China Derangement Syndrome - Once again, an economic yellow peril is exaggerated.

The 1979 book Japan as Number One: Lessons for America, by East Asia scholar Ezra Vogel, stoked fears that the United States was about to be outcompeted by the land of the rising sun. And why not? The U.S. had just suffered through a decade of stagflation and was about to enter what was then the worst recession since the Great Depression. By the late 1980s, the case seemed ironclad. "I don't mean to be an alarmist, but I get the uneasy feeling that America is history," wrote Robert Kuttner, then the economics correspondent for The New Republic, in the Los Angeles Times in May 1988. Evidence for this decline and fall? "The total value of stocks listed on the Tokyo stock exchange is now $3.54 trillion dollars, compared to $2.34 trillion for the New York Stock Exchange."

In his 1988 book Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It, former Reagan administration trade negotiator Clyde Prestowitz warned, "The power behind the Japanese juggernaut is much greater than most Americans suspect, and the juggernaut cannot stop of its own volition, for Japan has created a kind of automatic wealth machine, perhaps the first since King Midas."

Two decades later, we know that the panic over Japanese economic competition was greatly exaggerated. Today the total value of the New York Stock Exchange is nearly three times that of Tokyo's. Japan is not Number One. In fact, as of last year it became Number Three, behind China.

Twenty-five years ago, Japanophobes (or should they be called Japanophiles?) were fretting about the differential economic growth rates of the United States and Japan. At times in the 1980s, Japan's gross domestic product (GDP) was growing at nearly 10 percent per year, whereas American GDP was increasing at a merely respectable 4 percent. (All figures are unadjusted for inflation.) Had the growth rates continued at those levels after 1988, Japan's overall economy would have caught up to ours within 10 years.

Instead, the Japanese financial bubble burst. In 2011 the country's GDP in current dollars is $5.5 trillion, compared to the American total of nearly $15 trillion. Per capita GDP (adjusted for purchasing power, a measure of what it costs to purchase similar baskets of goods and services among countries) for Japan is $34,000, compared to $46,000 for Americans. Japan has suffered through two decades of stagflation, and you no longer hear anyone recommending that the U.S. adopt Japanese-style top-down industrial policy as an economic panacea.

So now comes China. "We are getting our clock cleaned by Chinese state capitalism," wrote Robert Kuttner, now editor of The American Prospect, earlier this year at The Huffington Post. Massachusetts Institute of Technology economist Simon Johnson piled on at the annual conference of the American Economic Association, declaring, "The age of American predominance is over. The [Chinese] Yuan will be the world's reserve currency within two decades." The conservative Citizens Against Government Waste even aired a television commercial featuring a Beijing economics class in 2030 in which a professor explains how America became indebted to China. The professor concludes, "So now they work for us." The class chuckles knowingly.

This gloomy message of American decline relative to China appears to be seeping into popular consciousness. An April 2011 poll by Xavier University found that "a stunning 63 percent believe that the Chinese economy is more powerful than the US economy."

"The U.S. could lose its status as the world's biggest economic power within five years," reported The Daily Mail in April. The Mail article was based on calculations released by the International Monetary Fund projecting that total Chinese GDP, adjusted for purchasing power, will surpass U.S. GDP by 2016.

Can that be? Let's do the math: China's total GDP is around $6 trillion today. Assuming 10 percent GDP growth for the next 20 years, China's GDP would rise to $40 trillion. If the U.S. economy grew at, say, 3 percent a year, total GDP would be $27 trillion. Back in 2007, before the financial crisis, the investment bank Goldman Sachs issued a report projecting that Chinese GDP would be $26 trillion in 2030, compared to $23 trillion for the U.S. It bears noting that current Chinese purchasing power per capita is about $6,000, compared to $46,000 for Americans.

But it is unlikely that China's economy can sustain 10 percent annual growth for two more decades. Economic history suggests that once countries catch up with leading economies in terms of technologies and business management, growth slows down. Consider what would happen if Chinese growth slows to 5 percent. Assuming sustained respective 5 percent and 3 percent growth rates for China and the U.S. for the next two decades, China's total GDP would reach just $16 trillion, not $34 trillion. In 30 years, it would grow to $26 trillion, by which time U.S. GDP would be $36 trillion. In 40 years, China's GDP would be $42 trillion, compared to our $49 trillion. All in all, it would take China a half-century to catch up.

Just to be clear: Anyone who thinks that they know what purchasing power parity might be between any two countries by 2060 is seriously deluded. Calculations like these—mine and Goldman Sachs'—can only provide rough possible scenarios for the economic future.

Of course, theres no guarantee that U.S. growth will remain steady at 3 percent. As the recent history of Japan shows, it is possible to adopt economic policies that produce decades' worth of economic stagnation. In that case, China's GDP may well surpass ours sooner rather than later, although perhaps not for the reasons alarmists predict.

Then again, China has already picked most of the low-hanging fruit, economically speaking. Future productivity increases will not come from merely copying technologies developed in other advanced countries. Furthermore, continued rapid growth depends on the kind of innovative management that can thrive only in open societies. Unless China makes the transition to an open society, its future is not growth but stagnation and political disillusionment. And if it does make that transition, then China will be a partner, not a rival.

China today is a superpower in the same way the Soviet Union was a superpower in the 1980's: by allocating a huge proportion of its wealth to military buildup while lying to the world and itself about its command economy.

No economy ever has or ever will sustain double digit growth , bubble free, for more than a few years at the most. China has claimed 8% for a couple decades now which in itself is essentially impossible.

To project 10% growth for twenty years is a daydream, even if beginning from scratch, which China is not. I think the parallels between Japan-hysteria and China-hysteria are very apt. Even fuelled by the same Chicken Littles of the media.

