China Takes Over the World

Goldman (GS) (yes, the same Goldman that is gambling with your money) is predicting China to grow blazing hot in 2009 and 2010. Goldman is probably jamming as much money as they can into the Shanghai Stock Exchange.

China has been sitting on a cushion of cash from exporting all of those goods to the United States. Every Chinese made product that Americans buy at Wal-Mart (WMT) directly fuels the wealth and growth of China.

Pundits like to use the often heard statement that when "America sneezes, the rest of the world catches a cold." The Great Recession slammed China just as hard as it slammed the United States. The oft heard statement might have been true for the past 60 years, but it no longer applies to China.

The economist in me predicts that the Chinese economy will recover faster from the Great Recession than the United States. China's huge cushion of cash and its willingness to use this cash for fiscal stimulus softens their suffering. They're not using the cash for just basic needs, but they're also using it to create new industries like automobiles, technology, and medicine. In contrast, the United States has to borrow it's way out of this paper bag. This will cost the United States in terms of future restrictions.

It makes sense simplistically. If we had two neighbors and one had a large savings account and the other only had credit, who would likely take care of their bills and have greater financial stability? This is a very gross simplification, but all-else-equal, it's better to have a savings account than none.

China's taking over of the economic world does not have to be a foregone conclusion. If the United States fixed its policies on education, taxes, limited liability, and maybe healthcare, then the US will remain the forefront of economic prosperity. That's unlikely to happen.

The investor in me says to invest in China through a broad based indexed ETF like GXC or FXI.

The gambler in me reminds us not to wager all of our money on one hand of China.

Disclosure: No positions

Comments

[CautiousInv...:]

This both an interesting and timely topic.

In looking at China from an intermediate term perspective, what stands out is that in rough terms 40% of their economy is is derived from exports (gross not net) and about 40% is derived through fixed investment. The former is determined by global markets while the latter is largely determined by the state.

Over the next year or two, while exports are being seriously challenged, I think China's growth hinges upon its willingness to fund infrastructure programs and to take measures to boost consumer spending. In the past months they have done both, with the $585 stimulus package and the effort to expand lending.

The package contains both social spending and infrastructure spending but whether this is sufficient to offset the drop in exports is under continuing debate. More importantly is the structural balance of government spending and how it balances the competing claims of inland China versus coastal China. The former is mostly agricultural while the latter is more developed and is home to most of China’s manufacturing, finance and trade.

The distinction between the agrarian inland provinces and the more developed coastal territories is important and will shape and influence the timing of the evolution of China into a more consumption driven economy in the long-term which is essential to its realizing its long-term growth potential.

Some argue that encouraging rural consumption at a time of higher unemployment is building a bigger problem for the future. This argument maintains that rural laborers earn only a small amount of money, and that while having them spend their meager savings now might keep gross domestic product up in the short term, it is a short-term fix and poses future problems in the form of social unrest. Some also feel pumping stimulus yuan into the countryside is a misallocation of money that could be better spent supporting the urban middle class, in theory creating jobs through increased middle-class consumption of services.

In many ways, these two views reflect long-standing economic arguments in China — namely, the constant struggle to balance the coastal trade-based economy and the interior agriculture-dominated economy. The former is smaller but wealthier, with stronger ties abroad — and therefore more political power to lobby for preferential treatment. The latter is much larger, but more isolated from the international community — and in Chinese history, frequently the source of instability and revolt in times of stress.

Thus, before China can become a more consumer driven economy government leaders must decide how to balance the needs of the agrarian poor with the desire to develop the coastal areas into consumer driven regions of prosperity.

Apr 23 09:23 AM

[Kapurnickus:]

Continue the analogy Philip,

If that neighbor (with all the savings) relied on his idebted neighborhood for all of his future income, which one would you then expect to win?

That question is slightly more complex.

The rise of the Chinese middle class is the lynch-pin in the equation of whether China will be the dominant force of the 21st century. Someone will have to pick up the slack of the American consumer now that it is gone. It doesn't look like any other nation (or region for that matter) can do it. But, if China can begin to consume its own products and services at significant rates, it will surely be a mighty force. But, without anyone to consume these products, what have they got, besides a lot of cash?

-Nick

Apr 23 09:33 AM

[socrateazz:]

People are just dreaming in the US. The US moved from a capitalistic to a socialistic economy and now they are moving toward communism...All of those moves will ultimately reducewealth in this country. China has moved from communism toward capitalism in their economy. They are going to thrive just because of that fact. We will see what happens but I bet the reasons for what happens will not really be seen by fixated propagandists

Apr 23 09:50 AM

[john redmond:]

China has a government run by a group of pragmatic capitalists who seek wealth creation and are willing to adopt any credo to acheive it. The United States is a country that has given in to the screams and demands of the howling mob and is now run by idiological criminals that are only interested in grabbing power over the lives of its citizens. History has proven that countries that work hand in hand with Natural law (Capitalism/ Free Enterprise) rise to the top of the economic ladder while countries who think that the human ego and central planning can create wealth always fail with their latest version of the "Five Year Plan".

