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Raj Majumder raj.majumder@imetanoia.com www.imetanoia.com Raj Majumder is the Founder of iMetanoia, a turn of the millennium financial services firm focused on the individual investor. iMetanoia encapsulates investment best practices wrapped in investors world class education to make the process... More
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  • Rise of China - Hold the Hyperbole 1 comment
    Dec 1, 2009 5:42 AM

    For the Chinese, the Olympics was a coming of age party that signaled the arrival of a superpower as a more open society.  The bearing of the torch through various countries, therefore came a rude shock that held a candle to the China the world knows.  


    Like it of hate it, China’s rise is undeniable and very deserving.  That said, it would not parallel the rise of America in the 20th Century.  For one the US rose from ashes of Europe and Japan, where it was able to dictate economic terms almost singularly.  The eastward flow of power would be in fits and starts, at no point a domineering transition, which could only be precipitated by a war that neither side is capable of bearing the cost of. 


    A large part of America’s dominant position in world trade for so long is thanks to the Dollar being the world’s reserve currency.  With the irresponsible use of that privilege, the US has all but closed the door on any single currency being the reserve in the years to come.  That means that China is unlikely to enjoy that same advantage. 


    America in the post war years rode the demographic wave of the Baby Boomers to set in motion one of the largest economic Plankton effects in recorded time.  China is an ageing economy that would not have this key multiplier effect on its side. 


    China has had a large revolution every 50 years or so of its existence. Political unrest is a given.  More importantly, China lacks the world’s trust.  So while the US was economically acceptable to the world, by and large, China has to be more deliberate in seeking the world’s trust.  This, trust deficit, will make its advance more expensive as it begins to project its economic power beyond the region.  China’s penchant for strategic assets will only exacerbate things.  Africa is emerging as the fault line for this redistribution of power, often taking on overtly political tones. 


    It dependence on global, especially American, demand is paradoxically supportive of keeping the US going as the world’s largest consumer.  And till the US is its chief consumer it will struggle to rise up the value chain.  This is very evident in the current Dollar debate, where inspite of the US being entirely reckless, China cannot credibly enforce much discipline.  A case of when you owe the bank a little the bank owns you but when you own a whole-lot then you own the bank!  It is also becoming clear that a lot of the US consumption of the recent past is unsustainable and would probably drop materially.  This would put severe pressure on the Chinese manufacturing complex which has built capacity to meet this demand growing at 3.5% per annum.  It would find it difficult to replace the shrinking US demand with domestic consumption in the short to medium term. 


    American companies became big by innovating and thus growing non-linearly.  China has largely imported its technology.  Even when it begins to innovate, it would have to compete with large international companies that can quickly leapfrog, thus denying a long benefit period.  China would not have the same non-liner growth in a sufficiently large part of its economy to leave other economies trailing by much.


    A large part of the US success has to do with its ability to provide 5% of the world’s population 20%of its consumption.  With globalization, it would be progressively more difficult to retain all the value created within nation-states.  Labor and capital both getting globalized will distribute wealth more widely. 


    So for analysts given to hyperbole (mostly Americans!) this should provide some pause.  Like with every other kind of change China will rise, perhaps not as meteorically as is sometimes projected, but handsomely nonetheless, alongside other emerging markets.  The US prominence in global trade will also be around for a lot longer.  But it is unlikely that we will see a revisit of the current  uni-polar world, either politically or economically, any time soon.

    Disclosure: None
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  • Tom Au, CFA
    , contributor
    Comments (6879) | Send Message
    The 2008 Olympics signaled the arrival of China. But not as a more open society. More like the way the 1936 Olympics signaled the arrival of post-Weimar Germany.
    1 Dec 2009, 11:09 AM Reply Like
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