China's Economic Prowess Predicts Geopolitical Change

The heart of the global economy has moved East, yet the necessary economic, institutional, and political adjustments are still in their infancy. However, events this spring strongly suggest a steady acceleration in reshaping the geopolitical map.

On the economic front, changes are more rapid. There has been a clear decoupling between the Chinese juggernaut and the 'old' economies of the U.S. and Europe. China, which first passed the U.S. in automobile production, has now also surpassed the U.S. in automobile consumption.

China's domestic economy continues to explode, with annual growth consistently above 20% per year. With remarkably little disruption, China is making the transition from an export-dependent economy to a much more domestically-oriented economy – with the rising incomes and huge pool of savings among China's 1.2 billion people providing the long-term support necessary for such a fantastic level of growth.

In the process, China has become the “engine” of the global economy, replacing the United States. As Chinese consumption becomes a dominant economic force, this in turn is radically altering trade relationships. Obviously, the emerging economies of Southeast Asia are now totally dependent on Chinese economic strength for their own prosperity.

However, a recent article in The Telegraph shows that this trend has become global. Brazil, which itself is one of the world's new “economic tigers”, recently announced that China had replaced the U.S. as its largest trading partner – for the first time in more than 70 years.

China is further cementing its new status by aggressively negotiating large, economic deals with other nations, from currency-swaps with six “emerging market” economies, to a huge petroleum deal with Russia, and a vast array of smaller, commodities-based economic deals. The combination of macroeconomic forces and this series of economic agreements is forcing various institutional changes, which thus far have lagged economic developments.

Chinese currency-swaps are clearly part of a long-term goal of the Chinese government to replace the U.S. dollar with the Chinese “renminbi”as the world's new “reserve currency”. This process has been boosted by simultaneous calls from China, Russia, and other nations to introduce an IMF “currency” - as a transition measure to “wean” the world off of grossly over-valued U.S. dollars.

This is crucial not just for China, but for most other global economies. With the U.S. burdened with debts which exceed those of all the rest of the world, combined ($50 TRILLION in existing public/private debt + another $50 TRILLION in unfunded liabilities), many economies are at risk of being dragged down by the U.S.

The only way for the U.S. to postpone bankruptcy is to rapidly devalue the U.S. dollar – as this has the effect of significantly reducing the real value of all those trillions of debt, through dilution of the currency. Even if the U.S. government didn't choose a devaluation of its currency, the only thing keeping the U.S. Treasuries “bubble” from an horrific crash is that the Fed has been printing dollars to buy-up U.S. Treasuries.

This is known as “monetizing debt” (i.e. printing new money in order to pretend to pay its bills). History is clear in this regard. No nation has ever been able to “monetize” its debt without paying a steep price in currency devaluation.

To fuel this trend much more quickly, the currency swaps of the Chinese government significantly reduce demand for U.S. dollars by eliminating the need to hold them for international trade. Concurrently, China has authorized six of its largest trading-cities to also begin using the renminbi and not the U.S. dollar for their international trade transactions.

Added on to this, there has been a catastrophic decline in foreign demand for U.S. paper – of all kinds. This is a large part of the reason why the Fed has already been forced to start “monetizing” debt. On a supply/demand basis alone, the U.S. dollar is doomed to a long, steady decline – with no equilibrium value visible at any price level.

The inevitable devaluation of the U.S. dollar must speed-up the transition to a new, “reserve currency” for one very important reason: as was seen prior to the recent economic collapse (when the U.S. dollar was also steadily falling), maintaining the U.S. dollar as reserve currency “exports” high, U.S. inflation to all other economies.

In “emerging market” economies, and those with “pegs” to the U.S. dollar (including China), such inflation is a special hardship on the populations of these nations. Having endured this pain once, these countries do not want to face those price-pressures again.

The divergent goals of these economies compared to the 'old' economies of Europe and the U.S. mandate changes to global institutions. The primary targets, initially, are the World Bank and the IMF. There can be no justification for the U.S. and Europe to cling to their totally dominant positions in these institutions – when the global economy is now driven by China, along with a growing collection of other economies around the world who are now in China's “economic sphere of influence”.

After those institutions have either been overhauled, or simply replaced by new, Asian-based entities, the next target after that would be the United Nations. However, prior to any significant changes there, which would obviously be strenuously resisted by the U.S. and Europe, there must be a radical alteration of the geopolitical paradigm.

With China steadily replacing the U.S. in economic dominance in bilateral relations, the U.S. is simultaneously facing out-of-control deficits, with a Soviet-style debt-implosion imminent. This necessitates massively slashing U.S. spending. An inevitable “casualty” of such budget-cutting is the U.S.'s military “presence” – in well over 100 countries around the world.

