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China’s rise and the “big cycles” of human history

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“The United States is the most powerful country [in the world], but [it is] declining.  China is close behind and rising quickly.” 

By itself, this quote from Ray Dalio’s fascinating book “The Changing World Order: Why Nations Succeed and Fail” (p. 496) would hardly be news.  Many others have made similar claims in the past, including me.  What’s different about this particular quote is the sheer amount of data and analysis that lies behind it.  As one reviewer put it, the book is “a sprawling, holistic study of how the world has worked over hundreds of years of history.”

Author Ray Dalio is well known in business circles as the founder of Bridgewater Associates,  the largest hedge fund in the world, with over $126 billion in assets under management.  Dalio retired last year, and published this book (his fourth) near the end of 2021.

Over the course of his career, Dalio became interested in long-term trends in investment booms and busts.  He began developing an enormous database of information on the rise and fall of “empires” which dominated world power and wealth.  By combining 18 measures of power into a single number, he was able to map out the “big cycles” by which four countries have dominated the world over the last 500 years.

This graph summarizes Dalio’s “big cycles” in relative power and wealth over the last 500 years, for the four most influential countries in the world.  For other countries, see Dalio’s book, or his free website.

As you can see in the graph above, the Netherlands (through the Dutch East India Company) was the most powerful empire in the world from the 1600s to the mid-1700s, followed by the UK through about 1900, and then the US.  China’s graph is the most interesting of these four, since by Dalio’s measures, it was the most influential empire roughly 1500-1625.  It declined suddenly in the 1800s due to the effects of European imperialism, including the Opium Wars, the Boxer Rebellion and more.  China began rising again after the conclusion of its revolution in 1949, and now threatens the US for the position of number one in the world.

The “big cycles” in the graph above are based on three smaller, underlying cycles that last 50 to 100 years within each country: economics (long-term debt and capital), internal order/disorder, and external order/disorder.  The ups and downs in these three sub-cycles can drive stock market booms and busts, and even wars.  Given the length of 50-100 years, many people’s entire lives are spent when things are near the top or near the bottom of a cycle. 

When examined from a distance, my entire post-war generation has lived near the top of the most comfortable peak in human history.   Of course, on a day-to-day basis such events as climate change, nuclear proliferation, Vietnam, Iraq, Afghanistan and the Ukraine, and the death of Miles Davis have hardly felt like we are living near the top.  But think big picture.  I have never lived through a local war or a famine, and technical advances have made my life longer and more comfortable than for any of my ancestors. 

As a result of living near the top, many people my age have become so comfortable taking Hawaii vacations on their credit cards, and so optimistic about the future value of stocks, real estate and other assets, that they have little or no savings to serve as a financial cushion for when the cycle inevitably heads down.  (Unless they had parents like mine who passed along their fears from the Great Depression.)  This reality has some intriguing implications for record setting levels of national debt in both the US (over 31 trillion dollars) and China (a mere 13 trillion or so).  The details of Dalio’s models of economic cycles are complicated enough, that to deliver on my promise of “five minutes of understanding at a time,” they will have to be saved for my next post.

The US score for internal disorder has been increasing for decades, putting our country at an extreme disadvantage.  Large numbers of Republicans and Democrats have not started shooting at each other yet, but some days it’s not looking good.  China on the other hand, is the very model of internal order.  Mind you, I think it would be absolutely horrible to try to live under all China’s authoritarian rules and surveillance.  But these measures do increase China’s internal order, and thus the country’s power.

Increasing external disorder is a risk for both countries, as China and the US compete more forcefully in trade, technology, geopolitical influence and the economy.  In the worst case, this could lead to military conflict, planned or accidental.

Dalio’s cycles are computed from the values of fifteen “gauges.”  The most important ones are education, innovation and technology, cost competitiveness, military strength, trade, economic output, markets, and reserve currency status, which he classifies as the “eight key measures of power.”  There are also seven “additional determinants of power” including geology (such as natural resources), infrastructure, and acts of nature (like Covid).

For the latest data on each element, Dalio provides annual updates which can be downloaded for free from his web page at www.economicprinciples.org.  (This webpage also includes links to many other resources and presentations, all free.)  As of this writing, Dalio’s most recent update is entitled the Country Power Index 2022.  It summarizes the latest power and wealth data on 24 countries and adds details on how each of the gauges is calculated (p. 52-54).

For example, one gauge that is rising rapidly for China is “innovation and technology,” based on such variables as its share of global patents, R&D spending, and its large number of technology researchers.  The US is still number one on this gauge, but China is quickly catching up.  In fact, China is currently ahead of the US on only 2 of the 8 key measures of power: trade, as measured by China’s percent of global exports; and cost competitiveness, measured by variables such as “productivity adjusted labor costs.”  As Dalio (p. 6) summed it up, “The eight major measures of power [for the US] are very strong today but are… falling slowly… [In addition], the US is in an unfavorable position in its economic and financial cycles… Internal disorder is a high risk… [and] external disorder is a risk… [Thus, the US is] a strong power in gradual decline.”   

