July 15, 2015
Dallas, Texas
© Paul Tiffany & Associates
China vs. the United States:
Is There an End-Game in Sight?
Part 1
Paul Tiffany, PhD
Haas School of Business,
University of California, Berkeley
© Paul Tiffany & Associates
China
vs.
USA
Where Are Things Headed?
This…
or this?
= Mutually beneficial economic
growth and development…
= Inevitable military confrontation.
© Paul Tiffany & Associates
The Global Economy in 2015
We Are
Here!
Global GDP: c. $107T in PPP. 2014 global GDP growth: 2.6%; 2015 projected
2.8% (though double-speed: 2.0% for advanced countries and 4.4% for EM
nations). Global Population: approximately 7.2 billion people at the end of
2014.
(Source: World Bank, IMF, CIA World Factbook, others)
© Paul Tiffany & Associates
World’s 21 Largest Economies
(January 2015 est. in USD Trillions)
Rank - Country
World
__2015 GDP (PPP)
$107,000,000,000,000*
1 China
$18.976
2 USA
$18.125
3 India
$ 7.997
4 Japan
$ 4.843
5 Germany
$ 3.815
6 Russia
$ 3.458
7 Brazil
$ 3.259
8 Indonesia $ 2.840
9 UK
$ 2.641
10 France
$ 2.634
(Blue = EM country)
Rank - Country
10
11
12
13
14
15
16
17
18
19
20
21
_ 2015 GDP (PPP)
Mexico
Italy
So. Korea
Sa. Arabia
Canada
Spain
Turkey
Iran
Australia
Taiwan
Nigeria
Thailand
$ 2.224
$ 2.157
$ 1.854
$ 1.668
$ 1.640
$ 1.619
$ 1.569
$ 1.354
$ 1.137
$ 1.125
$ 1.009
$ 1.031
(no other country over $1 trillion PPP)
Source: http://knoema.com/nwnfkne/world-gdp-ranking-2015-data-and-charts
* Global GDP is World Bank estimate for 2015.
© Paul Tiffany & Associates
World GDP Growth
Annual % - 2005-2014
6%
4.1%
4.1%
4%
3.6%
E 2.8%
2.6% for
2015
3.9%
2.8%
2%
2.3%
2.3%
2012
2013
1.5%
0
-2%
-2.1%
2005 2006
2007
Source: World Bank
2008
2009
2010
2011
2014
© Paul Tiffany & Associates
World Population | 20 Largest Countries
(July 2014 est.)
Rank-Country
World
World
Pop.
7,295,000,000
1. PRC (China) 1,393,784,000
2. India
1,267,402,000
3. USA
322,583,000
4. Indonesia
252,812,000
5. Brazil
202,034,000
6. Pakistan
185,133,000
7. Nigeria
178,517,000
8. Bangladesh 158,513,000
9. Russia
142,468,000
10. Japan
127,000,000
% of
100%
19.10%
17.05%
4.42%
3.46%
2.76%
2.69%
2.41%
2.28%
2.02%
1.80%
Rank-Country
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Pop.
% of World
Mexico
123,799,000
Philippines 100,097,000
Ethiopia
96,506,000
Vietnam
92,548,000
Egypt
83,387,000
Germany
82,652,000
Iran
78,470,000
Turkey
75,837,000
Congo
69,360,000
Thailand
67,223,000
1.63%
1.47%
1.29%
1.30%
1.18%
1.13%
1.12%
1.12%
1.04%
0.95%
#21-22-23: France, UK, Italy, all in low
60 million population range, while #2425-26 Burma, South Africa, and
Tanzania are the only other countries
over 50 million pop.
Source: http://www.worldometers.info/world-population/population-by-country/
© Paul Tiffany & Associates
Projected Population Growth:
Where Will the Resources Come From?
Projected Global Population Growth to 2050
2015:
7+ Billion
X
2040
2020
2050
2030
2010
2000
1990
1980
1900
1910
1920
1930
1.65
1.75
1.86
2.07
1940
1950
1960
1970
Population in Billions of People
2.30
2.54
3.03
3.70
4.45
5.29
6.12
6.91
7.67 8.32 8.82 9.19
Source: United Nations data
© Paul Tiffany & Associates
Henry Luce’s Visionary
“American Century”
“The American Century”– the 20th
Century– was a term coined by
Henry Luce, co-founder and publisher
Of Time Magazine, Life, etc.