Stripped of its economic dominance, the U.S. will find it increasingly hard to justify a military presence in countries who will be much more focused on their bilateral relationship with China then their previous ties to the U.S. Over time, the combination of growing Chinese economic dominance and waning, U.S. military “influence” will inevitably result in totally reshaping geopolitical dynamics.

The 21^st Century “belongs” to China – and we are all about to witness China asserting that claim.

Comments

[Ben Gee:]

People either over estimate China's ability to lead the recovery or think China will implode and collapse. Some are disapointed that China's industrial growth was only 7.3% in April. But 7.3% growth when exports was down by 22% was outstanding growth. But China's economy is small compared to US and EU. China will take at least 20 years to reach the some level of US or EU. Is it not too early to say that the world economic power is shifting to China? Some think China is rich because it has $ 2 trillion in foreign reserve. But this could evaporate if the US dollar goes down the tube. China came a long way and has a long way to go before it can be compared to any developed country in term of per capita income or buying power.

May 14 10:27 AM

[kelm:]

An excellent article! You have hit all of the major points I have been talking about on my blog for some months now. I also like the comment above regarding only 7.3% growth - that is 1.3 BILLION people growing at 7.3%. Size matters.

As for the currency situation, Jim Rogers stated that he could see the crisis as early as this fall. (Odd for him as he almost never makes any statement regarding timing.) I believe we will see the Fed announce a substantial increase in the QE strategy in the next few weeks in order to make a further attempt to drive down borrowing costs, especially for mortgages. How the market reacts when that comes may tell the tale. Last time rates dropped as everyone bailed out of bond shorts. This time we may well see a massive exodus from bonds and the dollar.

May 14 11:03 AM

[coreopsis:]

This is a very good summary of the most of the major favorable trends we are seeing in the rebalancing of the global economy away from the money-printing, warmongering, and gluttonous US. These may seem like value judgements, but in the longer run, everyone will benefit, with the possible exception of America.

As they say, 'if you want things to stay the same, something's got to change.' Change on a structural scale in the US is obviously impossible. As a result, the three most important problems will remain (and possibly worsen): the financial system (there is a small possibility that the next financial crisis could be worse than what we have now); vanishing manufacturing base, and healthcare.

The end of US superpower dominance of the global economy is inevitable and only those in denial would conclude otherwise.

May 14 12:29 PM

[PainfullyAware:]

China may be able to rise to be the main influence in world economic affairs - they are actively making longer term deals world wide and positioning themselves for influence well beyond their boarders.

The "Big Question" in my mind is whether they will be able to curtail the destruction of their "Living Environment". The health issues and general contempt for decent working conditions will be their undoing if not remedied.

I still think America has the "Best Base System" but its influence has been eroded to the point of being unrecognizable and without some "Maintenance and House Cleaning" may not survive. If we do not return to Constitutional Canons and Financial Simplification the future for America will be bleak.

All Empires End The Same Way - History Is Rife With Example. America; By Constitutional Mandate; Was Never Supposed To Be An Empire.

By making the Constitution a "Living Document" rather than "Wisdom Written From Experience With Tyranny" we have arrived at a point where power and influence now hold sway over mundane daily life. To "Save The System" even more Liberty will be sacrificed.

China And The US Seem To Be Moving To Meet In The Middle On Governmental Philosophy And Economical Metrics.

Economically, China Has Less "Dead Weight"; America's "Entitlement" has risen above 40% and is accelerating. When the populous realizes they can "Vote" themselves money out of the Treasury the end will occur within a hundred years (probably less with the speed things happen due to transportation and information). Rome Did Not Fall In One Day.

Governments Change; Humanity Does Not.

May 14 01:18 PM

[HALFTRACK:]

OBAMA WANTS TO "CHANGE USA INTO A SOCIALIST-COMMUNISTIC DICTATORSHIP COUNTRY", SUBJECT TO "U.N. WORLD ORDER RULES "SO ";ALL USA DOLLAR VALUES HAVE TO GO DOWN TO ZERO SO THE USA CITIZENS WILL DEPEND ON OBAMAS AND THE U.N. WHIMS ! HOMELAND SECURITY DEPARTMENT MUTATES INTO SOMETHING ORWELLIAN AS JUST RECENTLY THE FEDERAL AGENTS ARE NOW BEING SPECIFICALLY ENCOURAGED BY THE OBAMA ADMINISTRATION TO IDENTIFY AND TARGET AMERICANS FOR SCRUTINY AS POTENTIAL SECURITY THREATS BASED ON THEIR "POLITICAL BELIEFS" : HOW DO YOU LIKE THAT?????????

