Financial staying power gives China an edge

Gwyn Morgan is the retired founding CEO of Encana Corp.

The highest point on Hong Kong Island still bears its British colonial name. On these rare days when offshore breezes blow away the industrial pollution spewing from the mainland, Victoria Peak offers a spectacular vista toward the fastest-growing economic colossus the world has ever known.

The International Monetary Fund estimates that China's share of the global economy will triple by 2050, surpassing the United States' current share of 22 per cent. It wouldn't be the first time that China will lead the world: Its share of the global economy peaked at more than 30 per cent in the early 1800s, before Europe's Industrial Revolution and the emergence of the Americas displaced the Middle Kingdom economically. Then came subjugation and savagery at the hands of the Japanese during the two world wars, followed by Chairman Mao's brutally disastrous rule, leaving the population traumatized and impoverished.

It is testimony to the resilience and resourcefulness of the Chinese people that, so soon after these terrible times, their country is positioned to lay claim to the paramount role in a new world order of the 21st century. Only 15 years ago, China's manufacturing output was only one-fifth that of the United States. Now, it is about two-thirds and rising; IMF data show a dramatic rise of annual per capita income to $3,180 (U.S.) in 2008 from only $350 in 1990, lifting more than one-third of a billion people into China's standard of middle class.

The 60th anniversary of Mao's declaration of the People's Republic of China featured the obligatory socialist trappings, but the country's current leaders are intensely focused on continuing the market and private-sector reforms that have unleashed an economic miracle. Their biggest worry is how to sustain it: Unless massive numbers of new jobs can continually be created, millions upon millions who have yet to see their lot in life improve will lose hope - and their faith in the Communist party.

The major driver of personal income growth has been mass migration of rural unemployed to the construction sites and factory floors of the big cities. The current downturn resulted in the layoff of up to 30 million of these workers; meanwhile, China's universities and trade schools will graduate 20 million this year, resulting in 50 million of the urban population looking for jobs. This doesn't include the many impoverished millions in the countryside wanting a new future in the cities.

Building the economy isn't China's only challenge. On most days, the view from Victoria Peak to mainland Shenzhen province is obscured by a choking blue haze. Just as coal-fired steam engines drove the smoke-darkened European cities in the Industrial Revolution, China's industrial miracle is driven by coal-fired electric power. Until the downturn of the past year, a new coal-fired power plant was coming online every five days. Annual consumption of thermal coal is about 2.6 billion tonnes and China's coal is "dirty" - contaminated with compounds that yield a noxious soup of gaseous emissions along with airborne, toxic ash particulates, much of which hitches a ride on the jet stream to the west coasts of Canada and the United States.

While the United Nations and G8 continue to pressure China to clean up its act, it is the people of China who will drive the most change, and not only for air emissions. Angered by enforcement officials who either fail in their duties or accept payoffs to look the other way, rural communities are rising up against factories that pollute farmland and poison drinking water. In the new People's Republic of China, it is the people that Beijing's powerful need to fear most.

China's biggest post-recession economic challenge is building domestic consumption to offset a precipitous drop in the export of consumer goods to the West. If Americans have been the world's greatest consumers, the Chinese have been its greatest savers. Given generations of pain and poverty, such prudence is not surprising. Add to this the lack of a social safety net when citizens get sick, lose their jobs or become too old to work, and the challenge of moving the wary proletariat into those futuristic new malls becomes clear.

China's surprisingly buoyant growth, despite a 25-per-cent drop in the export of manufactured goods, is mainly attributable to enormous public stimulus spending. Eventually that will have to end, but what China's treasury has that the United States lacks is financial staying power. China's $2-trillion (U.S.) in foreign reserves stand in sharp contrast to the United States' rapidly growing $8-trillion net national debt. In the competition for global economic leadership, this may be the most important factor of all.