The Economic Sun Is Rising in the East

For many decades, investors worldwide always looked to the United States to find answers about the future direction of the world economy. Financial markets in the U.S. always took the lead and markets worldwide followed U.S. markets very closely. The correlations between international financial markets have risen quite a bit in the last two decades, especially in times of crisis where the link between the various markets is particularly strong. This time is no different. With global markets suffering badly, investors do not make a distinction between U.S. equities and other markets.

Comparable to previous crises, the world is looking for the U.S. to take the lead and help the world economy out of the dark, despite the fact that the global domino effect of the current crisis began in the U.S. We think that the focus of investors will shift in the coming weeks and furthermore believe that China will be the dominant force behind the economic recovery in coming months. This would be another confirmation that the global power shift from the West to the East is continuing.

In a time when most countries take on a very heavy debt burden to finance the various economic stimulus packages, China is using its enormous currency reserves to invest in the country’s future. Just last week, a Chinese delegation visited Germany and signed contracts in excess of USD 10 billion to purchase industrial equipment and technology from German companies and announced further plans to increase spending in this area. The Chinese delegation is also visiting Switzerland and other European countries in coming weeks. A similar trend can be seen in the area of commodities where China has been moving very aggressively lately to secure its place of authority on the future supply of commodities.

The Chinese National Congress is to give further details this week about its plan to stimulate the economy. So far, their efforts have been focused on the domestic economy, but the attention is now moving to further measures to stimulate the economy. There is increasing evidence that the size of China’s stimulus package could be twice as much as the initial outlay of USD 300 billion, which is already an enormous amount of money. Should the size of this package be substantially larger, then China’s economic stimulus program would make many other countries’ stimulus programs look very small in comparison.

The difference between China and the western world is that China has the budget surpluses and currency reserves to finance such a giant stimulus package without the need to drive the national debt to mind blowing numbers. It seems that China is making use of the current crisis and the opportunities it offers to further improve the structure of its economy and to again strengthen its position in the international community.

We think it is crucial that investors are aware of this structural economic change going on and consider Chinese investments in their asset allocation. The Chinese stock market lost almost two thirds of its value since its high at the end of 2007. We think the current levels offer a great entry point for investors. Look to the East; that’s where some of the most tangible economic and market gains are going to be made. We believe their effective stimulus plan will bring China firmly out of the darkness of the current crisis and solidify them as a global economic stronghold. Surely, the sun is rising in the East…

Comments

[peterthepai...:]

i like the east too...

but their markets are in the west...

or were...

Mar 05 05:12 AM

[Dave Wrixon:]

Yes, on the deficit, China might be going to 3% this year which whilst less than the 12% of the USA is still substantial.

However, the Chinese will be cumulating this onto an outstanding debt burnden of nothing. Indeed they have an ongoing revenue stream to fall back on. The US by contrast has been piling this on top of debts that have been accumulating over decades.

Also, China has the economic moral high ground. They are deficit spending in a severe cyclic downturn. Isn't that what any competant economist would tell you to do?

Mar 05 07:52 AM

[Josh Wong:]

.... Yes... Any competent *Keynesian* economist. Don't ask a Republican or Supply Side economist that question though if you want the same answer.

Nothing in this world is free, and we have to remember that a spending solution will have you paying for it later one way or another.

Having visited China, I can safely say that they could really use an upgrade in infrastructure and it *would* be the right thing to do (even without the downturn). The current economic climate merely makes the case all that more compelling as it adds the benefit of dampening the effect of the world wide decline.

However, as much as I agree with your "economic moral high ground" assessment, how often do the people in power (especially with China's history) worry about the morality context of their decisions? ;)

On Mar 05 07:52 AM Dave Wrixon wrote:

> Yes, on the deficit, China might be going to 3% this year which whilst
> less than the 12% of the USA is still substantial.
>
> However, the Chinese will be cumulating this onto an outstanding
> debt burnden of nothing. Indeed they have an ongoing revenue stream
> to fall back on. The US by contrast has been piling this on top of
> debts that have been accumulating over decades.
>
> Also, China has the economic moral high ground. They are deficit
> spending in a severe cyclic downturn. Isn't that what any competant
> economist would tell you to do?

