1. Intro In recent years, discussions between the governments of China and the United States have centered on each country’s external imbalances, large trade surpluses for China and deficits for the United States, and the need for structural reforms to achieve more sustainable patterns of growth in future years. This paper argues that reductions in external imbalances suggest that some restructuring has occurred. However, a more detailed examination of economic developments within each country offers less basis for optimism. China has experienced a large appreciation of its real exchange rate and an external surplus less than half that of the years preceding the global recession. However, the domestic counterpart has been even-higher rates of investment as opposed to lower rates of saving and a more sustainable growth of public and private consumption. For the United States, a reduction in the external deficit has been associated with an extreme contraction of domestic investment rather than increased saving. It is noteworthy that the economic trade between the two countries has become even more unbalanced than in the years before the recession, and the bilateral deficit now accounts for two-thirds of the U.S. global current account deficit.
The concluding section argues that further reduction in the trade deficit through the expansion of U.S. exporting capabilities is critical to its future performance. The section discusses policy changes that would slow the process of shifting production facilities out of the United States and promote improved export competitiveness. Those measures include further devaluation of the dollar, reform of corporate taxation, and increased investments in education and physical infrastructure.

2. Chinese American Economy

A.

For many years the economic dialogue between American and Chinese economic officials has centered on the imbalance of the bilateral trade between the two countries and the divergent trends of their relative performances in the global economy. During the 2000s, China’s exceptional growth was propelled by its oversized external trade surpluses–largest with the United States– that fueled charges of mercantilist behavior as China accumulated ever-larger financial reserves. In contrast, the United States was perceived as being on a consumption binge, with a low saving rate and a large trade deficit that were symptomatic of a country living well beyond its means.

Recently, an extensive volume of research and policy debate has stressed the need for China to broaden the basis of its economic growth model to incorporate a greater emphasis on the development of domestic markets in the future. The disruption of financial markets and the slowing of growth in the advanced economies after the 2008-2009 crisis highlighted the risks to China of its excessive dependence on external markets. The study, China 2030, is one of the most complete discussions of the policy changes required to develop a more sustainable and balanced economy going forward. It emphasizes many themes that have received strong support outside of China: the acceleration of the development of a market-based economy, expanding the role of China’s consumers, and further liberalization of the external sector.
At the same time there has been far less emphasis on the structural changes the United States must undertake to improve its trade performance as part of its efforts to recovery from the recession. Just as China has relied too much on external trade at the expense of developing a market-based domestic economy, the United States focused on its own domestic consumption boom and took little action to reverse the decline in its global competitiveness and the growing evidence that it has become an unattractive location for production. Leading U.S. corporations have shifted large portions of their production overseas, and come to view the United States primarily in terms of its importance as a market.
This paper begins with a discussion of recent changes in the Chinese economy and the prescriptions for economic reforms needed to maintain a high growth rate in the future. However, the primary focus is on the structural imbalances within the U.S. economy and evidence of its weak export performance, particularly with respect to trade with China. Thus, the objective is to outline the structural changes to restore employment in the economy.

