China Reaches Inflection Point Between Needy and Needed
By wchung | 23 Feb, 2025

Three decades after resetting its economic course China is settling into its place among the world's leading consumer powers.

It has been 31 years since Deng Xiaoping won acclaim as history’s greatest pragmatist by declaring, “It does not matter if the cat is red or white, so long as it catches mice.”

Deng was never willing to acknowledge that he meant to ditch socialism as China’s driving principle, but the tsunami of economic energy his reforms unleashed has certainly not been the “red” variety. As they set about buying third homes and fourth foreign cars, China’s million millionaires know well what Deng meant when he declared, “It is glorious to get rich.”

Deng himself would take far more pride in the fact that China’s poverty rate dropped from 53% in 1978 when he began engineering his reforms to around 6% by 2001. This year the world is focusing on the fact that China is about to pass Japan to become the world’s second biggest economy. That’s on a nominal basis. In real terms, allowing for purchasing-power parity, China probably passed Japan back in 2008.

The average Chinese should be more heartened by the fact that China is poised to surpass the U.S. in 2012 to claim the world’s biggest affluent middle class if you define the term as families with enough disposable income to own a home, at least one passenger car, have money to invest in stocks, send at least one child through college, take an annual vacation in a commercial hotel and have access to an internet connection at home. About 85 million Chinese enjoy that status this year. That number will hit 110 million in 2012, about the same as the U.S.

Americans can shrug off the fact that this year China’s middle class will have bought 18 million cars versus the 15 million bought by Americans. They’re cheaper cars on average. Besides, we already have more cars sitting in our garages and not too many Chinese even have two- or three-car garages.

But what will give us pause is the milestone China will pass in 2020 when it becomes the world’s biggest economy in absolute terms. That scenario is based on two facts: China’s 11.9% current growth rate last quarter versus our 3.3% and the fact that China has plenty of incentives to let the yuan rise to its natural level long before then. Among those are the need to buy vast quantities of natural resources to continue fueling infrastructure modernization, the advent of the yuan as a global reserve currency, the desire of China’s influential middle class to buy foreign trips, investment property, educations and consumer goods at bargain prices. Contrary to the assumptions behind today’s misguided American clamoring for China to appreciate its yuan, that move won’t put a dent in China’s trade surplus because few U.S. companies are equipped to compete in China’s dominant export sectors. And the U.S. doesn’t have access to the kind of labor waiting in China’s hinterlands.

Even allowing for slowing of China’s growth down to the 8.5% range over the next several years, we can expect those two factors to triple China’s nominal GDP from about $6 trillion this year to about $20 trillion by 2020.

From that point there will be no looking back for China short of fragmenting into several separate states as the need for a sense of collective nationalism diminishes in all quarters. But that’s a bit too far off in the dim distance.