(cf. “The American Century,”
1941 essay in Life magazine).
Luce was born in China, the child
of American missionaries, and lived
there the first 15 years of his life.
© Paul Tiffany & Associates
A “Lesson” from the Past?:
Modern World History for Dummies
► Spain and the 16th Century
► Holland and the 17th Century
►France and the 18th Century
► Great Britain and the 19th Century
► America and the 20th Century
Who will be the dominant power in XXI Century?
© Paul Tiffany & Associates
Why Is This Shift Happening…
And Happening Now?
 Globalization
– Political and economic factors that drove change
 Technological Change
– Constant and globally ubiquitous today
 Inevitable Shifts in Global Power
 No nation dominates forever- fatigue factors
 Unpredictable Long-Term Outcomes From
Short-Term Economic Decisions
– Pursuit of short-term profit seeking by firms…
regardless of national political consequences
© Paul Tiffany & Associates
But Has China’s Economic Growth
Finally Peaked?
© Paul Tiffany & Associates
Mao’s People’s Republic of China
Mao in1949, shortly after
the defeat of Chiang
Kai-shek (President of ROCthe Chinese Nationalists)
and their defection
to Taiwan
Source: Time (February 7, 1949)
Geographic Size of China
Compared to USA
© Paul Tiffany & Associates
Deng Xiaoping and the Building of Today’s
Industrial China
Deng in October 1984, on
the rostrum at Tiananmen
Square, addressing a rally
held in celebration of the
35th anniversary of the
founding of the Peoples
Republic of China
© Paul Tiffany & Associates
President Jiang Zemin
and the Rebirth of Shanghai
In 1985 Jiang was
appointed Mayor of
Shanghai, and in 1993
he became President
of the People’s Republic
of China. Under his
leadership, Shanghai
was transformed into
the world’s most modern
City.
© Paul Tiffany & Associates
Hu Jintao… and His Legacy of Economic
Growth and Massive Corruption
Hu Jintao, general secretary
of the Communist Party of
China and Chinese President,
was elected chairman of the state
Central Military Commission
(CMC) in Beijing in March 2004
The legacy….
huge economic
growth, and
massive
corruption by
Party officials.
"History indicates that indiscriminately copying Western
political systems is a blind alley for China," said Mr. Hu
at a ceremony observing the 50th anniversary of the partycontrolled legislature in September 2004. Hu pointed to
the failure of "China's bourgeois republic system" under
Sun Yat Sen's some 60 years ago as proof that China is not
suited to democracy [emphasis added].
Source: Pekingduck website (September 16, 2004)
http://pekingduck.org/archives/001760.php
© Paul Tiffany & Associates
Shanghai
The World’s Most Modern City
© Paul Tiffany & Associates
And Others Too: Beijing as a Modern
Metropolis of Skyscrapers
(There are 160 cities over 1 million official population in China. Those over 5 million
population: Shanghai, Beijing, Guangzhou, Shenzhen, Tianjin, Chongqing, Dongguan,
Nanjing, Wuhan, Hangzhou, Shenyang. [Officially, only one in USA: New York City.])
Shenyang
Guangzhou
Nanjing
© Paul Tiffany & Associates
Chinese SOEs and Political Corruption
Some 203 of China’s richest 1,300 citizens, about 15%, are delegates to the nation’s Parliament
(National People’s Congress and the Chinese People’s Political Consultative Congress, which
have a total of 5,200 representatives).
● For these 203, their combined net worth is estimated at $463.8 billion.
● Eighteen of these 203 parliamentarians individually have a net worth
greater than the combined reported wealth of all 535 members of the United
States Congress, the nine members of the Supreme Court, and the 23 members of
President Obama’s cabinet.
A major source of this wealth is from Chinese state-owned enterprise (SOE).
● While accounting for a relatively small proportion of total manufacturing, in
key sectors these SOE’s still dominate the economy, such as in automobiles,
information technology, petrochemicals, aviation, insurance, energy, banking,
railways, media, shipping, construction, metals, industrial chemicals, as well as
emerging high-tech sectors like biotech and avionics.