A1. Rebalancing China’s Growth

In the immediate aftermath of the global financial crisis, China was properly congratulated for the speed and magnitude of its economic stimulus, and many believed that it had emerged from the global downturn unscathed. However, more recently, economic growth has slowed, and the continued weakness of the global economy has made it difficult to maintain the former reliance on exports as a primary driver of growth. There is a growing recognition of the need to develop a more balanced approach that strives to revert back to the focus on reform and growth of the domestic economy, which characterized China in the years prior to its admission into the WTO. That is a central theme of China 2030, and similar studies calling for a shift in China’s growth strategy. Over the past several decades, China emerged as an extreme example of the East Asian model of economic development. It emphasizes rapid rates of capital accumulation, the drawing of underutilized labor out of agriculture, and the rapid upgrading (or copying) of the technologies available in more developed economies. It also adopted an authoritarian pro-business regime that has suppressed labor demands, channeled financial flows into capital accumulation, and used industrial policies to promote exports. While China has prospered under that model, it has reached the point that it is in need of some major adjustments.
Trade. China’s extraordinary growth performance has now stretched over three decades. But for much of that period, trade was not a primary driver of growth, as the economic reforms focused on the domestic economy. In the decade prior to China’s admission to the WTO in late 2001, trade was a relatively stable share of GDP: merchandise exports averaged 20 percent of GDP and imports 18 percent. However, as shown in figure 1, exports soared to a remarkable 35 percent of GDP by 2006, imports leveled out below 30 percent and the trade surplus reached 7½ percent in 2007. The explanation for the surge of export growth in the 2000s remains a bit of a puzzle. Many of China’s trade partners believed that they had extracted a high price for its admission into the WTO. China was impacted by the 2008-09 financial crisis, but only through the trade channel when its exports fell in parallel with the collapse of global trade. It was largely isolated from the crash of the global financial system. Fiscal stimulus was remarkably successful in restoring domestic growth in 2010-11, except the share of exports in GDP has remained well below the 2006-07 peak and the trade surplus has narrowed dramatically (figure 1). From the external perspective, China appears to have achieved a substantial rebalancing of its economy in line with the stated goals of the G-20. On the other hand, it is important to note that China’s exports have continued to rise as a share of the global total, albeit at a reduced rate–from only 2 percent in 1990 to 4 percent in 2000 and exceeding 10 percent by 2010.

It is instructive to divide China’s trade regime into two distinct components–processing trade and normal trade–that have been evolving in different ways. About half of China’s trade is accounted for by processing activities, which are based on the duty-free import of goods to be assembled and re-exported. The distinguishing features of processing trade are the low contribution of domestic value-added and its domination by foreign-invested enterprises. The processing trade is dominated by foreign invested firms (80%) and it is increasingly focused on the importation of sophisticated parts and components from other countries in East Asia, and using them to assemble computers, telecommunications equipment, and other high-tech goods. The exports are widely diversified by recipient country, but the United States is the largest single destination.

Domestic. It is harder to find evidence of rebalancing within the domestic economy, comparable to that on the external side. We expect the current account balance to move in tandem with narrowing of the gap between national saving and investment; but thus far, the fall in the current account surplus is the result of further increases in what was already an extraordinary rate of investment, rather than a reduced rate of saving. There is little evidence of a restructuring of demand toward a successful promotion of consumption over incestment.

The current rate of investment already seems excessive from a traditional long-run growth perspective in which the capital stock is expected to grow in line with output. A rising capital-output ratio should imply a falling rate of profit. Using the historical average of 10 percent growth in output, a capital depreciation of 5 percent per annum, and the current capital-output ratio of about 2.5, the warranted investment rate would be about 38 percent of GDP. That is well below the 48 percent average investment rate of the last three years, and it would be even lower (32 percent) if the long-term sustainable growth should be as low as 8 percent per annum.

On the other hand, the rate of return to capital has been extraordinary in China and there is little visible evidence of a decline in recent years (Bai and others, 2006). Capital has undoubtedly been wasted in some sectors, but the evidence that China is seriously over-invested is mixed. For example, even though China has experienced a boom in high-income residential housing and an enormous run-up of urban land prices, it continues to have a large deficiency of affordable low-income public housing. While there may be a need to shift the composition of investment away from the large export-oriented enterprises, an expansion of markets for domestic consumption will introduce its own investment demands. Finally, a slowing of investment without a commensurate fall in saving would intensify pressures to revert back to an emphasis on large trade surpluses. A program to rebalance the economy towards the domestic sectors needs to start with a rise in consumption (lower saving), not reduced investment.