If China continues to rise while the US falls, the risk of conflict over a new world order will rise.  The graph below summarizes 18 forces that determine the rise and fall of empires:

This is Dalio’s summary of the main forces that determine the rise and fall of every empire
(from The Changing World Order, p. 51)

For a quick intuitive overview of how you would rate the US-China standings, just check off which of these 18 points best apply to the US today in your opinion, and which apply to China.  If you accept the validity of the list, you will certainly conclude, as I did, that China is on the way up, and the US is at the top in some ways and headed down in the rest. 

Dalio argues that all this adds up to trouble for the US, and for the world.  “Wealth, values, and political gaps are now larger than at any other point during my lifetime (p. 12) … There are great increases in internal conflict between the rich and poor and different ethnic, religious, and racial groups. This leads to political extremism that shows up as populism of the left or of the right… The most recent analogous time was the period from 1930 to 1945. This [is] very concerning to me.” (p. 2)

As I’ve written before, an understanding of the potential for conflict, and how to avoid it, is greatly complicated by cultural differences between the US and China, including their “political patience.”  In his book (p 379), Dalio puts it this way “While most Americans focus on particular events, especially those that are happening now, most Chinese leaders view current events in the context of larger, more evolutionary patterns…  Americans are impulsive and tactical; they fight for what they want in the present. Most Chinese are strategic; they plan for how they can get what they want in the future.”

One recent example of this difference appeared in a New York Times opinion piece by Nobel Prize winning economist Paul Krugman entitled “China’s Future Isn’t What It Used To Be.”  In the piece, Krugman quotes several sources to support this, notably two studies that recently pushed back their estimates of when China will become number one in the world.  One now projects that to happen in 2035 (vs. its previous projection of the mid 2020s), and the other projects says China at number one is “at least several decades” away (vs. its previous projection of 2033).

To mainland Chinese, delays of a few years or decades do not define “the future.” They are a mere blip on the screen in terms of 100-to-400-year cycles. 

But at the end of the day, Dalio concludes (p. 485):  “The fact that the US is simultaneously deeply indebted, its international standing is weakening, and it is experiencing serious conflict should be concerning both to Americans and to non-Americans who depend on them. At the same time, in its 245-year history the US has shown a great capacity to bend without breaking. The greatest challenges it faces are internal ones: can it remain strong and united, or will it continue to allow division and internal struggles to lead to decline?”

Will China become the most powerful country in the world?

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Will China someday be the most powerful superpower in the world?  Yes, they will.  It may take 10 years or 20 years or 50 years or more.  The Chinese are not in a rush. 

There are many reasons China’s continued ascension seems inevitable.  Here are four very simple factors that convinced me:

1. China is really, really big

China’s population is 1.4 billion, or more than four times that of the US (327 million people).  Seven of the world’s 50 largest cities are in the US, topped by New York with a population of 8 million.  But China accounts for 17 of the 50 largest cities, and they are much larger than ours:  27 million people in Shanghai, 20 million in Beijing, 15 million in Chongqing, 13 million in Tianjin, and so on.

American companies already sell more than $100 billion worth of products to China every year.  Many companies – including such name brands as General Motors, Starbucks, KFC, Coca Cola, Apple, Microsoft, Intel, Gillette, and Nike – rely on China for a significant portion of their revenue.  And the potential buying power of 1.4 billion consumers makes CFOs salivate as they project future sales. 

China’s sheer size also makes it a formidable foe, and the country has been flexing its diplomatic muscle in Southeast Asia for some time.  At a meeting of the Association of Southeast Asian Nations in 2010, when the discussion turned to China’s aggressive actions in the South China Sea, “China’s foreign minister matter-of-factly [said]… ‘China is a big country, and you are small countries.’”

2. The people work harder than we do.

There was a time when the US was known as a worldwide leader for its hard work and “can do” attitude.  Now, it is known as a leader in obesity, entitled workers, and people pushing for a shorter work-week.  Summer jobs that used to be filled by college kids are now handled by illegal immigrants, because they are the only ones willing to do heavy lifting.

Meanwhile, in China, many companies follow the “996 system,” working from 9 AM to 9 PM, 6 days a week, for a total of 72 hours. 

So let’s do a little math.  According to Pew research, the US labor force includes 157 million workers.  For simplicity, let’s ignore lunch, assume that they are all employed, and work 40 hours per week.  This would come to a total of about 6.3 billion labor hours per week for the US.