● While the total number of SOEs are declining, there are still more than 155,000 in
the country employing well over 50 million workers directly, and tens of millions
more indirectly.
While some generate good returns, most of them underperform private firms or operate at a
loss and have heavy debt loads– but serve as the source of wealth of the country’s CCCP elite
political leadership.
© Paul Tiffany & Associates
The Formal Structure
But What You Don’t See!
of China Telecom ----------------------------------CPC Leader
BOARD
CHAIR
& CEO
Communist Party of
China
PRESIDENT
SECRETARY
EVP
CFO
The primary telecoms firm in the nation is China Telecom, with
approximately RMB 325 billion revenue ($54B) in 2014 and
nearly RMB 20 billion net profit ($3.3B). The firm has about
200 million mobile and over 250 million fixed line subscribers
and employs more than 300,000. It’s traded on the NYSE as
well as the local Chinese exchange. However, less than 20%
of the shares are privately owned as the majority is controlled
by the Government (that is, the CPC) and local investment
groups affiliated with regional government entities and
agencies. The Party boss must approve any significant policy
change or decision by the firm’s formal management.
© Paul Tiffany & Associates
And Now… A New Leader
Has Ascended to the Presidency
Mr. Xi Jinping, a son of a
revolutionary leader (a socalled “princeling”) was
chosen as president at the
CCP 18th National Congress
that convened on November
8, 2012. Like most Chinese
leaders, we know relatively
little about him and
how/why he was picked for
his new post. How does he
see current and future PRCUSA relations?
Good question!
Meeting President Obama
at the White House in
2012, will visit the US in
September 2015
Mr. Xi’s wife
(his 2nd), one
of China’s
most famous
singers.
© Paul Tiffany & Associates
So What Does President Xi
Want for China? Fact…, or Fiction?
“The hope is that Xi is a reformer who will guide China through domestic
transformation and to responsible statecraft. The fear is that Xi is a nationalist, who
has set China on an aggressive course of bullying its neighbors and confronting the
United States.”
R. Kuhn, “Xi Jinping’s Chinese Dream,” NYT (6-4-13)
“The Chinese Dream,” Xi has said, is “the great rejuvenation of the Chinese nation.”
Xi’s Chinese Dream is described as achieving the “Two 100s” -- the material goal of China
becoming a “moderately well-off society” by about 2020 (100th anniversary of the Chinese
Communist Party) and the modernization goal of China becoming a fully developed nation by about
2049 (100th anniversary of the People’s Republic). The Chinese Dream has four parts: Strong
China (economically, politically, diplomatically, scientifically, militarily); Civilized China (equity
and fairness, rich culture, high morals); Harmonious China (amity among social classes);
Beautiful China (healthy environment, low pollution). “A moderately well-off society” is where all
citizens, rural and urban, enjoy high standards of living. This includes doubling the 2010 G.D.P. per
capita (approaching $10,000 per person) by about 2020 and completing urbanization (roughly one
billion people, 70 percent of China’s population) by about 2030. And… he wants respect for China
as a global superpower.
© Paul Tiffany & Associates
China Today
Key Drivers:
∙ Large Population (1.34 billion people; but growth
rate of 0.44% is ranked 153 in the world)
∙ Determined Savers (30%+ household savings rate)
∙ Economic Dynamism, many competitive markets
∙ Disciplined Labor Force (c. 800 million workers)
∙ Rising Level of Education (engineering,
technology, sciences, business management;
c.7 million total college graduates in 2014)
∙ A Will to Win (nationalist pride: “The ‘century
of humiliation’ is over; now it’s our turn”)
© Paul Tiffany & Associates
China’s Economy in 2015
• 2014 GDP: $11.4 trillion nominal, $18.6 trillion in PPP (but be careful of all PRC stats!).
• 2014 GDP growth was 7.4%– lowest since 1999; 2015 projection now 6.8%.” But China’s
GDP has grown by over 63% over the past five years.
