Practical analysis for investment professionals
18 March 2014

Why China Will Not Dominate the 21st Century

Posted In: Economics

China, notes author and historian Jonathan Fenby, “breeds superlatives.” It is the world’s most populous country (a staggering 1.3 billion inhabitants); its Communist Party is the planet’s biggest political movement; it contains half of the world’s pigs; and its citizens smoke 38% of the world’s cigarettes. But it is also very easy to be swept away by the apparent inevitability of China’s dominance.

And that would be a mistake. The reality, as Fenby tells it, is that the Middle Kingdom is deeply flawed and its dominance is not inevitable. His latest book, Will China Dominate the 21st Century?, published this month, tackles the question head-on. Despite the title, it’s not an open question; rather, it is a treatise on why China will not dominate the 21st Century.

Fenby was editor of the South China Morning Post from 1995–99, during the crucial handover period, and now heads the China team at Trusted Sources, an emerging markets research and consulting firm.

He was recently back in Hong Kong to talk about his book. As a newcomer to the region — and a neophyte when it comes to China — I went to hear what he had to say.

In a brief lecture to members of the Royal Geographical Society, Fenby said no single power can dominate today’s fractured international environment (in the way that Britain then the United States have for over two centuries), and that China, in particular, would be held back by a series of domestic and international factors. The list is extensive, and most likely familiar to you: chronic air pollution, food security, wealth disparity, demographics (aging population), the economy, and the mainland’s uncertain regional and global relationships.

Fenby started out by setting the political scene, noting that Xi Jinping has been steadily accumulating power since being elected to the post of General Secretary of the Communist Party in November 2012. Xi is now:

  • Party general secretary
  • State president
  • Chair of the military commission
  • Chair of the reform commission
  • Chair of the national security council
  • And, most recently (February 2014), head of the central Internet security group

It’s essential to remember that the Communist Party is superior to the government. “People talk sometimes about Xi Jinping as state president and he is state president, he represents China abroad,” Fenby said. “But the important job is the general secretary of the Communist Party, which he got in November 2012. The seven members of the standing committee of the Politburo, which heads the Communist Party, are the top dogs of China, and Xi has established himself over the last 14 months [sic] as the toppest of top dogs.”

Xi “has accumulated more power in those hands than anybody since Deng Xiaoping,” Fenby said. “If he is serious about economic reform — we are not talking about political reform — maybe this will be more effective than what we have seen in the past. . . . You have this concentration of power such that we have not seen in a very long time.”

He added that Xi has been ridding himself of his opponents, including Bo Xilai, the former Communist Party chief in Chongqing, who is now locked away in prison serving a life sentence, along with the network of Zhou Yongkang, a retired member of China’s Politburo Standing Committee, whose associates “have been toppled one by one” under the anti-graft and corruption campaign.

“Xi has shown that however powerful you were, you may be in danger if you are seen as an obstacle for him,” Fenby said.

Fenby said Xi’s “China dream” is to strengthen the Communist Party; foster national unity, meaning above all keeping Tibet and Xinjiang; make the one-party state more efficient; crack down on corruption; improve living standards, especially in the rural economy; modernize the military; and increase China’s regional and global weight (the desire for more regional weight is seen in the escalation of the confrontation with Japan).

Before listing the weaknesses inherent in China, Fenby said he wanted to start with the strengths of the system, “particularly given the nature of China and the number of faults you can find there, whether it’s a solar company not paying its bond interest [a reference to the default by Shanghai Chaori Solar Energy Science and Technology], or whether it’s the demographics, whether it’s the environment, or whether it’s the nature of the system, there are manifold weaknesses but there are also huge strengths which owe everything to Mao Zedong.” Here are the strengths Fenby sees:

  • Economic growth. (“The ‘ism’ that counts in China today is not Confucianism, not Communism, not Maoism, not Marxism — it is materialism,” Fenby said. “This has been the great motor for everything that has gone into China’s growth.”)
  • Relative stability. (He noted that this is “relative” because there are anywhere between 150,000–180,000 protests in China in every year, but they are all small-scale, localized protests over corruption, over land grabs by local officials, over misdemeanors by local police, over bus fares, etc.)
  • National unity, meaning that Tibet and Xinjiang remain part of China. There is this historic myth that China has always been the size it is today, that is has always included Tibet and Xinjiang, that is has always been ruled by the Han, Fenby said. This is “a good narrative” but it doesn’t stand up.
  • Lack of opposition. (“Although I regret saying this in many ways,” Fenby noted. “The Communist Party has made sure there is no opposition. It is the fulcrum of all power, all authority, and all jobs. . . . It is the biggest employment agency in the world.”)