Apr 23 10:03 AM

[Mark Bern:]

China may be the answer someday, but they are not positioned to lead the world out of recession yet this time. Their Premier keeps saying that they will have 8% growth in GDP in 2009. Since that decision was made official and repeated publicly several times, the negative information from the Chinese government has stopped. Prior to the announcement, the government admitted that over 20 million jobs had been lost and expected the total to rise to as high as 50 million before the recession ended.

Since that sort of information does not support the "official" 8% growth projected by the central committee, it can no longer be allowed. Get used to such manipulation. We could see it here in the good old USA. As a matter of fact, it appears that we may already be experiencing it regarding the health of the big banks.

Apr 23 10:10 AM

[Dustinian:]

I have thought this for some time. It is true that exports will continue to apply downward pressure, but the Chinese are far more aware of this than any of us. They are actively trying to reduce their dependence on the rest of the world's consumption by increasing their own. In this regard they have been very effective. Furthermore, I think it is likely that another consumption boosting stimulus will be introduced by the CCP before the end of the year.

Apr 23 10:53 AM

[nun:]

socrateazz is exactly right. Bringing China into MFN status and the WTO supposedly (with no conditions whatsoever) would "infect" China with democracy. Instead the US has been infected.


On Apr 23 09:50 AM socrateazz wrote:

> People are just dreaming in the US. The US moved from a capitalistic
> to a socialistic economy and now they are moving toward communism...All
> of those moves will ultimately reducewealth in this country. China
> has moved from communism toward capitalism in their economy.

Apr 23 11:35 AM

[Dustinian:]

There is still really nothing socialistic or communistic about the United States. This is all nonsense.

Apr 23 01:07 PM

[Dana H.:]

Yes, Dustinian, there is nothing at all socialistic about the President of the United States firing the CEO of GM. Nothing to see here folks. Move along.

(To be precise, we're moving in the direction of fascism rather than traditional socialism, as aptly explained by Yaron Brook in this PJTV video: www.pjtv.com/video/PJT.../;jsessionid=abcDovzj_...

As for China, I wish them the best, and hope they can keep moving in the direction of increased freedom. The more wealthy, capitalistic countries in the world there are, the better for all of us.

Apr 23 01:47 PM

[HaavBline:]

An overly sensational title but rather conventional and basic content. But as a first article, it is welcome.

It is no secrete by now that China is in much better financial health and, relatively speaking, this global financial crisis will turn out to a good opportunity for China.

It is now a cliche to say that the Chinese words for "crisis" consist of the words for "challenge" and "opportunity". For China, this current crisis may turn out to be one time the challenge for two times the opportunity.

Challenge: Export.
Opportunities: Improved access to natural resources. Balanced domestic growth.

Apr 24 02:21 AM

[HaavBline:]

Excellent points.

There is no question to me that after 30 years of neglect, China must address the well-being of the vast inland-rural poor as top priority. Internal debates are healthy, and much of the elite class now represent the urban/coastal residents who have benefited at the expense of the inland/rural residents.

Fortunately for China, the current Chinese leaders clearly understands the danger that the widening costal-inland urban-rural divide are very dangerous for China. This is clearly the biggest challenge for China and will probably take the next 30 years to resolve.

On Apr 23 09:23 AM CautiousInvestor wrote:

> This both an interesting and timely topic.
>
> In looking at China from an intermediate term perspective, what stands
> out is that in rough terms 40% of their economy is is derived from
> exports (gross not net) and about 40% is derived through fixed investment.
> The former is determined by global markets while the latter is largely
> determined by the state.
>
> Over the next year or two, while exports are being seriously challenged,
> I think China's growth hinges upon its willingness to fund infrastructure
> programs and to take measures to boost consumer spending. In the
> past months they have done both, with the $585 stimulus package and
> the effort to expand lending.
>
> The package contains both social spending and infrastructure spending
> but whether this is sufficient to offset the drop in exports is under
> continuing debate. More importantly is the structural balance of
> government spending and how it balances the competing claims of inland
> China versus coastal China. The former is mostly agricultural while
> the latter is more developed and is home to most of China’s manufacturing,
> finance and trade.
>
> The distinction between the agrarian inland provinces and the more
> developed coastal territories is important and will shape and influence
> the timing of the evolution of China into a more consumption driven
> economy in the long-term which is essential to its realizing its
> long-term growth potential.
>
> Some argue that encouraging rural consumption at a time of higher
> unemployment is building a bigger problem for the future. This argument
> maintains that rural laborers earn only a small amount of money,
> and that while having them spend their meager savings now might keep
> gross domestic product up in the short term, it is a short-term fix
> and poses future problems in the form of social unrest. Some also
> feel pumping stimulus yuan into the countryside is a misallocation
> of money that could be better spent supporting the urban middle class,
> in theory creating jobs through increased middle-class consumption
> of services.
>
> In many ways, these two views reflect long-standing economic arguments
> in China — namely, the constant struggle to balance the coastal trade-based
> economy and the interior agriculture-dominated economy. The former
> is smaller but wealthier, with stronger ties abroad — and therefore
> more political power to lobby for preferential treatment. The latter
> is much larger, but more isolated from the international community
> — and in Chinese history, frequently the source of instability and
> revolt in times of stress.
>
> Thus, before China can become a more consumer driven economy government
> leaders must decide how to balance the needs of the agrarian poor
> with the desire to develop the coastal areas into consumer driven
> regions of prosperity.