• P/C GDP was c. $11,906 in 2013, ranks 118 in world; the goal is to match advanced
economies by 2050– now is <1/5 of USA p/c income. And income distribution is uneven,
especially between rural western provinces and rich coastal provinces (though Gini
coefficient of 41.5 is about the same as USA).
• The PRC is now world’s largest economy in PPP (moved ahead of USA in 2014).
• Since unlocking RMB in 2005, currency has risen c. 20% + to USD (though currently
fluctuating due to central bank policy maneuvers).
• Personal consumption only c. 35% of GDP (vs. c. 67%+ in USA, 50-60% in Europe).
• Exports still dominate the economy (c. 35%+ of GDP, or c. 3X more than USA).
• Forex reserves and gold holdings of $3.84 trillion at end of 2014.
• Labor force is approximately 795 million people (40% in agriculture); China needs to add 15
million jobs annually to maintain growth targets.
• QUESTION: Will inflation remain under control and/or will a financial
and/or housing bubble burst in 2015? (E.g., Shanghai Exchange in a
downward trend after massive expansion fueled by speculation; still
millions of unoccupied apartments and structures.)
© Paul Tiffany & Associates
China’s Residential Property Bubble Seems
to Have Broken…
© Paul Tiffany & Associates
Shanghai Stock Exchange A-Share Index
(Mid-2011 to Mid-2015)
A Bubble?
2011
2012
2013
2014
2015
© Paul Tiffany & Associates
Is China Now Entering
an Era of Secular Decline?
China: Projected growth pattern assuming
steady reforms and no major shock
1995–2010
2011–2015
9.9%
8.6%
2016–2020
2021–2025
2026–2030
GDP growth
(% p/a)
5.0%
7.0%
5.9%
Already too optimistic?
Source: World Bank (2012)
© Paul Tiffany & Associates
So Where is China Going?
Three Scenarios:
Soft Landing?
Hard Landing?
or… NO Landing?
© Paul Tiffany & Associates
Pro/Con Factors Currently Effecting
China’s Development
• PRO: Fiscal strength, money in the bank, still growing economy.
• Large, hardworking, intelligent, and ambitious population.
• Powerful coordination of economic policy from the top with little need to seek
national consensus on goals and priorities.
• Muted social and political opposition to government policies and choices.
• Growing military strength with international ambitions.
• CON: Aging population.
• Demands for economic inclusion by hundreds of millions of peasants.
• Little knowledge or experience of its leaders beyond local borders.
• Potential financial bubbles (RE, stock market); unsustainable growth.
• Growing public demands for government accountability and transparency,
individual freedoms, economic entitlements (health care, etc.).
• Increasing anger towards China by international trade partners, local and
regional neighbors, international human rights and environmental activists.
© Paul Tiffany & Associates
Top 10 Key Issues for
China’s Future
1. Political participation, governmental transparency
2. Social unrest in the rural regions (“two Chinas”)
3. Boosting of internal consumption, reduction of exports
4. Trade tensions with the USA, EU, other nations
5. “Peaceful Rise” of China– or military expansionism?
6. Infrastructure development and pollution problems
7. Relations with its Asian neighbors (Taiwan, Japan, etc.)
8. Aging of the population-- and gender and health issues
(and how to pay for improving them)
9. Establishment of a value system beyond wealth
10. China’s place in a re-ordered global system
© Paul Tiffany & Associates
Shambaugh’s Five Key Indicators
of China’s Future Problems
1. Increasingly defensive and self-serving behaviors of China’s
economic elite who are moving assets and family abroad.
2. The increased repression of dissent of any kind in the country
by Party leadership.
3. Increasing ambivalence of the Party rank-and-file about the
propaganda message disseminated by Party leaders.
4. Deeply embedded corruption that permeates all levels of
society and the increasingly selective anti-corruption drives of
the Party leadership, which is targeting political rivals, real or
potential, rather than the concept of corruption itself.
5. The difficulties of continued growth of the economy as it
matures– and the need to deliver constant growth given the
lack of political legitimacy of the Party.
Source: David Shambaugh, “The Coming Chinese Crack-Up,” Wall Street Journal (March 9, 2015)
© Paul Tiffany & Associates
The Future Relationship…
And What America Needs to Decide
China and the United States Going Forward:
Order and Stability
vs.
