Thursday marks the 60^th anniversary of the foundation of the People’s Republic of China, and is an opportune time to reflect on where China is going. There is a widespread belief that China is on course for global domination, and this is best captured in the title of a recent book, When China Rules The World, which I reviewed on Risk Watchdog back in August. Less prominent, but hardly worthy of dismissal, are a small group who think that China is heading for a catastrophic collapse. At this moment in time, I feel that the two scenarios are not mutually exclusive. China could indeed experience an economic meltdown within the next decade, but emerge stronger and continue to grow rapidly for some time thereafter.

Things That Could Derail China’s Ascent

• First of all, an economic crisis cannot be ruled out over the next decade or so. China’s growth is heavily driven by fixed-asset investment, cheap credit, and exports, and for all the government’s talk of rebalancing the economy towards private consumption, this will take many more years yet. Meanwhile, the bubble-like conditions in the economy as a result of pump-priming could easily burst or trigger a double-dip slowdown. Thus far, the authorities have skilfully steered China away from crisis, but can they manage this indefinitely? Given that virtually every other major emerging market has undergone a painful crisis or adjustment at some stage, it would be surprising if China can avoid one. Even if a crisis is avoided, China’s growth is likely to cool off over the next decade as the working age population peaks.

• Secondly, China could experience a political crisis if the economy comes a cropper. Even if it does not, the experience of most one-party states (e.g. Russia, Mexico, Brazil, South Korea, Taiwan) has shown that as countries become more developed, they face growing calls for democratisation. China is rare among major economies in that it has not democratised. How (or whether) China manages this transition is one of the great unknowns facing the country. If all goes well, China could gradually democratise over a multi-year period, starting with towns and cities, then provinces, then finally the national level. However, there is at least a chance that the transition could be unstable and even violent, disrupting the economy and frightening investors.

• Thirdly, China’s regional disparities could yet prove highly destabilising. By now you’ll have heard that the coastal regions have been the main beneficiaries of rapid economic growth, while inner and western regions have been lagging. This is not necessarily detrimental to stability, but there are grounds for concern about separatism in Tibet and Xinjiang, which saw violent unrest in 2008 and 2009 respectively. I expect centre-periphery relations to become a key political issue over the coming decades, and it is not unthinkable that China could become federalised like the US, Canada, or the EU.

• Fourthly, China’s demographic outlook could be problematic. China’s population is ageing, but the bigger concern is the ‘surplus male’ problem as a result of the one-child policy and a preference for male babies. Chinese leaders fear that this could prove politically or socially destabilising, if tens of millions of young men who cannot find jobs and wives become radicalised or drift into a life of crime.

• Fifthly, China’s environmental problems and looming water shortages could act as a check on growth. Of course, many rapidly developing countries experience such problems, and these are sometimes tidied up. However, this requires a concerted effort, which in the short term could prove disruptive to economic activity. At this point in time, Chinese leaders are prioritising growth, but at some stage environmental issues are likely to rise up their agenda.

• Sixthly, China could at some stage make a serious miscalculation in its foreign policy, such as by invading Taiwan or taking aggressive action on some other perceived vital interest, that could discredit in internationally or lead to conflict with other major powers that sets it back economically.

The above are just some of the problems China faces. Overall, they are not qualitatively unique, and indeed are common to many developing states. However, they are probably unique in quantity – i.e. on a scale never before witnessed by mankind – and this is what makes them such a colossal challenge for the Communist Party.

China Has Formidable Rivals

Even if China overcomes all of its problems, this does not mean that it will become the dominant global force. India will be a formidable rival, and people should be careful about believing that the US is in decline. Furthermore, in view of how much China has achieved over the past six decades, Africa is surely worth watching.