B. The United States in China

Surprisingly, the United States is not heavily involved in the Chinese economy. While exports to China have been growing rapidly in recent years, that growth has not matched the expansion of the overall import market, and the U.S. share continues to fall, from 11.4 percent in 2001 to 7.7 percent in 2011.6 Both the European Union and Japan export more to China, but they too have suffered an erosion of market share as China’s trade with other emerging markets expands even more rapidly. Furthermore, direct investments in China have remained at about 3 percent of the U.S. global total. The rate of return on those investments have consistently exceeded those of U.S. investments in other countries, but some of the areas of strong U.S. involvement, such as finance and insurance, are still constrained in China. Manufacturing activity has declined in the United Sates, but it has not been a simple process of moving production facilities to China. Instead, many American firms have shifted away from the prior model of large integrated production units in order to focus on product design and marketing. Thus, they contract with firms that are part of the regional production network in Asia, and undertake little of their own production. Apple computing is a leading example of such a company: it owns no large production facilities in the United States or elsewhere, preferring to contract with companies in Taiwan and Korea who assemble the products in China. But, by controlling key elements in the value chain, Apple extracts most of the value. Similar networks have become common in the market for personal computers. In contrast, Mattel has also closed all of its production facilities in the United States, but continues to operate factories throughout Asia.
Furthermore, from China’s perspective, the United States is an important but not dominant export market. Exports to the United States were 20 percent of the total in 2011, about the same as the US share of global GDP, but the proportion of China’s trade going to the United States has fallen substantially since 2001 when it accounted for 29 percent. The bilateral trade flow is of reduced importance to a rapidly growing China with potential for growth with other emerging markets. China has a large trade surplus with the United States, but many of the exports are in the processing sector where the value added benefits to China are limited.

In general, analysts prefer to adopt a multinational perspective on trade as opposed to an emphasis on the bilateral relationships, but over the past decade the magnitude of the US-China bilateral imbalance has reached extreme levels, and it is hard to ignore the dominant role that China plays in the area distribution of the U.S. external deficit. The distribution of the U.S. current account balance by major region is summarized in table 3. In 2000, the U.S. current account deficit reached $400 billion. About half of the deficit was with Asia, and. the bilateral imbalance with China represented only about a fifth of the total. By 2005, the total had grown to $750 billion and the United States had transaction deficits with nearly every region of the world, and the China share had grown to about 30 percent. In the latter half of the decade, a depreciation of the exchange rate and the recession both contributed to a substantial improvement in the external balance, and the current account deficit fell back below $500 billion.
The United States now has a surplus or near balance with nearly all of the major regions with the exception of China and the major oil producers. And the deficit in oil trade may recede in future years as the United States develops its domestic shale oil and gas supplies. However, the deficit on transactions with China has continued to expand to about $300 billion and it now represents a startling two-thirds of the total.
In part, the imbalance with China has grown because China has invested its large exchange reserves in U.S. bonds, and the interest payments are a substantial component of China’s surplus. However, it is primarily the result of continued growth in imports from China that are now three times larger than U.S. exports to China. Because the magnitude of the initial difference in trade was so large, it continues to rise even though U.S. exports to China are now growing faster than imports in percentage terms.

