Ultimate Economic Showdown: China vs. the U.S.

Less than a week ago I wrote a well commented article called "New Economic World Order: U.S. No Longer On Top," in which I briefly summarized the economic fallout of the last few weeks, and then argued how the U.S. would not continue to be on top of the economic world order. I argued that there were two reasons the U.S. had lost economic power over the global scene.

The first was that regardless of who is to blame for producing the toxic debt (regulators, banks, leveraging practices, U.S. entities, foreign entities, etc.) the fact is that the U.S. produced the majority of it. Many individuals agree that the U.S. already had a tenuous image abroad, and that many foreign individuals, institutions, and perhaps even governments, might blame the U.S. for the current global crisis. Comments on another article I wrote stated that was preposterous  - the U.S. was not solely to blame for current market conditions and that many non-U.S. banks imitated the same practices.

I argue that it doesn't matter. It's all relative. Foreign individuals are going to have their own perspectives and I strongly believe in psychological attribution theory - that it's human nature to blame failure on outside factors (in this case foreign individuals blaming the U.S. for the crisis) and success on internal factors (perhaps when markets stabilize on their own bailout packages).  In no way am I trying to make a gross generalization and say that this is the case for the majority of foreign individuals – only that it does exist, and I see it growing in the near future. Subsequently, I see the U.S. losing a good portion of its political and economic clout at the global bargaining table.

Secondly, the U.S. has taken the brunt of the economic fallout and will not recover quickly or easily. The clear absence of economic dominance (for the time being) opens a number of possibilities for other nations to fill the gap.  Specifically, cash-rich nations like Japan, or emerging power-houses like China or India can step in. I quoted a NY Times article entitled: "Japan considers Bigger Role on Economic Stage," which stated:

…the fact they [economic proposals] are being discussed at all underscores the vacuum in leadership being felt across the world in the wake of an American-led economic debacle. The fact they are appearing in Japan, a nation long content to follow Washington's lead, reflects what many here call a movement toward a new global economic order in which no single country dominates. 'With the relative decline in U.S. economic and financial power, it is inevitable that U.S. leadership will also decline,' said Yasuhisa Shiozaki, a former chief cabinet secretary. 'We are seeing a new, multipolar economic regime starting to emerge.'

Why am I restating this? Because we saw last week some of the strongest language to date coming from China's official state newspaper. It completely supports the argument that the vacuum of economic power left by the U.S. in the wake of the financial disaster is attracting others to jockey for global position in a sort of pecking-order struggle.

A recent Reuters article: "U.S. has plundered world wealth with dollar: China paper", states how one of the leading commentaries

...in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

According to Reuters, the Friday quote read:

'The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place.'

The commentary certainly does not directly reflect government viewpoints - and few would argue it makes logical sense - but it does appear prominently in the traditionally heavily-censored, chief paper of the ruling communist party.

The Reuters article states further: "But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis."

This comes at the same time that the ASEM Asian-European financial meeting is taking place. In another article from the Wall Street Journal, "China Backs Europe's Push for Oversight," Ian Johnson describes how China officially supports Europe's push for more global regulation. Johnson describes it quite well:

On one hand, China values stability and this would seem naturally to support regulation. On the other, it likely doesn't want international institutions that curb its sovereignty or constrain its financial flows. In Brussels, EU officials said they weren't surprised China agreed to side with the EU in pushing for new rules for financial markets. 'They want a seat at the table in whatever is going to happen.'

I think that last sentence sums it up perfectly. The world knows that China is going to be one of the – if not the – leading economic powers of the next century. It can only be expected that China wants to position itself as one of the leading global players.

Emerginvest's China and U.S. market comparison  over the last year:

I highly doubt we will continue to see this kind of strong language coming from such official sources as the state newspaper, but I do think we will see growing international disdain for the U.S. in light of the crisis. China certainly has her own amalgam of problems to deal with, including an extremely downtrodden stock market and falling commodity prices. Yet, I strongly feel we will continue to see China avoiding any global solution where the United States takes a dominant role. In my opinion, between the EU bloc, India, China, Brazil, the U.S., and the Middle East, there will be no one entity that comes out of this global economic catastrophe as definitively dominant.

But I think that's the point: before this I would have said the U.S. without question.

Disclosure: Emerginvest is an international finance portal, helping investors find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.

Comments

[mauldin0495:]

dollar and Treasury, before they were backed by faith and confidence of USA gov. now they are backed by faith and confidence of China, Japan, Russia, and Europe. how much faith and confidence will be left for foreigner if USA cant control its national deficit?

2008 Oct 28 08:47 AM

[mauldin0495:]

now they are backed by faith and confidence of China, Japan, Russia, and Europe on USA.

2008 Oct 28 08:48 AM

[Nick Gogerty:]

I agree with the articles premise about attribution theory and the potential for some dangerous policy both domestic and abroad from Chinese and US positions going forward. In times of crisis people tend to organize arond others and group think sets in. These are dangerous times with policy and power vacuums building in many parts of the world.

2008 Oct 28 09:26 AM

[Emerginvest:]

economy101,

I certainly agree that investor confidence plays a major role, although I'm not sure what you mean by "now they are backed by faith and confidence of China, Japan, Russia, and Europe" if you wouldn't mind clarifying.