Mar 05 08:22 AM

[Tony Daltorio:]

Good article. Economic power is definitely flowing from the West to the East.

Mar 05 09:07 AM

[kelm:]

Good article. China is clearly executing a broad, strategic plan to purchase hard assets ensuring commodity supply for decades to come. They have also made large cash loans to Russia ($25 billion) and Brazil in exchange for oil. The key will be for China, and Asia to get domestic consumer spending higher and break the export model dependency. If Asia was even partially successful with that the west would drop in importance to them.

Mar 05 09:29 AM

[Ferdinand E...:]

The Chinese have more than "budget surpluses" and "currency reserves". They believe in themselves, and they are playing for keeps. The progress in China is nothing short of amazing, and if they keep their eye on the ball they can achieve anything.

Mar 05 09:32 AM

[jack kreg:]

one major difference between the China and the USA, is that China is not burdened by a horrible public school system run by political unions. 5 decades ago American schools were the standard as were our university's (public/private). The union run K-12 system now spends over $300,000/year to run a 8 month class room, the teacher getting only $70,000 or maybe $80,000, including benefits. Its a total failure.
The political school unions have ruined our K-12 schools and turned their backs on our society, leaving the middle class with a 3rd world education, at a 1st world price. University's have faired a little better, only because of parent choice, public/private, and the generousity of the alumini. Foreign students still flock to our univeristy's, but they dont immigrate for a failed K-12 system.
The public school unions, run by politically driven leadership has failed the middle class for decades, and now America is paying the price.
I cant find a good thing (NOT ONE) to say about what the political unions have done for our schools and country.

Mar 05 11:32 AM

[Tom E.:]

When the US savings rate goes above 10% (as it will), the Chinese economy will crumble.

Mar 05 03:40 PM

[Moon Kil Woong:]

What are you talking about Jack Kreg, all of China is effectively run by a Socialist union, the communist party. It is probably only that fact that has prevented a purge or major revolution there. As their export driven economy deflates, I wouldn't rule out another purge and destruction of productive capital again.

However, I agree with you that no child left behind is leaving behind an entire generation. We should be spending TALF on education not financial institutions.

Mar 05 10:58 PM

[knownothing:]

How abour US default on the Treasuries Chinese hold?

Mar 06 04:21 AM

[coreopsis:]

This comment can't see the forest for the trees. The read difference is (in Asia in general), you don't have to pay people to learn. In the US, you have a systemic incorrigible faction of young people who would rather game, watch TV & sports, and generally hang with their equally unambitious crowd than learn anything and be productive (at least in an economic sense).

The job of teachers is to teach, not to act in loco parentis and create the will to learn.

The US will continue to pour billions into education (and healthcare) with the hope of educating the next generation, with diminishing returns.

This is the secret to the rise of Asia and it will continue until economic parity and a breakdown of traditional values makes them as "fat, dump and lazy" as Americans are perceived to be.


On Mar 05 11:32 AM jack kreg wrote:

> one major difference between the China and the USA, is that China
> is not burdened by a horrible public school system run by political
> unions. 5 decades ago American schools were the standard as were
> our university's (public/private). The union run K-12 system now
> spends over $300,000/year to run a 8 month class room, the teacher
> getting only $70,000 or maybe $80,000, including benefits. Its a
> total failure.
> The political school unions have ruined our K-12 schools and turned
> their backs on our society, leaving the middle class with a 3rd world
> education, at a 1st world price. University's have faired a little
> better, only because of parent choice, public/private, and the generousity
> of the alumini. Foreign students still flock to our univeristy's,
> but they dont immigrate for a failed K-12 system.
> The public school unions, run by politically driven leadership has
> failed the middle class for decades, and now America is paying the
> price.
> I cant find a good thing (NOT ONE) to say about what the political
> unions have done for our schools and country.

Mar 07 01:09 PM