Daniel Gross

Obama Says China Has “Grown Up” Economically. Has It?

Contrary Indicator

On Monday, President Obama articulated what many policymakers and economic analysts in the developed world have been thinking: Now that it has "grown up," China should have a more adult attitude toward trade, protecting domestic markets, its currency, foreign aid, and participation in international institutions.

Of course, that's not quite how China sees itself and its position in the world.

I recently returned from China, where I visited factories, met with government and military officials, and spent time in an impoverished village in the countryside outside Xi'an, as well in a swanky, New York-style cocktail lounge at the top of Beijing's tallest building. (In the accompanying video, I discuss my impressions with Aaron Task.)

And there's a kind of schizophrenia. China is proud of and recognizes its growing financial heft and record of strong growth, its position as a huge consumer of commodities and an important producer of goods. There is plenty of evidence -- luxury retailers, modern hotels, fancy infrastructure, skyscrapers — that China has matured economically. But the country still has a self-image as a gangly adolescent, a 98-pound weakling that is too focused on its own issues to be much help (or much of a menace) on the international stage. "In my very first class, I always tell my students that China is poor, large, and rapidly growing, with a very diverse level of development," said David Li, the Harvard trained economist who runs the Center for China in the World Economy at the Tsinghua University School of Economics and Management in Beijing.

The China of Shanghai and Beijing and luxury retailers and raging car sales is real. But it's only a small part of the picture. This is a country that essentially sat out the 20th century, and that is only 15 years removed from utter poverty. People who live in Shanghai can all remember when Pudong, the business district on the far bank of the Huangpu River, was rice paddies and farms. A huge chunk of the population remains outside the consuming mainstream. "China is in the process of developing from a poor country to a rich country," says Wen Hai, a senior professor of economics at Peking University. "We still have 50 percent of our population living in agriculture areas, but they only account for 10 percent of GDP."

For every indication that China is ahead or equal to the U.S., there are hints of the country's relative economic weakness. When I visited the military base of the 6th Armored Division on the outskirts of Beijing, I saw tanks that looked like ones the U.S. relied on in the 1970s. Defense officials told me and a group of journalists that the People's Liberation Army is 25-30 years behind the U.S. army technologically, and that China simply doesn't spend that much on its military. The PLA, they said, was still in the process of mechanization and was a long way from integrating information technology thoroughly into its operations.

"Military spending as a percentage of Gross Domestic Product has been between 1.3 and 1.5 percent for the last 18 or 19 years," says Yao Yunzho, a senior colonel who directs a research unit in the Academy of Military Science's Department of World Military Studies. Given the country's eagerness to adapt the latest technology for civil sectors like transports and logistics, I found the modesty a little hard to swallow. (The World Bank in 2009 put China's military spending at 2 percent of GDP, compared with 4.7 percent for the U.S.)

China would like the world to believe that it is spending all its resources to maintain the breakneck pace of economic growth. This is a matter of politics, not just economics. Despite the lack of political competition and direct national elections, the party line is that China's government is under immense pressure. If local, regional and national officials fail to complete projects, improve living standards, and deliver on economic growth, they'll lose their legitimacy. For the overwhelming majority of people in China, including (and especially) the elites, the rise in economic growth and living standards trumps the lack of political freedom or ability to dissent.

Beyond the need to focus on its own substantial economic problems, China may simply not be emotionally ready to play a full role in international financial affairs. With its long history of invasions and an enduring sense of economic inferiority, China simply isn't that confident in dealing with the outside world. Says Wen Hai, "We still lack the human resources to play an international role."

Like many adolescents, in other words, China is too obsessed with its own problems, desires and frailties to take into account the needs of others. When it comes to economics, China may have the body of a grown up, but it has the mind of a teen.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

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