At the same time, there are “great” weaknesses:

  • The enormous imbalances and inequalities in income and living standards, especially between big cosmopolitan, first-world cities such as Shanghai, Beijing, and Guangzhou and the provinces where “you are back in the 19th century.”
  • Concerns about the quality of life. Questions such as: Why do I have to put a face mask on when to work? Why can’t I drink the water? Why can’t I feed my baby infant formula made in China?
  • Environment and demographics. (Falling fertility rates and a shrinking labor force. Plus there is an aging population and a pension system that is “a black hole,” Fenby said.)
  • Agriculture, the challenge of feeding 1.3 billion people when the amount of arable land is shrinking and much of it is polluted.
  • Lack of innovation. China is very good at applying innovations but lags when it comes to domestic innovation.
  • The ethnic minorities in Tibet and Xinjiang. (See: “The Burden of Empire: After a Brutal Attack in China, the Communist Party Needs to Change Its Policies Towards Minorities“)

Fenby noted that China is resource dependent — it needs the oil, minerals, and maybe the food from other countries — and it’s only ally is North Korea. And even though China recently announced its defense budget for 2014 stands at $132 billion, up 12.2% over the previous year, it still lags the United States in overall military power, and America remains the dominant power.

He discussed several reasons why China will not dominate the 21st century, but acknowledged that he would not address the financial system, the debt overhang, the credit addiction, and many other weaknesses. (See: “China’s Debt-Fuelled Boom Is in Danger of Turning to Bust“)

Environmental issues are a major concern. Fenby mentioned that a recent survey found that if you were born this century in China, your life expectancy in northern cities — where the pollution is worst — would be reduced by five and a half years. This month Premier Li Keqiang said China will “declare war” on pollution and that efforts would focus first on reducing hazardous particulate matter known as PM 2.5.)

Add to this is what he calls “the trust deficit” in China — people simply do not believe in the cleanliness of the air, or the water, or in the safety of food production — and the tensions with the so-called “restive regions” of Tibet and Xinjiang.

These issues are compounded by the overarching question of change. “There is now a recognition by Xi Jinping of the need for change, but what change and under what conditions?” Fenby said. “The idea of an independent judiciary is not there. . . . If you do reform, you are basically attacking the status quo. . . . You meddle with the status quo at your peril. Regime preservation takes first place. The nature of the system and the preservation of that system inhibits the kind of change which is needed and becomes a weakness rather than a strength.”

At the end of the lecture, I was left wondering what sort of reaction the book and its message had received. When Fenby’s Hong Kong appearance was announced, the response was so overwhelming that the Royal Geographical Society had to offer the lecture twice, in back-to-back sessions. The first lecture was standing room only. Was this because the audience (mainly ex-pats, from what I could tell) wanted reassurance from his thesis? Or because Fenby is a contrarian?

Jonathan Mirsky, an historian of China and former East Asia Editor of the Times of London, recently penned a review of the book that provided some context.

“If Jonathan Fenby were named Fenbi Zhan and had published this lethal essay in China, he would already be in a cell near Liu Xiaobo, China’s only Nobel Peace prizewinner, now serving 11 years in prison for advocating democracy,” Mirsky wrote. “Fenby’s title, and the book as a whole, takes aim at those — most notoriously Martin Jacques, author of the pro-Beijing When China Rules the World: The End of the Western World and the Birth of a New Global Order, but also other somewhat better-qualified observers — who say that before long China will dominate, if not rule, the world.”

It seems, however, that Fenby’s thinking is not all that contrarian.

Two years ago, Michael Pettis, professor of finance at the Guanghua School of Management at Peking University, spoke at the 65th CFA Institute Annual Conference in Chicago. He took a similarly jaundiced view of China’s long-term economic prospects.