C. Rebalancing the U.S. Economy
In contrast to the extraordinary growth of the Chinese economy, the United States has seen its economic performance deteriorate in several dimensions over the past decade. And in many respects, its problems are the opposite of those of China. Americans consume too much of their income, perpetually living beyond their means in both the private and public sectors. And for several decades, U.S. firms have devoted little attention to developing their export potential, preferring to focus on a strong domestic market. The decline is particularly marked on the external side
External. The United States has had two major episodes of current account imbalances, one in the early 1980s and the current episode, as shown in the top panel of figure 6. The 1980s’ experience was dominated by a large rise in the real exchange rate in the first half of the decade that priced many American products out of the global market. But it quickly reversed and returned to its former value by 1988. In response to the exchange rate gyrations, the current account swung into large deficit and back to a small surplus by 1990. In subsequent years, however, the U.S. external balance steadily deteriorated, reaching its largest current account deficit in 2006 at $800 billion, or 6 percent of GDP. The exchange rate began to depreciate in 2002 (figure 2), and the cumulative drop reached 30 percent prior to the onset of the financial crisis in the fall of 2008, which triggered a rush back into the safety of dollar-denominated assets and a partial reversal of the prior depreciation. But, the exchange rate remains well below its prior peak, and the current account deficit has receded to about 3 percent of GDP, half the magnitude of 2006. The ongoing weakness of the domestic economy plays a major role in limiting the size of the deficit, which would rise substantially should the economy return to full employment.
Furthermore, the international data suggests that the United States suffers from a deterioration of its competitive position in global markets, and a steady loss of market share. U.S. exports of both merchandise and commercial services peaked as shares of the global total both peaked in 2000, at 12 and 19 percent respectively, and have fallen substantially since then (figure 7). The merchandise trade shares is now below 10 percent and the services share has fallen to 14 percent. The decline in services is particularly surprising because it has long been seen as an area of U.S advantage and the United States still records a surplus relative to its own imports.
Finally, advanced technology products (ATP), particularly in the area of information and communications technologies, fueled the economic boom of the 1990s and a surge of productivity; and ATP exports exceeded imports by an average of 20 percent. By 2011, however, the U.S. trade balance in ATP has swung into large deficit and imports are now about a third larger than exports. While U.S. firms remain competitive in generating IT innovations, and in managing global production chains, they have shifted many of their production facilities (and employment) to other countries or contracted with Asian suppliers.

3. New Cold War ?

A. Public Smiles A combination of deepening strategic distrust (found most notably within the militaries of the two countries), China’s steady acquisition of maritime power projection capabilities, and a growing sense in China of the United States’ economic decline could prod both countries to view Asia as a zero-sum game and look for ways to counter each other’s military actions. If this is to be prevented, the two countries will need to start considering more long-range, strategic communication.
Since the 1990s, China has increased its military spending by an average of more than 10 percent per year as it seeks to modernize its defense forces. Beijing now has close to 50 modern diesel submarines, and is developing a new class of nuclear submarine. China also has new short-, intermediate-, and long-range ballistic missiles—both conventional and nuclear—while its medium-range missiles can already reach many parts of Asia, including Japan and several US airbases. As a result, China’s growing capabilities and its ability to reach beyond its borders are causing concern not just within the Asia-Pacific region, but in the West as well.
China’s neighbors—notably Japan and Southeast Asian nations—are worrying about how they might counter China’s growing ability to regularly deploy forces in the region, and are concerned that China will directly confront other countries over territorial and resource issues in the South China Sea and East China Sea.
In response, Japan is shifting the deployment of its military southward, while Southeast Asian nations are acquiring greater offshore capabilities. They are also looking to the United States—as the region’s dominant military power—to provide a counterbalance to China’s growing power.
And Washington isn’t sitting idle. It is deploying more forces to Guam, reaching a better understanding with Japan about the use of force during crises, increasing surveillance and patrolling along China’s coast, selling more arms to Taiwan to deter Beijing from using coercive means, and engaging in classified efforts to counter China’s missile threat to US warships.
But as the two militaries grow more suspicious of one another, they are driving the competitive and adversarial dimensions of the overall bilateral relationship. The concern is that perceptions on both sides—Washington can increasingly see a more assertive and aggressive China, and Beijing a United States in a prolonged period of decline—will fuel the feeling of strategic rivalry. The assumption that military competition will ultimately lead to a Cold-War type situation is the biggest threat to stability.

