has reached #2.
What鈥檚 most important is the share China鈥檚 production received and consumed by the Chinese themselves. The problem is it continues to drop.
China has dozens of billionaires but the vast majority of the Chinese are still extremely poor. The typical Chinese lives off the equivalent of about $3,600 a year. That puts him behind workers in 126 other countries. (The typical Japanese earns the equivalent of about $39,000; the typical American, $46,400.)
Yes, Chinese employers are starting to respond to new-found demands of Chinese workers for higher wages. But Chinese wages are so meager relative to China鈥檚 productive capacity that it would take a tsunami of labor agitation to push pay up to where it should be.
China is now the world鈥檚 largest market for everything from cars to cell phones 鈥� but that鈥檚 not because these items are within easy reach of the average Chinese. It鈥檚 because, out of 1.3 billion people, a couple of hundred million can save enough to buy them.
If the wages and purchasing power of Chinese households continues to rise more slowly than China鈥檚 capacity to produce goods and services 鈥� more slowly than China鈥檚 corporate profits and the government鈥檚 share of national income 鈥� we鈥檙e all in trouble.
Think of China as a giant production machine that鈥檚 growing 10 percent a year (this year, somewhat less). The machine sucks in more and more raw materials and components from rest of world 鈥� it鈥檚 now the world鈥檚 #1 buyer of iron ore and copper, and close to the #1 importer of crude oil 鈥� and spews out a growing mountain of stuff, along with huge environmental problems.
But because the Chinese consume a smaller and smaller proportion of this stuff, it has to be exported to consumers elsewhere (Europe, North America, Japan) to keep the Chinese working. Much of the money China earns by selling it around the world is reinvested in factories, roads, trains, and power plants that enlarge China鈥檚 capacity to produce far more. Another big portion is lent to or invested in the rest of the world (helping to finance America鈥檚 budget deficit at very low cost).
But this can鈥檛 go on. China鈥檚 workers won鈥檛 allow it. Workers in other nations who are losing their jobs won鈥檛 allow it, either.
The answer is not simply more labor agitation in China or an upward revaluation of China鈥檚 currency relative to the dollar. The problem is bigger. All over the world, we鈥檙e witnessing a growing gap between production and consumption, while the environment continues to degrade. The Chinese machine is fast heading for a breakdown only because it鈥檚 growing fastest.
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