Did you actually read the article? It doesn’t even address whether or not China has an adversarial attitude, it just talks about economic reality

If you are acting like politics and economics are wholly separate from each other, think again. In communism especially, they are one and the same. Therefore, China's adversarial attitude cannot but be discussed when it comes to their economics, and no, China will not ever move to a more open society without being forced to do so from the outside—by military force.

China today is a superpower in the same way the Soviet Union was a superpower in the 1980's: by allocating a huge proportion of its wealth to military buildup while lying to the world and itself about its command economy.

No economy ever has or ever will sustain double digit growth , bubble free, for more than a few years at the most. China has claimed 8% for a couple decades now which in itself is essentially impossible.

To project 10% growth for twenty years is a daydream, even if beginning from scratch, which China is not. I think the parallels between Japan-hysteria and China-hysteria are very apt. Even fuelled by the same Chicken Littles of the media.

WADR, I think you're underestimating the zealotry of the Communist Party of China for spreading communism to every corner of the globe. It's their opinion that communism will not begin to work until the entire world is under its sway; therefore, all non-communistic, capitalistic entities must first be swept aside.

You still are missing the point. The article is pretty clear about the fact that China’s growth will slow down inevitably if it doesn’t open up. So if they don’t, fine, they will hit a wall on growth and their economy will stop expanding.

If they keep the type of government which leads them to be adversarial, they are going to limit themselves and thus limit the threat they present.

You still are missing the point. The article is pretty clear about the fact that China’s growth will slow down inevitably if it doesn’t open up. So if they don’t, fine, they will hit a wall on growth and their economy will stop expanding.

If they keep the type of government which leads them to be adversarial, they are going to limit themselves and thus limit the threat they present

You must really think that the CPC really cares about stuff like that. The more that the naïve West continues to support that communist regime by trading with it, the more resources the Party has to crush dissent, via "tank diplomacy" if necessary. The USSR would still be around if we had traded with it the same way we trade with the PRC.

And the most naïve of all is the statement in the thread title. Neglecting the threat or trying to make light of it is pure ignorance.

This is evidently not going to go anywhere. You don’t seem to care at all about the point of the article, nor seem terribly willing to recognize it.

You don’t seem to care at all about the point of the article, nor seem terribly willing to recognize it

Actually, you don't "seem to care" that whatever point is trying to be made is utterly invalid, because it's predicated on the impossibility of China "mak(ing) the transition to an open society" by itself—if you continue to strengthen a rival, then he'll remain a rival and not "transition" to a partner (this is one of the basics of foreign policy, or so I thought; to wit, appeasement fails utterly). You can't ignore reality while trying to make a point, or else you'll end up writing a bunch of empty paragraphs.

If wrecking its own economy while bringing the economies of its sworn enemies down with it is the accelerant towards Red China's communist party's final push towards world communism, they will do it; it only gives them an excuse to use their military, which they are building up by leaps and bounds.

There are many more problems such as dishonest books in provincial banks and a series bogus accounting principles done by the central planners to take nonproducing loans off the books.

I made the same mistake just two days ago.

The way out of our financial mess is transparency

They're (the Japanese) still refusing to resolve all of their non-producing loans, IIRC.

I'm pretty sure the correct term is non-performing loans. Otherwise, thanks for a nice summary of the looming problems facing the Chicoms.

There is a lot of thought here that is off base.

CDS is alive and well here every day.

The process under way in China is economically driven political evolution. That is, change. The process of change largely is restricted and constrained by old men. As they die, the society evolves in a new direction. The specific outcome is of course unknown.

I don’t think there will be a revolution. I think the new direction after 50 or 75 years will result in a socialist state more like Europe of the present than China of 1965.

The process under way in China is economically driven political evolution

No such thing is happening in Red China. Rogue states do not "evolve"—they have to be destroyed, and never appeased. Again, if we had traded with the USSR the way we do China, it would be here today and most likely more malevolent than ever.

You haven’t offered anything remotely akin to proof that the article is wrong

You haven't offered anything to prove the article right. I, for my part, filled in the missing holes in the argument, which makes it collapse. You cannot predicate anything on a statement that is based on pie-in-the-sky hope (authoritarian Red China transitioning by itself to a more open society, especially while you continue to strengthen the authoritarians). WADR, are you just trolling? because it appears you are just blatantly ignoring the obvious.

You don’t even bother to grasp the salient points

Invalid points are not salient. Salient points do not ignore reality.

You are mighty impressed with your own arguments. However they aren’t even vaguely close to as good as you seem to think they are.

But it’s also quite apparent that arguing with you is as fruitful as arguing with a wall, so I’ll pass. Have fun with your delusions.

It's not my fault if you want to be evasive. You can't run away from the facts, and whatever ones are posted by the libertarian magazine are already tainted by missing facts. The focus of the government of Red China is not economic growth as capitalists see it, but to acquire as many means as possible to prepare for making the world transition to global communism—this is why they are building up their military, among many other things. If their economy goes, they know that the economies of their enemies will be shattered rather than merely weakened, and they'll have a huge upper hand if they want to inject their military even more into their foreign policy.

And comparing things to Japan of thirty years ago is yet another canard.

It seems the Communists have cut them off from the ancient philosophy (which overwhelmingly rejected anything like modern communism), and so they are shallow.

Well, Confucius was a statist on a grand scale - so they like him enough to start re-introducing his teachings. Lao Tzu and Taoism on the other hand, that kind of free thinking and ridicule of authority they don't really care for. :)

I do, which is why I posted what I did. The flaw in this article is that is assumes much more GDP growth that what we’re experiencing, and what we’re likely to experience for the next several years. China doesn’t need to continue 8+% annual growth to overtake the US, not when we’re muddling along at 2%, 1%, or even lower.

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