Pettis warned that the engine of growth in China is a familiar model simply taken to a new extreme. He compared China today to Germany in the 1930s; the Soviet Union in the early 1960s; Brazil in the 1960s and 1970s; and Japan in the 1980s. Asked by the audience if his public skepticism about China’s prospects had provoked any negative response from the government in Beijing, Pettis responded that there is a healthy debate about these topics and, in fact, he is not as pessimistic as many others.

Indeed. Other commentators frequently point to the size of China’s domestic security budget as a sign that the country is still a long way from superpower status. If you spend more on domestic security than on the army (as China did in 2011, 2012, and 2103 — and may still be doing now), then clearly the government fears its own people as much as foreigners. This looks like a sign of weakness. (China left out major details from its domestic security budget this year. After three years in a row in which the domestic security budget drew headlines for exceeding the fast-growing military budget, the government this year did not publicize the overall figure despite a stepped-up focus on stability at home.)

Fenby and Pettis are emerging critics of China’s future prospects. The attendance at the Royal Geographical Society is a good indicator of the interest the rest of the world has in the future of China. Regardless of the outcome, we need to watch and understand developments out of the Middle Kingdom.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

19 thoughts on “Why China Will Not Dominate the 21st Century”

  1. jiang says:

    Dumb, myopic Western thinking.

    Social inequality/Quality of life: Irrelevant feel-good values that have nothing to do with the strength of the collective.

    Uppity ethnic minorities: Too small and weak to challenge Han power.

    Innovation/Agricultural resources: No different than Japan or Korea, except on a 1.4 billion man scale. Think that won’t dominate the world?

  2. Bill says:

    Quote from author Paul Thoreaux in his book, “Ghost Train to the Eastern Star”. “China exists in its present form because the Chinese want money. Once America was like that. Maybe this accounted for my desire to leave. Not revulsion, but the tedium and growing irritation of listening to people express their wish for money, that they’d do anything to make it. Who wants to hear people boasting about their greed and their promiscuity? I left for Japan, revelling in the thought that I was done with China – its factory blighted landscape, its unbreathable air, its unbudging commissars and its honking born again capitalists. Ugly and soulless, China represented the horror of answered prayers, a peasant’s greedy dream of development. I was happy to leave.

  3. foubs says:

    Jiang your comment is the best example of Chinese typical denial that could lead the country to a massive disaster

  4. Jing says:

    Why is it that we don’t see any Americans here arguing why US will not dominate this century?
    Why is that we don’t see any Chinese here arguing why China will dominate this century?
    There is an obvious problem of anti-Chinese sentiment in the West.
    If it were up to Westerners, they would never have allowed China to even rise this much.
    Wasn’t leading the world supposed to be a white man’s burden anyway?

  5. Naswar Khan says:

    Yes, China Likely to dominate, as the challenges highlighted by the authors are just pretends.

    Agree with Jiang!!!

  6. Wang says:

    No domination can be stamped without a war. With human beings empowered by new technologies, small countries like Israel (or Japan, compared with China) may already own the possibility to destroy the world. Do we really want any country to dominate the world? We, as the most stupid species in the planet, have been repeatedly fought for the “domination”, to ensure somebody’s names to be printed in the history books, at the cost of the peace of our lives and even the lives of our children.
    As a Chinese, I think Chinese government should focus on solving those problems for its people, instead of dreaming for domination. The exact phrase can also be applied to the United States, Russia, or any country who has such a dream. Whoever can dominate or not, I, as a peasant working to feed the family, do not give it a damn.

    1. ma hon li says:

      [1] Wang – it is good to see an intelligent and insightful comment. Who indeed should want to dominate the world when every country has a lot to do at home. Your comment is appreciated.
      [2] Thanks CFA for fostering an essential variety of views.

    2. Very good comment Wang. I concur this should be the primary responsibility of any government. Most people around the world desire a safe environment (which is a challenge today for a variety of reasons), to have a better life for their children and to be treated fairly. Unfortunately many governments do not operate this way.

  7. Thank you everyone for visiting our blog and offering your viewpoints on Jonathan Fenby’s view of China. We don’t all have to agree with his assessment; the point is to foster a fruitful discussion on the issues he raises.

