Will China be the world's economic superpower? And if so, when?

February 12, 2010 | Posted by Chris

Contradictions abound in Chinese society, and perhaps most vivid is the economic paradox. The Chinese economy is, quite literally, an exemplar of both tremendous wealth and extreme poverty, with equally enormous potential for great success and terrific failure.

In 2008, China's economy had the third largest nominal GDP in the world, amounting to $4.4 trillion. However, its GDP per capita ranks it 104th in the world, with each person in China on average earning not much more than $3,000 per year.

According to the Financial Times, mainland China now has more millionaires than the United Kingdom, and total consumer spending was $1.7 billion in 2007. In contrast, total consumer spending in the US for the same period was $12 billion. Also according to the Financial Times, less than .02% of the Chinese people are "wealthy" -- which is defined by an annual income of more than $30,000. In China, being middle class means earning $5,000-$10,000 a year. As the numbers indicate, the dichotomy in China is substantial: while members of the new monied class in Shanghai are chauffeured around in 4-door Porsches, residents of rural villages often subsist on $10-15 dollars a month and spend their entire lifetimes in a radius of ten or twenty miles.

Premier Wen Jiabao succinctly phrased the economic situation of his hugely populated country when he said, "Any small problem multiplied by 1.3 billion will become a huge problem, and any figure divided by 1.3 billion will become a tiny number."

The US economy, which in 2008 had a nominal GDP of $14.4 trillion and GDP per capita of over $47,000, has become very intertwined with the Chinese economy, and at the center of this relationship is the core to the futures of both countries: the ability to innovate.

In brief, the Chinese economy is not yet a source of world innovation, despite the large investments being made toward that end. In The World is Flat, Thomas Friedman has a discussion with Harry Shum, who at the time was the head of Microsoft Research Asia and now is a corporate VP at the company. Shum says that it's easy for students in China to absorb cutting-edge research, but the ability to produce that research is still "ten or twenty years" away.

This is evident in world supply chains that frequently use Chinese manufacturing and American or European branding, because very little value is added in China. It's called a "smiling curve," where high value exists at the beginning and end stages of production and dips in the center. In this curve, the initial high-value is the branding, design and engineering of a product, and the high-value at the end of the curve is retail sales and service contracts. Chinese factories are in the middle of the curve, constituting the low-value dip. For example, in the production and sale of a Chinese-made laptop that runs Microsoft Windows and is sold in the US, only 3-4% of the total value remains in China.

And while no one in China has expected a modern economy to be built overnight, the country has made concerted efforts to be gloabally competitive. Take for example renewable energy, a major industry in which China is innovating. According the New York Times, China is the world's largest maker of wind turbines, having surpassed Denmark, Germany, Spain and the United States last year, and also is the world's largest manufacter of solar panels. In a related article, Friedman quotes Hal Harvey, the CEO of ClimateWorks, who says, "China is moving. They want to be leaders in green technology."

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