May 14 11:32 PM

[nova:]

The author is correct: a major geopolitical realignment process is on.
This is indisputable.

China growth and US decline in military and economic areas are also the facts.

Communism is not dead as the Western propaganda told us million times. Chinese communist rulers were much more wise and flexible than their Soviets counterparts. It is very obvious that American crony-capitalism is much less viable than Chinese free-market communism.

However, somehow people forget about other major world players such as Japan and Russia.

The bottom Line:
- The present geopolitical realignment process is not a simple one and is very unpredictable. Who could imagine just 25 years ago the Soviet collapse and the China rise?

- At the same time, US political and economic elite is totally clueless about the world processes and the consequences of their actions.

- Finally, as I stated many times on "Seeking Alpha", the present American situation is very reminiscent to the Soviet one just 15-20 years ago prior to major Soviets convulsions took place.

May 15 12:36 AM

[Simon Smelt:]

Agree mostly with your points and I've been arguing a similar line myself. Roubini is forecasting the Remnimbi will eventually take over from the U.S. $: www.nytimes.com/2009/0...

But:
1) An effective global reserve currency must furnish global liquidity. That requires a very large economy running significant deficits and / or against which large scale borrowing can take place.
2) Such a currency must also be backed by a sophisticated and trustworthy banking system with global reach.

Currently, China is a long way from meeting any of those requirements, which is why it is pursuing the currency basket approach. The U.S. and the Eurozone are currently the only runners with the U.S. having put immense effort into supporting its banks trustworthiness (albeit not from a taxpayer's perspective).

May 15 12:37 AM

[beijingpaddy:]

The Chinese have created their own form of socialism (State Socialism) that is a distinctly Chinese variant of the European based communist and socialist models. It is part Chinese Imperial Rule (something they are familiar with and used with some success for a few thousands years) mixed in with some imported leftish (economic, not social) stuff. It seems to be working for them. China unlike the USSR is not interested in exporting their model. Their main foreign policy goals at the moment are to break out of the US blockade, regain their status as one of the world’s leading countries and to get rich (develop).

The US might have a chance to regain its former glory if it were to follow a libertarian model. It culturally fits at least. Outward military expansion would cease, the government shrink, innovation amply rewarded, taxes reduced, and so forth. Kind of turning back the hands of time to an America in its golden days. But this is not very realistic. There were lots of Romans during the failing imperial period that dreamed of going back to the Republic. In any case, American is no longer a place of cheap labor and a developing country. No going backwards, just forward. Nor can it imitate Eurtopia, as Obama and the Democrats seem to want. Neither can it conquer the world as the Republicans mistakenly thought. Although it is in a very difficult place, I would hesitate to write the obituary too early. America is a richly endowed place in terms of people and land. It is not facing any serious moral decline either. Just a world around it, one it helped to create (Frankenstein), that is changing at hyper speeds. But everybody is facing that same challenge.

The last two centuries oversaw a world order created by Europeans (and their kith and kin) in their own image. There are now competing visions of what that world order should look like from Asia. (Latins will be comfortable with the European version for obvious reasons). The competition should be non-violent thanks to the nuclear peace. The previous American administrations blew a fine chance to begin the slow (and painful) road to a more democratic international order, choosing instead unilateralism. But this is one of the few viable options going forward. Nobody can go it alone anymore.
Power must be shared and something new created.

Chinese often complain that they know a lot more about the outside world then the outside world knows about them. Chinese, unlike the Japanese, appreciate outsiders learning about them and their language. Most westerners, when they try at all, want to see China through their own cultural glasses (this is natural) and get frustrated when the Chinese refuse to accommodate this vision (this is learned behavior and not natural). Think about the differences in ideas about Tibet, the media, the role of elections in the political system and so forth. Westerners I meet in China still insist that their ways (democracy, human rights, rule of law, the western version of these) are the only way forward for a global civilization and that China will some day have to grow up and see things as they do. Don’t hold your breath. Westerners no longer rule the world. The Chinese appreciate that foreign people do things differently and think that nations should be more tolerant of these differences. (I am here talking about the viewpoint of the people and not just the Chinese government). This is their idea of tolerance.

Maybe Americans should begin encouraging the kids to start learning Chinese. At least it is a start. Every Chinese student learns English. Even though English will remain the international Lingua Franca during our lifetimes and longer, it is a sign of friendship to be able to at least have conversational skills in Chinese. Kai shi ba!

