Everyone knows that China has the world's 2nd largest economy and has been growing at a 10% rate for over three decades straight.  It is also the world's biggest exporter, and has an enormous amount of foreign exchange reserves.

But how powerful is China really?

Despite its massive economy, and fast growth rate, China remains a poor country with a big population.  A lot of fuss was made when China's economy overtook Japan last year.  But at $4,260, China's GDP per capita is merely one-tenth that of Japan, while it's population is 10 times Japan's. China's GDP per capita is way below that of the US at $47,240, and even well below that of Greece ($27,260) whose government would like Chinese assistance!

GDP per capita does not of course mean everything.  But it is a broad indicator of both a country's standard of living and level of economic development.

Total GDP can be an indicator of the total resources available for arming the military.  And China is undergoing a very rapid military expansion.  But the level of economic development can also be an indicator of the level of a country's military sophistication and organization.

The People's Liberation Army is capable of nuisance value in its neighborhood, especially the South China Seas, but not much more than that at this stage.

Poverty reduction has been impressive over China's period of strong growth, with less than 20% of the Chinese population now living on less than $1.25 a day (the measure of absolute poverty).  Nevertheless, around half the Chinese population live on less than $2.50 a day.  In other words, a large share of the Chinese population live in near poverty, and are vulnerable to the effects of food and energy price shocks, and live in a state of economic insecurity.

Statistics also greatly overstate China's importance as an export giant.  Over half of China's exports are "processing trade", that is, exports for which China merely assembles components imported from other, more advanced countries.  Given its low level of economic development, China has specialized in assembly operations, the lower skilled, labor intensive part of the supply chain.  And China's value added in these exports is minimal.

For example, the Asian Development Bank Institute estimates that China's value added in the iPhone, which it assembles, is less than 4% of the total value of the iPhone exported from China.  The major part of the value comes from high-tech components manufactured by Japan, Korea, Germany and the US, as well the US product design.

And what's more, while Chinese workers might assemble the iPhone, the company they work for is actually Taiwanese ("Foxconn").  Indeed, about 60% of China's exports are produced by multinational companies, not Chinese companies.

All things considered, China is emerging as an important economic player.  But its strength as an economic power house is greatly overestimated.  This is clearly evident in its squabbles with the US and other countries over intellectual property.  China steals intellectual property and bullies foreign companies into providing intellectual property because its own level of technological development is still so low.

Well, you might say, China is still on track to become the world's biggest economy in a matter of years.  In reality, continued economic success is far from assured in China.  And with China's rapidly ageing population, it will grow old well before it grows rich.

China's stunning economic performance was launched by the great leader Deng Xiaoping, and pursued by Jiang Zemin and Zhu Rongji.  But the current and prospective leadership in China are much more cautious, and reform has been essentially blocked by excessive caution and conservatism.  This paralysis is only increasing with the uncertainty generated by next year's change of Chinese leadership and the likelihood of a financial crisis exploding.

The era of great leaders has passed and now China is governed by committees of Communist Party functionaries who can't move forward.  What's more, the earlier leaders undertook all the easy reforms, and breaking into new reforms is more difficult -- all the more so, given that many Communist Party officials and family members profit from the current system.  Corruption is the currency of the Chinese Communist Party.

Fundamentally, continued reform is seen as a risk to the Communist Party's monopoly on power.  Indeed, China's GDP per capita has now reached the level where one would expect a natural transition to democracy.

China's massive foreign exchange reserves, more than $3 trillion, appear to be a sign of great strength.  And certainly they give the Chinese government finance for overseas investment, both economically and politically motivated.

But these foreign exchange reserves are a costly investment, as they earn a very low rate of return.  In fact, Chinese citizens' lives would be much better if they were spent on imports.  But Chinese internal politics stop the government from revaluing the exchange rate, which could also provide a stimulus to industrial upgrading.

Let's move on now to politics.  How powerful is the Chinese government?

All the evidence suggests that the Chinese government is nervous, panicked and paranoid.  It is frightened by the Internet undermining its grip on power.  How could the Internet become such a destabilising force?  The Chinese public are sick and tired of official corruption, abuses of power, widening gaps between rich and poor, lack of freedom of speech, and so on -- and they are not afraid to blog and protest about this.

And the Chinese government's nervous reaction to everything from high-speed train crashes and food safety scandals reveals the insecurity of its grip on power.

On the international scene, China is also skittish in its behavior, as it swings from charm offensives to bully-boy tactics with its neighbors.  This is partly due to the fact that the political leaders cannot control the military leaders on whom they depend for their political survival, another sign of China's political weakness.

While the US is now keen to become more actively involved in the Asia-Pacific to balance China's role, it is being welcomed with open arms by most of China's neighbors who do not trust the dangerous dragon.  China is becoming a lonely rising power!

Chinese leaders recently asked Joseph Nye how China could improve its "soft power".  They were apparently shocked when he responded that they should free the Nobel-prize winning jailed activist, Liu Xiaobo.

China's long and deep culture of autocratic power and authority mean that it still has much to learn about the exercise of power in the modern world.

References:

John Lee.  Lonely Power, Staying Power: The Rise of China and the Resilience of US Pre-eminence.  Strategic Snapshot 10.  Lowy Institute.

http://www.lowyinstitute.org/Program_IntSecurity.asp

World Bank. Indicators.

http://data.worldbank.org/indicator

"The developing world is poorer than we thought, but no less successful in the fight against poverty", Shaohua Chen and Martin Ravaillion, World Bank -- www.worldbank.org

Yuqing Xing and Neal Detert.  How the iPhone Widens the United States' Trade Deficit with the People's Republic of China.  Asian Development Bank Institute

http://www.adbi.org/working-paper/2010/12/14/4236.iphone.widens.us.trade.deficit.prc/

Joseph Nye.  Conference on the Future of Power.  International House, Tokyo.  10 December 2010.  http://www.i-house.or.jp/en/ProgramActivities/academy/pastprograms.htm