B. Conflict resolution

There are things Washington and Beijing can do to avoid this outcome.
First, the two countries must engage in a strategic dialogue at the track-two—or semi-official—level with military and civilian figures outside government. By holding open-ended talks that go beyond the official level, these participants can address the medium- and long-term implications of the current military trajectories and the specific territorial, economic, and political issues driving the countries apart. While leaders won’t officially be involved in the discussions, track-two participants should maintain close contact with them to keep them informed of developments and seek their input.
Second, both sides must sustain and strengthen military-to-military links, as US Defense Secretary Robert Gates signaled during his recent visit to China. These ties must be insulated from the overall ups and downs of the bilateral relationship, to avoid feeding mistrust and curtailing understanding between the militaries.
Third, Washington and Beijing need to assess the military dynamic over Taiwan. China’s military continues to deploy forces along the coast, while the United States continues to sell arms to the island. As time goes on, China will be less likely to tolerate US military aid to Taiwan. Washington should therefore reconsider its current strategy and contemplate broaching a conversation with China about mutual constraint.
Fourth, both militaries should expand ways of cooperating on other security issues. China is already participating in international piracy controls in the Gulf of Aden. Further cooperation in areas such as disaster and humanitarian relief, counterterrorism, or other non-traditional threats would help boost the overall relationship.
All of these steps will involve strengthening the incentives and abilities of both militaries to cooperate, while avoiding the use of worst-case assumptions about the other. It won’t be easy—both militaries will need to make a sustained commitment to communicate frequently, at both the personal and operational levels, and with as much candor as possible. This in turn will require a strong commitment to such military contact on the part of senior civilian leaders on both sides. Unless this happens, however, progress on strategic issues will be limited, hostility could grow, and both sides could become more resolute about defending their respective military objectives.

4. Chinese education (1.3 billion test takers)

China’s current education system is nothing if not impressive. After all, its schools have taught 1.3 billion people to read and write one of the world’s most complex languages. That’s primarily thanks to the nation’s test-oriented system, which guarantees that all Chinese citizens attain the basic knowledge necessary to function in a socialist economy.
But faced with a free market global economy, China is seeing the limitations of this time-tested system. Chinese students may memorize textbooks all day before university entrance exams, but once accepted many quickly revert to World of War craft. Most American students may be no better, but there's still a minority that thrive in the free, open and rigorous environments colleges offer, and go on to become some of the world’s best scholars, thinkers, innovators and entrepreneurs.
As a result, multinationals and Chinese companies alike may find their growth limited by the lackluster nature of Chinese university graduates, many of whom can't find work. Even those who do are often paid no more than migrant workers. Among the myriad threats to China’s continued economic expansion, education is one of the most pressing.
Today, many in China’s rising middle class are choosing to send their children abroad: Current estimates place 128,000 Chinese students in the United States alone. And while most of these students will return to become the country’s next generation of managers and entrepreneurs, the Chinese economy is far too large and diverse to become dependent on such students alone.
Over the next decade, China’s monolithic, top-down education system must change because of increasing social and economic pressure for reform. The next 10 years in Chinese education will be marked by chaos and conflict, which will ultimately lead to a system of choice and diversity.
China’s best universities tend to be stifled by intense bureaucracy, with a party secretary holding the real power and pushing forward his political orthodoxy as a priority. Chinese universities need autonomy and intellectual inquiry to be able to inspire professors and students to engage in cutting-edge research. Therefore, privatization may be a viable solution here, and while it may lead to corruption, some universities will still thrive and rise to global pre-eminence.
What will drive the privatization of Chinese universities? The West’s very best schools entering the China education market. This is already happening to some degree; Duke University recently launched a new campus in China, and the University of Chicago already has a de facto embassy in Beijing.
And although currently Western schools can’t recruit Chinese K-12 students, this policy is likely to relax as the Communist Party realizes a well-educated middle class is fundamental to economic growth and thus to its hold on power.
Perhaps eventually, Western schools with unsuitable business plans will also be drawn into China as well, although with a little luck the market should sort all that out too. But overall, healthy competition from Western schools holds real promise for the rise of better Chinese schools, which will in turn help foster a more vibrant and dynamic Chinese economy.
5. Extreme Inequality in China
A. Civil Reform

