Global Competitiveness Report Pours Cold Water Over China Supremacy Story

September 30, 2015 Updated: October 2, 2015

Please repeat this sentence over and over: “China will overtake the United States as the world’s largest economy. China will overtake the United States as the world’s largest economy.” Somebody must have given Wall Street and the mainstream media this instruction at the beginning of this decade, and some people are still following it.

The truth of the matter is, even if you have four times the population you have to bring something more to the table than just building things and stealing technology: You have to compete. China previously was quite competitive because of a cheap currency, cheap labor, and cheap land. Not anymore. Now it has to innovate to keep moving ahead. 

Hedge fund manager Jim Chanos of Kynikos Associates has long been skeptical about China’s ability to do just that: “We are still waiting for that one on China,” he said.

While Chanos’s word carries some sway, we now have the scientific proof that innovation in China is just not happening.

“Faced with rising production costs, an aging population, and diminishing returns on the massive capital investments of the past three decades, China must now evolve to a model where productivity gains are generated through innovation and demand through domestic consumption,” the World Economic Forum states in its Global Competitiveness Report of 2015. 

In fact, China is ranked only No. 28 in global competitiveness, compared to No. 3 for the United States.

The World Economic Forum compares the competitiveness of China and the United States across 12 pillars. The United States wins 9. (World Economic Forum)
The World Economic Forum compares the competitiveness of China and the United States across 12 pillars. The United States wins 9. (World Economic Forum)

The critical elements for competition through innovation in the 12 pillars (and their respective rankings) are the following: 

  • Higher Education and Training (China 68 / U.S. 6)
  • Technological Readiness (China 74 / U.S. 17)
  • Business Sophistication (China 38 / U.S. 4)
  • Innovation itself (China 31 / U.S. 4)

Even if we look at some of the pillars where China is ahead, we can find some bones to pick. 

  • Market Size (China 1 / U.S. 2) 
  • Health and Primary Education (China 44 / U.S. 46)
  • Macroeconomic Environment (China 8 / U.S. 96) 

While there is practically no difference between the two countries regarding the size of the respective goods and services markets, it is quite embarrassing for the United States to be ranked so low in health and primary education. 

However, when it comes to the macroeconomic environment, the Global Competitiveness Report just takes some numbers at face value without really understanding how the Chinese economy works. 

The 12 pillars of competitiveness. (World Economic Forum)

Many of the factors determining the ranking are based on government spending and national debt. Yes, the United States is a spendthrift and has racked up too much debt, no question about it. 

China, on the surface has not. But only because the companies that the Chinese state owns and which are drowning in debt aren’t counting toward government debt. Neither does the local government debt (about 25 percent of GDP) or the state-controlled banking system debt (about 300 percent of GDP). 

China also ranks in position No. 3 with 48.9 percent of GDP in gross national savings. But that is just the one side of the balance sheet. On the other side is a mountain of wasteful investment spending.

So after Epoch Times adjustments, the official tally between China and the United States is 10 U.S. wins and two draws. Or in the words of Jim Chanos: We are still waiting, China. 

For good measure, the top 10 economies:

World Economic Forum
World Economic Forum