China’s labor force consists of about 806 million people.  If each worked 72 hours, China’s total would be 57.6 billion work hours per week, or about nine times as many total labor hours as the US. 

3. They study harder than we do.  

According to one recent study the average student in China spends 65-77 hours a week studying.  As they get older, the number goes up.  When it comes time for college admissions, every student in China takes the same standardized test over the same three days.  The gaokao, as the test is called, includes Chinese literature, English, Math, Physics, Chemistry, History and Politics.

In the US, of course, standardized tests are an important factor in determining college admissions. But they are just one factor.  Grades, class rank, essays, recommendations, interviews, sports, extracurricular activities and more are also considered. 

In China, everything depends on your gaokao score. Of the 10 million students who take the gaokao, about 60% will not get into any college.  For the rest, your score will determine whether the college you attend will be the Chinese equivalent of Harvard, or Podunk Community College.  And this will in turn have a major impact on the job you get after graduation.  In other words, in a way your whole professional life depends on this one score.  Students are therefore under enormous pressure to do well.  Some of them spend an entire year preparing for the gaokao in “exam factories,”  where they study up to 16 hours a day, 365 days a year.

Some of this work ethic survives even after people emigrate from China to the US.  In a Wall Street Journal article entitled Why Chinese Mothers Are Superior, Yale Law Professor Amy Chua, author of the bestseller The Battle Hymn of the Tiger Mother, described a study comparing the attitudes toward education of American mothers and Chinese immigrant mothers.   “Almost 70% of the Western mothers said [things like] ‘stressing academic success is not good for children’… By contrast, roughly 0% of the Chinese mothers felt the same way. Instead, the vast majority of the Chinese mothers said that they believe… that ‘academic achievement reflects successful parenting,’ and that if children did not excel at school… parents ‘were not doing their job.’”

4. They cheat

My post “The Biggest Theft in History” provided a number of examples of the way Chinese merchants and scientists do not play by our rules and have stolen intellectual property to leapfrog their US colleagues. 

Stealing intellectual property is not just a habit of imitation Apple stores, under some circumstances it is actually required by law.  “According to Article 7 of China’s National Intelligence Law ‘Any organization or citizen… shall support, assist with, and collaborate with the state intelligence work in accordance with the law’… In addition to espionage and cybertheft by the Ministry of State Security, the party tasks some Chinese students and scholars in the U.S. and at other foreign universities and research labs with extracting technology.”

So, to sum up, China has four times as many people as the US, its laborers work nine times as many hours as ours, and its students work much harder than ours too.  And oh yeah, stealing intellectual property is the law of the land. 

As a reformed academic, trained to examine both sides of every coin, I feel compelled to admit that not everyone agrees that China will become more powerful than the US.  For example, a recent report from Capital Economics concluded that “The widespread assumption that China will overtake the US as the world’s largest economy is likely to be proved wrong.”  The most common counter-arguments usually stress key challenges China faces, including economic storm clouds, enormous debt, an aging population, income inequality, and corruption.

I reviewed corruption in a recent post, will discuss each of the other issues in the future.  For the purposes of this five minute post, I will simply agree that all of these challenges potentially affect the leadership of the Communist Party, and even its very existence.  But while they may slow China’s progress, I don’t believe they will derail it.

Regime change may sound attractive to some politicians, but, according to a Washington Post article:  “Given the landscape of nationalism and xenophobia that already exists in China, a successor regime to the CCP is likely to be as unfriendly — if not even more belligerent — than the present leadership.”

What’s more, according to Richard McGregor in The Party (p. xxii) “The Party’s marginalization of all political opponents makes it somewhat like the Iraqi army after the second Gulf war.  Even if it were disbanded or fell apart, it would have to be put back together again, because its members alone have the skills, experience, and networks to run the country.”

Similarly, Harvard Ph.D. and CNN analyst Fareed Zakaria has written that:  “China’s… population dwarfs that of the United States, and [it is] the world’s largest market for almost every good… It houses some of the planet’s fastest computers and holds the largest foreign exchange reserves on earth. Even if it experienced some kind of regime change, the broader features of its rise and strength would persist.”

Current US policy sometimes seems friendly to China and other times seems shaped by the belief that “This planet ain’t big enough for both of us.”   As I explained in my post entitled “Dueling superiority complexes” politicians in China and in the US are both convinced that “our system is better than your system.” 

I certainly agree the US system is better for me.  The more I learn about China, the more I want my grandson to live under the US system, and fear what it would be like if he had to live under Chinese rule.

In any case, it is clear that “China’s ascension to global power is the most significant new factor in the international system in centuries.”  Sooner or later, the US must find a path to an acceptable world order in which we are tied for number one or – gasp – clearly number two.