While China’s economy continues to storm ahead, events in 2010 (in particular, the harassment of civil rights groups and democracy activists) proved that in other areas, the system remains very repressive. The brutal fact is that in 21st century China, it's still possible to get an 11-year jail sentence for peacefully expressing a desire for political change.
The Communist Party of China has very effectively destroyed all potential sources of organized opposition. It has done this through a combination of inducements to newly rich classes, and threats to those that try to oppose it. And there's little sign that the current political elite have any intention of changing this in the short to medium term. Premier Wen Jiabao has talked about democracy and the need for reform, but very much within the one-party system. Under President Hu Jintao, inner-party democracy has been as far as things have gone. No indications are given for more radical moves in the newest Five Year Plan to run from 2011 onwards. And despite long-term promises for a form of democracy, the taste within China amongst the vast majority of decision makers for Western style, parliamentary systems isn't strong. They are seen as inappropriate for China’s needs and its future development.
Whatever reforms might happen in the coming years, therefore, are likely to focus on building stronger rule of law, institutional safeguards against abuse of power and a system that is able to deal with the increasing contention in society as it grows richer and more unequal, so that instability is avoided. On this, at least, there is at the moment reasonably broad consensus. And the continuation of the dominance of the Communist Party is seen as central to the delivery of these aims.
Civil society is growing increasingly important, with government withdrawing from large areas of activity, allowing groups to be active on the environment, care of the elderly and the poor and educational provision. In the next five years, however, the Communist party and the government will come under increasing pressure to give civil society groups proper legal status, rather than continuing with the complex and ambiguous arrangements that exist at the moment. The sheer complexity of society as it develops towards middle income status by 2020 (this is the stated aim of the government) will mean that civil society groups will become more various, and their work will be far more needed. The current restrictions on their activities have already been challenged several times at the National People’s Congress, China’s parliament, and are likely to be revised so that they are fit for purpose.
All of the above is predicated on a China able to deliver decent economic growth in the years ahead, and one which is able to enjoy a peaceful, stable international environment. In the case of a severe upset, such as unexpected international conflict, a pandemic that severely affects China or an uprising amongst the more disaffected groups in society such as farmers or poor urban dwellers, the outcomes would be highly unpredictable. China continues to face enormous challenges to how it governs itself and develops as a society. It also has to deal with a rapidly aging population, an energy-hungry economy and an environment depleted by decades of rapid growth and industrialization. While on balance, China is likely to develop politically and socially in the decade ahead, recent history has proved that it is always wise to expect the unexpected, especially as China now enters a crucial phase of its transition, where GDP growth is no longer the sole priority, but far more complex outcomes have to be encountered.