Ideology and Values
Which is Better? Which Does the USA Want?
© Paul Tiffany & Associates
What Does America Want
Regarding China?
1. Maintain the status quo
1. What is US interest in the region?
1. National security for the US– control the globe in
a global economy
2. Economic growth (for whom– investors or labor?)
3. Maintain relationships with other nations in the region,
provide security umbrella for allies
1. Seek and maintain global peace
2. Maintain global hegemony of “American values”
2. Slow re-balance as China grows more powerful– allow some
accommodation of its differing political system.
3. Abandon Asia to Chinese political, economic, military power
4. Delay an ultimate confrontation over control of the region
© Paul Tiffany & Associates
A Final Note of Caution…
“Offensive Realism”
Professor John J. Mearsheimer
University of Chicago
The Tragedy of Great Power Politics (2001):
Given the difficulty of determining how much power is enough for today and tomorrow, great powers
recognize that the best way to ensure their security is to achieve hegemony now, thus eliminating any
possibility of a challenge by another great power. Only a misguided state would pass up an opportunity to
be the hegemon in the system because it thought it already had sufficient power to survive. In this world,
there is no such thing as a status quo power, since (says Mearsheimer) "A great power that has a marked
power advantage over its rivals is likely to behave more aggressively, because it has the capability as well
as the incentive to do so.“
The rise and containment of China: Mearsheimer asserts that China's rise will not be peaceful and that the
U.S. will seek to contain China and prevent it from achieving regional hegemony. He believes that China will
attempt to dominate the Asia-Pacific region just as the U.S. dominates the Western Hemisphere. The
motivation for doing so would be to gain a position of overwhelming security and superiority against
neighbors which it sees as potential challengers to its status. Additionally, he maintains that the U.S. will
attempt to form a balancing coalition that consists primarily of India, Japan, the Philippines, South Korea,
Vietnam, and Indonesia to counter the growing strength and power projection capabilities of China. He has
predicted a war between China and the USA by 2030….
© Paul Tiffany & Associates
China’s Growing Military Might…
A Threat to the West, or Something Else?
Whoops,
wrong
address;
sorry…
The Liaoning - China’s First Carrier - Deployed September 25, 2012
(but don’t forget what happened to the USSR when it had an arms race…)
© Paul Tiffany & Associates
China’s Territorial Claims
in the South China Sea
(the “nine dash” line)
Seven countries
have claimed
territorial rights
in the South
China Sea for
fishing, minerals,
etc.
Taiwan
Philippines
Distance from
point A (Ho Chi
Minh City) to point
B (Manila) is
1,000 miles
Malaysia
Singapore
Brunei
© Paul Tiffany & Associates
Chinese Port Construction
Fiery Cross Reef – Spratly Islands
2015
© Paul Tiffany & Associates
China’s Future Guam?
Mischief Reef in the Spratly Islands
US 7th Fleet
© Paul Tiffany & Associates
One Mistake Can Lead to a Tragic Outcome
(June 28, 1914 – Duke Ferdinand Assassinated in Sarajevo)
Distance from USA
Air Force base in
Guam to Shanghai
is 1900 miles (or four
hours flying time)
© Paul Tiffany & Associates
The US-China Relationship
What Would You Recommend?
Part 2
Participant Exercise
© Paul Tiffany & Associates
Participant Exercise
 With your table mates, please discuss the following
question: What should be the policy of the US regarding
China going forward? While your group can suggest
whatever it thinks appropriate, here are some basic
alternatives to start the discussion rolling:
– Maintain the status quo of today’s relationship with China, but
continue the wary watchfulness over Chinese actions.
– Increase US military presence in Asia.
– Enact limits on US private sector investment in China and Chinese
DFI in the US.
– Engage China in a new strategic relationship that recognizes the
changing economic situations of the two nations.
© Paul Tiffany & Associates
So…Who Knows What Might Happen Next?
How do
you hedge
the China
bet
today?
© Paul Tiffany & Associates
China vs. the US:
Is There an End-Game in Sight?
Part 1 and 2
Paul Tiffany, PhD
Haas School of Business,
University of California, Berkeley
© Paul Tiffany & Associates