Via: McKinsey Quarterly
The Chinese government will continue to find ways to stimulate internal demand for products and services to rejuvenate the Chinese economy. The Chinese government will likely continue to reduce their country's investment in assets that are denominated in developed-yet-poor countries' currencies over the long-term and slowly but surely reallocate significant percentage of their surpluses to a.) their own internal projects and programmes to stimulate internal demand and b.) strategic investment in assets located in other resource-rich emerging countries and frontier countries, and c.) reduce China's reliance on export to developed countries. However, the success of this huge long-term effort is unclear since Chinese people like to save significant percentage of their income. The Chinese people's saving habit is highly cultural and hence very hard and slow to change. Therefore, we expect Chinese government to face an uphill battle to increase private domestic demand for many years to come.
Increasing private domestic demand in China is now being embraced happily (even demanded) by developed countries for now in the short-term since many developed countries are running huge trade deficits with China; however, when and if China's effort to stimulate internal demand and making friends with other emerging and frontier countries are successful, the long-term outcome will not be favorable to the developed countries. Why? It will be because a.) the Chinese will not need to depend on developed countries anymore politically and economically, hence reducing the developed countries' standing and political cloud globally and increasing China position as de-facto top nation in the world; and b.) Many resource-rich emerging and frontier countries will be very good political and trading friends with China and are likely to back whatever China is doing and ignore any political demand or pressure by developed countries.
The Chinese government now is blessed with both significant budget and trade surpluses. The Chinese government is clearly in a very good financial shape and can afford the current global economy problems (however, this does not mean all its citizens are in good shape financially) and as such, has been wisely using some portions of its huge budget surplus to stimulate internal demand (mostly through large government spending on government-owned/public projects and programmes) and to invest in strategic foreign assets everywhere including in many resource-rich countries that are not favored politically by developed countries. The long-term return on investment is still unclear and may result in various big hits and misses as the government officials are still learning and gaining knowledge and experience how to invest prudently and successfully (with decent returns or profits) not just strategically and politically. Naturally, there has been several high-profile political pushback from various developed countries (e.g.: Australia - Rio Tinto (RTP) deal, United States - Unocal deal, and in many other developed countries) on foreign investment by Chinese government's sovereign wealth fund despite the facts that these developed countries now are actually much poorer than China and hence, need foreign investments. The economic incentives clearly are clashing with political incentives, pure nationalism and escalating domestic protectionism. Therefore, we expect global geopolitical tension between China and developed-yet-poor countries to increase rapidly in this century and could potentially result in a huge cold war.
Any smart and able politicians and leaders in existing developed countries like US, UK, Germany, Japan, France, and many others should be well-aware on the above situations. However, being aware is not the same as doing the right things with a sense of urgency and focus to stay competitive and more importantly to stay ahead of the game. Developed countries now still have time and resources to stay competitive and to prosper; however, if these countries' leaders do not come up with great programmes, projects, plans, and updated long-term visions to take their countries, economies and citizens forward, the windows of opportunities for these countries to just stay competitive both economically and politically in the 21st century are diminishing every month, every quarter, every year to various emerging countries/emerging economies which as a group has been clearly able to grow and prosper rapidly and is still very hungry for even bigger long-term political and economic success by increasing their domestic demand power. Hence, in our view, the key for developed countries like US to rejuvenate their economies is driving and increasing innovation and entrepreneurship in to high gear and capture the innovation premium to stay ahead of the game year after year.