B. The Few and the Many

During a round table with business leaders during Chinese President Hu Jintao’s visit to the United States in January, US President Barack Obama stated optimistically that ‘With China’s growing middle class, I believe that over the coming years, we can more than double our exports to China and create more jobs here in the United States.’ To be sure, that is a reasonable expectation. When other Asian economies like Japan and Korea grew toward the GDP per capita level of $10,000, sizable middle class populations did indeed emerge.
However, when looking under the bonnet at China’s economic engine, it’s clear that a growing middle class with rising disposable income and consumption is missing. Instead, there’s an economy that is still dominated by state owned firms and state-led investment, as well as by rapidly rising inequality. Instead of an enlarging urban middle class, China is increasingly splitting into a small upper class that spends freely on luxury goods, and a remaining population whose earnings and savings are eroded by inflation and state confiscation.
The underlying dynamics are clear in a recent statistical release by the government. First, real urban disposable income rose a comparatively tepid 7.8 percent in 2010, despite economic growth of nearly 10 percent. However, urban retail sales of consumer goods grew 14.5 percent. While the growth of consumption is good for China's economy, the pattern of this growth suggests rising inequality.
The biggest growth in consumption included jewellery (46 percent), furniture (37 percent), cars (34 percent) and construction material (34 percent). Essentially, these are items related to the spending of the upper class. These ‘consumer’ goods also made up 33 percent of all retail consumption in China. The large size and strong growth in luxury items implies that grey income was substantial in 2010, as suggested by a Credit Swiss report authored by Prof. Wang Xiaolu.
In this report, released last year and based on a survey of urban households in 2009, Wang found nearly 1.5 trillion dollars in grey income unreported in the official household income numbers. He further found that over 60 percent of this grey income accrued to the top 10 percent of households. The latest numbers also suggest that while income of normal households likely grew at around 8 percent, the top 10 percent of households may have seen income growth above 25 percent.
A growing middle class is also absent among recent college graduates. According to the Ministry of Education, only 68 percent of college graduates in 2010 were able to find permanent employment. Even among those who found employment, wages were often no better or sometimes even worse than those for migrant workers in factories. Unlike the rest of the world, however, China enjoyed a spectacular 10 percent growth rate. This impressive growth, however, didn’t translate to high paying jobs for college graduates. In major cities, many college graduates live as an ‘ant tribe,’ packed tightly in small dormitory rooms with four or more roommates. And, lest we begin to think of China as a dynamic market economy, the latest data showed that of the 27.8 trillion yuan in fixed asset investment, 15 trillion was accounted for by investment undertaken by state-owned enterprises or investment in real estate. Even among the ‘joint stock’ firms, many are actually state-controlled. Thus, at least in terms of investment, the state still controls the lion's share. Meanwhile, well-financed state owned enterprises have nationalized firms in the coal, automobile, and steel industries in recent months, meaning competition and efficiency in these sectors might actually have suffered from large-scale, state-led investment.
Why does China have an economy that is highly unequal and dominated by the state? The answer is quite simple when considering China’s political system and contemporary history. Despite economic reforms that liberalized goods markets and the labor market, the state continues to hold a tight grip over most of the financial institutions. The financial sector in essence takes money from foreign exchange earnings and from household savings and channels it to state-owned firms controlled by the central or local government. Having little choice, households in China must deposit money in the state banks, and when there’s inflation as there is today, they earn a negative real interest rate from the banks because the government fixes deposit rates at a level that is below inflation. Meanwhile, real estate developers with political connections and large state-owned enterprises can borrow money at interest rates that are near zero in real terms. In effect, the Chinese financial system channels wealth from ordinary households to a small handful of connected insiders and state-owned firms. To be sure, other Asian countries have also pursued this state-led financing model. But China has pursued it for the longest period of time. Meanwhile, there’s still no liberalization of the financial sector in sight.
At the local level, local governments confiscate the other major source of wealth—land and real estate holding—often giving residents illegally low compensations. Without political accountability and elections, ordinary people can do little to change what amounts to property theft. Even escalating welfare spending in recent years can’t make up for the large transfers of income and savings from ordinary households to the wealthy and connected, which are shaped by government policies.
As a result of all this, ordinary households actually get poorer in relative terms and even in absolute terms. Meanwhile, although growth appears robust, the nature of the growth has changed over time. As Yasheng Huang at the MIT Sloan Business School has documented in his Capitalism with Chinese Characteristics, the healthiest period of growth in China was in the 1980s, when farmers made and sold light manufacturing goods and agricultural outputs to rapidly emerging goods markets. Into the late 1990s, however, China ‘restructured’ its banks so that they could continue to channel cheap loans to state-owned behemoths, now even larger due to consolidation in the 1990s. Growth from that point increasingly relied on net exports and state-led investment and decreasingly on household consumption. Although growth of this sort can continue for a few more years, the vast majority of China’s population won’t see many of the benefits.

6. Conclusion
In the current state China is able to compete with the U.S. and may overcome it as the greatest Economy and superpower on the globe, but not for long. The communist party does not mix well with people of growing financial freedom as well as increased exposure to other nations with other way of thinking. As well as the increased outrage of American citizens with Chinas continuous thievery of American ideas through trademark infringement and cyber thievery. In the simplest terms if China does not modernizes itself and change with its economy it will implode.