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the munk debates

Former U.S. Secretary of State Henry Kissinger speaks at the International Economic Forum of the Americas/Conference of Montreal JuneSHAUN BEST

At the height of the global economic crisis in 2008, governments everywhere opened the taps and flooded their financial systems with capital. But none came close to matching the scale, scope or speed of the Chinese response. Beijing pumped in close to $900-billion (U.S.), at a time when Washington was still debating spending its first $100-billion. Other major economies were staring at a job-crushing recession. China was worried because growth had fallen below double digits.

Unlike deficit-ridden governments in the U.S. and Europe, Beijing was – and still is – swimming in surpluses. So money was no object. The Chinese leadership was highly motivated to do whatever it took to get the economy back on the fast track. Strong economic growth is vital to maintaining the country's improving living standards, keeping social unrest in check, greasing the wheels of China's unique version of state capitalism and ensuring that the Communist Party's hegemony remains unchallenged.

More than two decades of unparalleled growth have transformed China from an economic backwater into a powerhouse sucking in commodities and capital from the rest of the world at an astonishing pace. Canada, Australia and other major resource producers have ridden this rocket to considerable prosperity of their own. Now, the Big Red Machine stands at one of those crucial inflection points. Has it become the world's biggest bubble economy, a giant Ponzi scheme, in the words of one critic, that's about to unravel? Or is it truly an awakening giant on the verge of global domination, the only supposedly Communist state ever to successfully embrace a capitalist model as a means of maintaining social order and ensuring the party keeps its tight grip on the levers of the power?

China's heavy pump-priming worked. Major infrastructure and social-housing projects got off the ground quickly. A flood of subsidies kept large numbers of factories open, avoiding the spectre of millions of unemployed migrant workers taking to the streets. But the influx of cheap credit and investment capital has also created dangerous bubbles in real estate and other assets.

Now Beijing is engaged in a tougher exercise: slowing the economic freight train to corral steadily rising inflation, without sending it off the rails. If there is anything more worrisome to a Politburo member than an army of unemployed migrant workers, it's an army of workers facing price increases of 10 per cent or more for certain staple food items and other living costs. The new five-year plan – No. 12, if you're keeping track – outlines a bold agenda designed to shift the focus of growth to boost domestic consumption, reduce reliance on low-cost manufacturing, develop the nascent service sector and invest heavily in "emerging strategic industries," such as bio-technology.

There is a joke in China that rapid economic development has benefited everyone but workers, farmers and entrepreneurs without good party connections. Those plugged in to the right networks have enjoyed phenomenal success. China now ranks second to the U.S. in billionaires, with 128. Millions of other people have been lifted out of poverty. But most of the gains from the long-running boom have eluded a huge swath of households. Nearly half a billion people struggle to get by on less than $2 a day.

If this latest transformation works, economists calculate China will be able to live with lower annual growth, as wages rise and income disparities diminish. The large cadre of China boosters believe the pragmatic and nimble leadership will manage this essential but tricky rebalancing act. They argue that the country remains on course to supplant the fiscally challenged and politically paralyzed United States and Europe as the world's next superpower – one poised to tower over its rivals for the rest of this century, much as the British owned the 19th century and the Americans most of the 20th.

The equally large group of China skeptics, though, insist this is a house of cards on the verge of collapse from myriad external and especially internal strains exacerbated by a broken growth model.

On the international front, the bumps on the road to superpower status include a host of monetary, investment and trade actions that have drawn the ire of other nations, led by a deliberate strategy of keeping the yuan artificially cheap while China deploys a fraction of its more than $2.8-trillion in reserves to snap up energy producers, mineral deposits and farmland around the world. But Beijing has done an excellent job of protecting and enhancing its political and economic interests abroad, not least because of its status as the world's No. 1 creditor and biggest buyer of just about every major commodity.

It's on the domestic front where China's frailties stand out – a feeble financial system, falling consumption as a share of GDP, weak job growth, major inefficiencies in state-dominated sectors and unfavourable demographics stemming from the one-child policy – and where dreams of global domination are most likely to come unglued.

Within a single generation of sustained high growth, China has vaulted past Japan to become the second-largest economy. And it will most likely overtake the United States within two decades or sooner. But by some important measures, China will remain far from the top. Even if per capita national income tripled, it would still amount to only about one-quarter of the U.S. level, ranking somewhere near Hungary in about 45th place.

That would give China another first. No other country has managed to build such a huge economy and yet remain separated from the rich countries by such a wide gap in average incomes. The climb up the ladder still has a long way to go.