[Viewpoint] Size matters less than quality of growth

The issue of China’s economy surpassing Japan’s is causing much ink to be spilled on what it all means.

Even more important is what it doesn’t mean: greater Chinese purchasing power, longer life spans, better health care and education, freedom of speech, assembly, religion and expression, safer roads and building standards, free elections, clean air and water or social harmony.

It’s great that China is growing 10 percent. Just don’t get carried away about what this moment means. China faces the daunting task of getting per capita income into the orbit of Japan’s, which is 10 times higher. That’s what matters and we’re a decade away from knowing how China will do.

China is altering the global economy, and not always for the better. Two phenomena growing before our eyes are the spread of an authoritarian model and the dominance of the “Wal-Mart economy,” both of which represent a race to the bottom.

No, I’m not betting against China. Only the most cynical and short-sighted among us would want China to fail. A fifth of humanity enmeshed in crisis is in no one’s best interest.

China, though, must beat history. No economic giant has avoided a major crisis. If China is to eclipse the U.S. by 2027 - as London-based Goldman Sachs economist Jim O’Neill predicts - it must grow at today’s rate indefinitely. PricewaterhouseCoopers LLP, the world’s largest professional-services organization, says it will happen in 2020.

At the moment, China’s trajectory is anathema to what Adam Smith taught us about the nature of economic development.

“China legitimizes a market-authoritarian example,” said Stefan Halper, a senior fellow at Magdalene College in Cambridge, England, and the author of “The Beijing Consensus.”

With American-style capitalism in tatters and Europe unraveling, developing nations are clamoring for new role models. Countries from Angola to Myanmar to Venezuela see China’s state-directed capitalism combined with authoritarian rule as a better path than liberalization and democracy.

How you create thriving markets over time without transparency and a free press is beyond me. Wall Street took things too far and acted with shame because of very little oversight. China has the opposite problem.

There’s a reason investors question China’s data. The country somehow comes up with a single figure in a gray economy, a structurally imbalanced system of more than 1 billion people at very different levels of development, and local governments whose budgets rely on reporting rapid growth.

With modest resources, officials settle on one number purporting to capture the daily activities of the nation - almost always within the range of expectations of economists. Try explaining that.

The spread of the “Wal-Mart economy,” an ever-growing effort to mass-produce at the cheapest cost, also bears watching. China’s reluctance to let the yuan strengthen underlines the primacy of its exports. As China grows, so does the scope and efficiency of this trade machine. That would be fine if output were translating into rapid increases in domestic consumption.

It’s not.

There have been rays of hope on that front, such as demands for higher wages for factory workers. There are limits, though, to how much the government will allow income to skyrocket, lest it fuels inflation or reduces competitiveness. The Chinese, like the Germans, will continue to produce more than they consume. Companies are reinvesting much of what they earn in increasing capacity, upgrading their machine.

News reports that China is now the biggest market for cars and cell phones and that LVMH Moet Hennessy Louis Vuitton SA is making a beeline there are deceiving. They suggest vast pockets of consumers can afford such goods. They can’t. China’s purchasing power is growing slower than its ability to undercut all competitors in the production of goods and services.

As China becomes better at churning things out cheaply, other developing nations will be at a loss. Until recently, Asian countries such as Indonesia and the Philippines were ecstatic about China’s growth. Now they see it’s more of a zero-sum game than they anticipated. Expect this dynamic to grow with China’s size. This is a budding, but major, geopolitical issue.

China may have regrets about passing Japan. More will now be asked of its leaders on climate change, North Korea, energy deals that support dodgy regimes, and even human rights.

Size matters less than the quality of growth. China, for example, surpassed Japan in trademark patent filings in 2009. Further progress here means China may well be home to the next Silicon Valley. That is, if the nation’s state-economy model doesn’t smother innovation.

The entrepreneurial potential is a key reason investors are bullish on China. The Japanese are doing lots of soul-searching this week, wondering why they became No. 3. Here’s why: In China, you have 1.3 billion people working hard to circumvent government regulations so they can make a quick yuan. Japan has 126 million complaining about how the government isn’t fixing their lives.

Whatever happens, China has some work to do before it can topple the U.S. from the top slot.

*The writer is a Bloomberg News columnist.

By William Pesek