May 15 05:55 AM

[polsLVNV:]

Our CEOs who are only interested in selling stocks and bonds to raise money to raise their bloted comp (houses, bonuses on bonuses, resorts, jets, stock options, etc., etc.) We/they have not been paying attention. The Japanese started selling cars here in the 50s. Over the years they have perfected them and bypassed GM. GM recently sold stock and bonds, and cooking the books, with the help of their CPA, in order to get a good rating. A group of class action vultures collected $300,000,000. to settle, without having to go to court. In order to collect on this, investors of course had to sign that the offending parties were not at fault and could not sue. The stockholders received about 22 cents per share, and I was told to sign off, but they did not know how much my bonds would get me (23 cents?) When Brooks McCormick tried to break his unions in the 1980s CEOs found out it only would bankrupt the company, like it ultimately did to International Harverster. Our short sighted CEOs thought by sending jobs abroad, they finally have ridded themselves of the worker problem. Now, who is left in America to buy the goods their companys produce, in china? Also, the Chinese have stepped up to fill our lack of manuracturing will. Now, if you want to build a factory in China, you can. However, China mandates they own 50% of the stock and profits and have many Chinese slanted ordinances. Who is dumb. We welcome them to attend our universities, and steal our technology, by getting good tech jobs with our nuclear group, auto group - on and on. Over a period of years, our intelligence has caught many of them stealing tapes, disks, and etc and taking our secrets to China. Of course, I don't believe they yet recognize patent law and copy right law. Its take, take, take, and we have given, given, given, and we will eventually run out of everything from money to natural resources. China is currently buying up copper, and other minerals all over the world, with our money, from buying their goods. The report states, they have not begun to buy gold. They insist we buy all their cars and everything else, however, they will not buy our products, why should they, they have taken our technology, and make their own; and we buy it. Remember their currency valuation - to their advantage. We continue to be stupid, in all relms. Also thank the Business Roundtable, a fraternity of CEOs, whose president said "the stockholders only own the company, We run it". The CEOs are filling their boards of directors with other CEOs who give themselves millions and millions of the stockholders money. Why? Because these companies have so many stock and bond holders, it is impossible to get them together for logical action of any kind. Business is not too big to fail, it is too big to succeed. Big has really reduced us to serfs. The CEOs millions will be worthless, like our money. This article looks realistic.

Tom Davis

May 16 03:54 PM

[Vienna:]

Do you think by writing big letters people will listen to you?

Well, after the US has been preaching the world what to do, everybody is eager at giving it back, wait for it.

beijingpaddy: Yes, chinese system is very similar to the European. Chinese and Europeans get along far better. It's not the nuking mentality.

On May 14 11:32 PM HALFTRACK wrote:

> OBAMA WANTS TO "CHANGE USA INTO A SOCIALIST-COMMUNISTIC DICTATORSHIP
> COUNTRY", SUBJECT TO "U.N. WORLD ORDER RULES "SO ";ALL USA DOLLAR
> VALUES HAVE TO GO DOWN TO ZERO SO THE USA CITIZENS WILL DEPEND ON
> OBAMAS AND THE U.N. WHIMS ! HOMELAND SECURITY DEPARTMENT MUTATES
> INTO SOMETHING ORWELLIAN AS JUST RECENTLY THE FEDERAL AGENTS ARE
> NOW BEING SPECIFICALLY ENCOURAGED BY THE OBAMA ADMINISTRATION TO
> IDENTIFY AND TARGET AMERICANS FOR SCRUTINY AS POTENTIAL SECURITY
> THREATS BASED ON THEIR "POLITICAL BELIEFS" : HOW DO YOU LIKE THAT?????????

May 17 08:48 AM

[Cowboy America:]

Many reserves are treated as a State secret including America's true gold reserves. True oil reserves in Saudi are treated as a State secret. What do you think America did during WWII in Europe and at other times and other places around the world over the past 200 years? The U.S. hauled thousands of tons of gold from around the world to U.S. territory. The U.S. has accumulated enough gold over the past 200 years that we really have NO deficit if the true gold reserves were revealed. Certain parameters must be met for U.S. politicians to tap that strategic gold reserve.

What's the end game? The U.S. is about school the global financial community once again and most of Congress does not know. America will make her move when the following occurs; China's currency is no longer pegged to the US Dollar, US currency is dramatically devalued, and gold hits $1,500 an ounce. America will zero her debt by exercising contract options to pay off with gold. At then current exchange values which would be very beneficial to America when her currency is the weakest and gold is trading at it's highest. That action will soon thereafter cause a crash in gold prices and a powerful rebound of U.S. currency value and America ends up settling her debt for pennies on the dollar while still retaining significant gold reserves.

Now discount this comment as the lunatic ravings of an imaginative dreamer.

May 18 12:38 PM