Apr 24 02:35 AM

[coreopsis:]

Really nothing...except the sense of entitlement to SUVs, healthcare, a college education for everyone even though they'd rather been smoking weed, and tests that prove that Americans (especially racial minorities) are 'all above average'.

It is true that, in the end, it's the quality of leadership that counts. Americans have elected the lowest common denominator twice in GWB, and that's a very deep hole to dig out of. Granted that the Republicans cannot be blamed for everything, but the reality is that the problem is America is really political. For that reason, they have been, are, and will continue to lose ground to political systems which are more effective at building consensus around the goals of nationhood and more equitable forms of income distribution.


On Apr 23 01:07 PM Dustinian wrote:

> There is still really nothing socialistic or communistic about the
> United States. This is all nonsense.

Apr 24 09:12 AM

[Know Nothin...:]

I would advise you not to use such a strong "Heading" in your report. Your comments are right. But please be humble and use more friendly words. The title may enrage our friendly nations.
China should not and will not fall into the mistakes that other countries made before. Humble and resilient is the best way to co-operate in this world.

Apr 24 10:34 AM

[Dustinian:]

The ousting of the CEO of GM was simply a political move. Obama had to been seen as being "tough" on corporations asking for money. So he gets rid of the CEO of a car company which has asked for small amounts of loans compared to Wall Street, and furthermore will soon be split up.

*shriek* Command economy!


On Apr 23 01:47 PM Dana H. wrote:

> Yes, Dustinian, there is nothing at all socialistic about the President
> of the United States firing the CEO of GM. Nothing to see here folks.
> Move along.
>
> (To be precise, we're moving in the direction of fascism rather than
> traditional socialism, as aptly explained by Yaron Brook in this
> PJTV video: www.pjtv.com/video/PJT.../;jsessionid=abcDovzj_...
>
>
> As for China, I wish them the best, and hope they can keep moving
> in the direction of increased freedom. The more wealthy, capitalistic
> countries in the world there are, the better for all of us.

Apr 24 10:48 AM

[Obi-Wan:]

Classic tale of new bully on the block coming in and posturing with the old bully on the block (US). Whoever blinks is out.....

Apr 24 12:56 PM

[Joseph Sherman:]

The world is changing. Rather thank looking of a single dominant player in the global economy, look for communities who will create value for each other.

Apr 24 01:11 PM

[one eye:]

the Chinese don't blink.

May 07 08:25 AM

[belikewater:]

I think a more interesting question to be raised is "what would the US-based readers of this article do, if China were to become the dominant world power in a decade?"

-Would you move to China to take advantage of the growth?
-Would you prefer to work for a MNC?
-Do you think that China would actually become a consumer of any potential future US goods/services vs. its own?

Just curious to see what you think.

May 15 03:43 AM

[harammph:]

belike: I would learn Mandarin and customs first, I would be welcomed because of my age and white hair, I would learn to eat their food and would Bribe the proper officials before making any kind of Foray into their Business Sector.

Up to the Crash, The Chinese were a Big Consumer of anything Foreign. You name it they bought it, Big Flat Screens, Cars, Refrigerators.

2 reasons, a sign of wealth and the Junk China was producing for its internal consumption. Now the Good stuff is kept but once the People feel better they will resume buying externally with a vengeance.

The Internet has shown them what an be had.

May 23 05:03 PM

[Freya:]

China expects unemplyment to rise to "50 million"...WOW. Sounds really big doesn't it.

But then China has more than 4 times as many people as the USA, that 50 Million on a percentage basis is around 4%...Don't we wish. (1.3 Billion)

Internal Consumption has been growing in the double digits for months(last Oct/Nov if I recalled correctly) but then they did have a 25% savings rate and can afford to buy the goods which were slated for export( better quality), especially now when Credit restrictions are being dropped and Incentives to Buy internally are being raised.

As far as exports are concerned... go into any store other than Walmart, don't buy anything, just look where a product was made. China, China, China.

We are in a deep recession but the goods we still buy are predominantly of Chinese manufacture.

They are still exporting, we are still buying, they are growing internally, we aren't.

Apr 24 02:12 AM