China’s moon landing proves it is more than just a paper dragon | Larry Elliott | Business

For the US it was a wake-up call. Convinced that it was a world leader in the knowledge economy, the US was shaken out of its complacency when its communist rival announced a breakthrough in space exploration.

More than six decades separates the launch in 1957 by the Soviet Union of Sputnik – the first artificial satellite – and China’s success last week in being the first country to land a spacecraft on the far side of the moon, but the same question is posed by the two events: is US economic hegemony at risk?

In the late 1950s the answer was no, although many Americans thought otherwise. Congress declared a national education emergency, federal funding for science was tripled and President Dwight Eisenhower paved the way for the Apollo moon landings by setting up the National Aeronautics and Space Administration – better known as Nasa.

Eventually, the US stopped panicking. The Soviet Union had a good, basic education system, excellent scientists, and was globally competitive in some specific manufacturing sectors but its command economy was incapable of delivering the living standards enjoyed in the capitalist west. Economic sluggishness brought about its collapse little more than 30 years after the launch of Sputnik.

China poses a much more realistic threat. For a start, it has posted four decades of staggeringly high growth, which has resulted in rapid improvements in living standards and victory in the battle against extreme poverty.

What’s more, the caricature of China as a country that just makes cheap goods for the west is out of date. In some areas of the digital economy – e-commerce and mobile payments for example – China is a world leader. The authorities in Beijing have ambitious plans for artificial intelligence and the use of big data.

While the US still leads the way in the knowledge economy, China comes second in terms of research and development spending and, mindful of the pollution affecting its cities, has been investing impressively large sums into green technologies.

China has also developed in its own way. Liberalisation has been slow and careful. The state is firmly in charge of economic management. The overall approach is top down, authoritarian and target driven. One reason that the country is making progress in big data is that little heed is paid to the rights of the individual to privacy when collecting information.

Sooner or later China was bound to lock horns with the US. It is a fast-growing country; it wants to compete in cutting-edge technologies; it has a rival ideology; and, despite regular predictions of impending doom, it shows no sign of a Soviet Union-style collapse. Washington has long seen Beijing as an economic, political and military rival, but it has taken the arrival of Donald Trump in the White House to bring those fears to the surface. The tit-for-tat tariff war launched by the US last year is about far more than trade.

China badly wants to de-escalate the tension. Its economy has clearly been slowing and it is only able to hit official growth targets of 6%-plus by counting wasteful investment. Stripped of the creative accounting, the economy’s trend growth rate is around 3%.

The aim is to steer the economy away from its dependency on investment and exports, but this is proving hard to achieve. China’s fast growth over the past four decades has been based on moving the population out of low-productivity jobs in agriculture into higher productivity jobs in manufacturing – a process that can only happen once and is now over. Transition to a consumer-led, service-driven economy requires some short-term pain: unprofitable enterprises going bust, factories closing down and unemployment rising.

Xi Jinping, China’s strongman leader, certainly does not want his authoritarian rule threatened by economic and social unrest, so every time growth slows down Beijing tightens political control while simultaneously using lower interest rates, easier credit, tax cuts and higher public investment to boost growth. This helps stabilise the economy but at the cost of keeping alive an economic model that the authorities know has to change.

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In his book on China*, the economist George Magnus questions whether it is possible for a one-party state like China to make the switch from an economy where the government makes all the key decisions to one that encourages the development of new ideas. “Behind a wall of censorship, a surveillance state is developing rapidly that may be very effective at gathering information but also quite stifling in terms of creativity and disruption – phenomena in which the west has traditionally enjoyed strong advantages.”

The monetary stimulus provided in 2018 had little effect and exports growth is sagging as a result of slower global growth and US protectionism. That explains why high-level talks to end the US-China trade conflict are taking place in Beijing this week. Xi has blinked first in the standoff with Trump by offering easier access to the Chinese market for US exporters, because the US is a much more important market for China than China is for the US. Ultimately, the US can get the goods it currently sources in China from elsewhere. For its part, China simply cannot afford to be frozen out of the US market.

That said, Trump also seems keen that this week’s talks succeed and not just because protectionism hurts the US as well as China. It is also because China matters in a way that the Soviet Union never did. The recession in Russia that followed the collapse of communism was deep but essentially a regional affair. A full-blown recession in China, as Trump is aware, would have profound implications for the US and the rest of the global economy.

* Red Flags: Why Xi’s China Is in Jeopardy, by George Magnus; Yale University Press

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