2008 Oct 28 10:43 AM

[Emerginvest:]

economy101,

I obviously agree that investor confidence is one of the core issues of the crisis. Can you clarify "now they are backed by faith and confidence of China, Japan, Russia, and Europe on USA?" I'm not sure I know what you mean.

2008 Oct 28 10:45 AM

[Emerginvest:]

Nick,

Thanks for the comment. I don't think that mass hysteria or anything close will set in, all I'm saying is that there will be far reaching negative sentiment against the US which many people don't seem to be talking about. You might find an article I just read which is tangentially related fairly interesting.: www.nytimes.com/2008/1....

Are there any specific ways you think it will affect the rest of the world?

2008 Oct 28 10:45 AM

[P29:]

"China certainly has her own amalgam of problems to deal with, including an extremely downtrodden stock market and falling commodity prices"

Please explain why falling commodity prices are a "problem" for China, rather than a function of its slowing.

2008 Oct 28 11:12 AM

[Alex Filonov:]

Every time somebody wanted to "bury" USA, it became stronger. China might say whatever it wants, but it still supports dollar against own currency. Sharp growth of US dollar in the last three months tells you something too. When it hits the fan, everybody wants US treasuries, thus supporting US dollar.

Disclosure: long UUP.

2008 Oct 28 12:14 PM

[Consider_this:]

China's exchange "PEG" with the dollar hasn't changed, despite USD raising almost 20%+ in a short time. It has gradually floated "up" from 1 dollar = 8 yuan at about Jan 07, to about 1 USD = 6.8 today.

This acts as a double whammy against it's exports: (A) It's export did not become cheaper from the USA's perspective even as USD climbed. It's exported goods are just as equally expensive as a few months back, if not more so. (B) The yuan increased relative to other countries, like EUR or rest of Asia, which makes these regions consume less goods from China.

Also consider that the Chinese govt has scaled back the tax benefits of exporting.

And yet, the yuan is still relatively pegged against USD and shows no sign of reversing it's climb against USD. What does this tell you?

It says that China is intentionally weaning off it's export dependence. It's yuan, as it gets strong, will one day no longer need to "PEG" to USD. A strong currency will also start to serve boost domestic consumption power.

In this backdrop...

Try pricing the China's stock market value against other measures: like EUR, Gold, etc. And you'll see that Chinese stock market didn't really drop as much as the above graph suggests.

That's pretty impressive for an Emerging Market country.

2008 Oct 28 12:58 PM

[Mark Anthony:]

Talking about the Ultimate Show Down. I wonder if China is behind the $2.29T nakes shorting of US Treasury Bonds? You have got to be SHOCKED out of your shell if you read this:

seekingalpha.com/artic...

2008 Oct 28 02:18 PM

[X-15:]

The Chinese think they can smooth out the bubbles that we in the US have a proclivity to produce lately ?Good deal.

Barak Obama better have a game plan, because as it stands we are knee deep in it.
Paul Volker for FED HEAD and T. Boone Pickens for Energy Sec would be a nice combo to start.

Consider_This -interesting comment on China

2008 Oct 28 08:21 PM

[Planting $ ...:]

China is one of the main growth stories of our time. So is Technology. In the late 90s everyone was excited about technology as they have been about the growth of the BRIC countries, and especially China. Technology is still booming, but the market and irrational exuberrance has quieted. China's economy will continue to grow even now that its stock is down to attractive valuations.

Like the Wall Street Journal article said China wants a seat at the regulatory table. There economy certainly buys them a seat at the table. Will they be the dominant economic force. Maybe in your lifetime James, but not in the near future.

Listed here is the GDP by country as found in the World Bank website.

Gross domestic product 2007
(millions of
Ranking Economy US dollars)

1 United States 13,811,200
2 Japan 4,376,705
3 Germany 3,297,233
4 China 3,280,053
5 United Kingdom 2,727,806
6 France 2,562,288
7 Italy 2,107,481
8 Spain 1,429,226
9 Canada 1,326,376
10 Brazil 1,314,170
11 Russian Federation 1,291,011
12 India 1,170,968


In 2006 I was amazed that China had moved to fourth place by beating out Germany. This year the U.K. and Germany switched places. China only needs to double a little more than twice to catch up with the U.S. Using the rule of 72, if China grows its GDP by 10% per year then they will double approximately every 7.2 years. They could double from $3.28 Trillion to $6.56T by 2014, and on to $13.12T by half way through 2021. This means they would almost catch up with the U.S. if the U.S. completely stoped growing for the next 14.4 years. More likely the U.S. grows at more like 2.5% a year. Of course 2.5% of the U.S. GDP is $345B and 10% of China's GDP is $328B, so it would take longer than 14 years at these growth rates. Most prominent economists do think China will pass the U.S. this century. The very aggresive estimates are around 20 years. To say it will happen when we recover from the current crisis is extremly aggresive. Of course a lot can change in the next 50 years or so.

Information technology is ushering in a new world order, but the excited investors 10 years ago were early. What they foretold is still taking its time to play out. So to with China.

2008 Oct 28 10:06 PM