  8. K B says:

    If our species spends another century concerning itself with dominating one another, there will be nothing more than an apocalyptic hellscape left to rule over. Antiquated hegemonic politics are the exact hurdle mankind faces at this moment in history. Infighting will not resolve the global challenges that threaten our very existence. China’s problems of pollution, food supply, overpopulation, economic imbalances, civil rights and quality of life are found, albeit in differing combinations and degrees, in every other nation on Earth. The scope of our shared problems exceeds that of our political organizations. This disparity is China’s opportunity to lead. It is a new paradigm, not master, that our species and planet require. If China can solve the aforementioned problems domestically, it will position itself to lead on them internationally – should they wish to bother with us barbarians at that point.

  9. Savio Cardozo says:

    Hello Lauren
    Thank you for drawing attention to this persistent question.
    In its current state I do not expect China to a be a force to reckon with because of its persistent human rights abuses.
    A country can only be a superpower if it has the unshakeable support of its people.
    Do you see political and economic immigrants lining up to enter China or the United States?

  10. @Savio Cardozo, check out how many of the Chinese people do support their government at any given moment of time as opposed to the situation in the US of A for example.

    You will be surprised.

    1. Nate Kennan says:

      @ordinary malaysian, your comment has no backing, mostly because China is not a democracy. How on Earth can we know if the government has backing from its people?

      How can we know what the political preferences are of 1.4 billion people with a Communist Party that has just 87 million members? There is no logic in assuming anything about the popularity of the government, aside from the fact that millions of Chinese nationals leave every year, and don’t return. What we do know is this: they definitely didn’t choose any of their leaders, so I doubt those leaders are who they’d prefer in an election.

      Don’t treat the people of China with contempt by assuming that they simply want to be lorded over by a party that won a war 75 years ago against democracy.

  11. B says:

    But almost all our manufacturing is there! Unions have same mentality as CEO’s just not quite as effective at getting an absurd proportion of gross as salary, we have priced ourselves out of being competitive. Guy at top should not make more than 20 times guy at bottom is what unions should fight for. Even though governments keep printing more should treat $$$ as a finite pie.
    China is expanding in south china sea and when we go to war we will lose because they wont sell us any bullets or guns etc, cause all the parts are made in China!

  12. This article has some interesting insights and other than the head line, I think it’s largely on track. I agree that China will not dominate the world the way the U.S. and Britain did for the last 200. Nor will the U.S. dominate the world over the next century the way it has for the last 100 years.

    China has had very impressive and unprecedented growth over the last 25 years. But it has come at a very stiff price in terms of wasted resources, corruption (which is an issue in all countries, but a higher scale there) and misguided polices (again..not only a China issue..the U.S. has had a number of misguided policies the last 15 years).

    Given China’s size, it’s going to be a major player…and that is a good thing. They have some significant issues as this article points out. But as time goes by I’m sure many of them will be addressed. Hopefully their leadership will avoid overplaying their hand.

  13. Nick says:

    Comments along the lines of “Why would anyone want to dominate?” fail to understand basic human nature. Kids want to dominate the playground. Companies want to dominate their markets. Countries want to dominate internationally, whether that is by financial or military means. Only once they have tried, and their people known the terrible cost of failure, do they come to a point of acceptance. We are currently seeing this in the UK: there is no desire to go to war with our neighbours, but we are still jostling, both internally and externally, about our level of power in our interactions with other European nations.

    China is massively misunderstood by Westerners, particularly in the US. One just has to watch US TV to see incredibly insular and racist views towards the Chinese that would simply not be tolerated towards other ethnic groups. There is a sense that it is an unstoppable force, powered by an almost unlimited pool of human capital and a political system – baffling and terrifying to many Westerners – which contains collective power over the individual that we cannot imagine. This image of China entrenches an idea of it as a threat.

    Mr Fenby’s book is therefore hugely valuable, not only as a guide to understanding the challenges facing China, but also in encouraging Westerners to engage with it, rather than simply fearing it.

  14. SHRIKANT TIWARI from INDIA says:

    Also China is going to lose a fight of south china sea against japan and others, with the support of India and America and allies
    This will be a great lose for the country as south china sea is full of valueable resources.
    India’s look east pocily is supporting Japan for their legal water territory for using that area and America is bound to help Japan as they do not want to see Chinese win the race of power and dominating internationally

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