Financial Insights

Alan Greenspan: US-China Relations

Dr. Greenspan is Advisors Capital Management’s senior economic advisor.

The key to global economic balance over the next generation will be defined by the increasingly contentious relationship between the United States and China. China is endeavoring to wrench global hegemony from the United States. This conflict was foreshadowed by Xi Jinping’s declaration, shortly after ascending to the leadership of the Communist Party of China, that China would be the dominant world power by 2049, the 100th anniversary of the People’s Republic.

The failure by the United States to effectively deal with the onset of the COVID-19 crisis has only worsened its competitive position in this long-term battle. China is the first major economy to have grown since the onset of the pandemic—an 11.5% rebound in second quarter real GDP, while the U.S. saw an alarming 9.5% decrease during the same period, the largest decline by far in the more than 70 years of published quarterly data. The resurgence of the virus in the U.S. threatens to forestall our economic recovery. And as political tensions heat up between the world’s two largest economies, the balance of power that will result is still unclear, but becoming of increasingly greater concern by the day.

To understand the arrival of China as a world economic super-power, we must first reach back to its emergence from the grip of Mao Zedong following the decade-long Cultural Revolution of 1966. After Mao’s death in 1976, Deng Xiaoping gradually rose to power. In 1978, in response to an extreme drought, Deng created a surprising expansion of agriculture called “China’s Rural Reform” which immediately led to Deng employing what we would now term “capitalist economics” to the Chinese Republic. The results have been spectacular and immediately led to similar initiatives in the nonagricultural sector as well.

China’s embrace of capitalism, albeit “capitalism with Chinese characteristics,” which meant a leading role for the state and the Communist Party under Deng Xiaoping from the late 1970s onward, produced nothing less than an economic miracle, with the Chinese economy growing at an annualized rate of 10.1 percent a year from 1980 to 2010. China became not only the world’s largest producer of labor-intensive goods such as toys, clothes, and electronics, but also the world’s most popular location for multinational transplants.

China’s surge in economic activity following Deng Xiaoping’s adoption of “capitalism with Chinese characteristics” was coupled with a surprising degree of economic liberalism that accelerated through the regime of Jiang Zemin (1989–2002) and his premier, Zhu Rongji. Regrettably, the progression toward ever more liberal regimes has come to a dramatic halt with the recent indefinite extension of Xi Jinping’s presidential tenure.

China’s economy is larger than America’s when judged in terms of purchasing power parity: $27.3 trillion compared with America’s $21.4 trillion as of 2019. Its manufacturing output overtook America’s more than a decade ago. Its exports are 50 percent larger.

China’s current success is happening at a time when the United States sometimes looks as if it has lost its way. America’s politics have taken a populist turn. America sometimes seems to be unhappy with the global institutions (the IMF, the World Bank, the WTO, and even NATO) that it fathered and did so much to reinforce its power in the twentieth century.

The United States will probably enjoy less dominance in the twenty-first century than it did in the twentieth: China will account for a growing share of the world’s GDP, and Europe is unlikely to tear itself apart as it did in the twentieth century. But the United States is still a long way ahead of China in terms of GDP per head: $65,112 versus $10,099 (or $19,504 at purchasing power parity). And it is doing a better job of preserving its share of global GDP than did Europe.

China also shows no signs of replacing the United States as the pacesetter of the global economy. America leads in all the industries that are inventing the future, such as artificial intelligence, robotics, driverless cars, and, indeed,
finance. And for all its problems with populism, America has something precious that China lacks: a stable political regime that both constrains the power of the president and allows for the peaceful transition of power from one leader to the next. So far there are no tales of American billionaires buying political escape-hatch homes in Shanghai or Beijing.

The COVID-19 crisis has presented a real threat to the United States’ position of global dominance. But America has bounced back from previous disappointments. In the 1930s, America suffered from one of the longest and deepest depressions in history. Then it emerged from the Second World War as by far the world’s most powerful economy and entered into twenty years of sustained growth. In the 1970s, however, America’s economy was plagued by stagflation and its companies lost out to those of Germany and Japan. In the 1980s and 1990s, America seized the opportunities provided by the IT revolution and globalization to regain its position as the world’s most dynamic economy. There is good reason to think that America can pull off the same trick again.

America’s problems are problems of poor policy rather than senescent technology. This does not mean that they are insignificant: unless we fix them, the U.S. growth rate will be permanently reduced. But it does at least mean that they are fixable. Some suggest that America is mired in a swamp of low growth. I prefer to think that it is trapped in an iron cage of its own making: out of control entitlements and ill-considered regulations are forcing it to perform well below its potential. Entitlements because they divert resources towards consumption and away from the savings that fund capital expenditure and hence productivity improvement, and regulations because they make the distant future more uncertain, thereby discouraging businesses from investing in projects with long-term payoffs. This is an optimistic vision: swamps by their nature are hard if not impossible to get out of. Cages can be escaped from provided you have the right keys. We have shown that America has all the keys that it needs to open the cage. The great question is whether it has the political will to turn them.

Next month I’ll cover the emergence and impact of the novel coronavirus, the once in a century economic phenomenon, and what we can infer in its patterns to date.


The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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