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Pax Sinica. To be or not to be?

Although the past decade has been quite a turbulent time for the global economy, this could not halt China’s dynamic expansion. After each period of turbulence the Chinese economy became stronger and even more powerful.
 
If, at the beginning of the decade, very few paid attention to economic data out of China (perhaps only sporadic news reports like “China’s economy again expanded 10%”), right now data out of China are closely followed. And sometimes the reaction to this news is so powerful that even US financial markets have no immunity against these data. This was not possible to imagine just 10 years ago.
 
Instead of comparison of various macroeconomic indicators, which is common in such cases, I would like to give what is by no means an exhaustive list of China’s greatest achievements in the past decade:
 
·         largest international reserves;
·         the largest port by cargo turnover;
·         the largest auto market;
·         the largest number of cellphone users;
·         a record number of Internet subscribers;
·         the largest casino by earnings;
·         the longest bridge;
·         the longest network of hi-speed railroads; and
·         the biggest retail center.
 
Although this list is not all-inclusive, it becomes evident that China can no longer be considered as merely a country with a cheap and poorly educated workforce. Many facts underpin claim. Western companies tend to relocate their R&D divisions to China, the Chinese military managed to shoot down a satellite within the Earth’s orbit, premium and luxury car sales are growing by leaps and bounds, and Hong Kong real estate is 55% more expensive than in London. If we take a look at the elite real estate sector, the gap is even wider. A house located in the Peak, an upscale residential area, can cost twice as much as a similar house in Mayfair or Knightsbridge in London, according to real estate broker Savills Plc.
 
However, instead of just a tedious citation of the past events it is much more interesting to try to understand whether we can expect to see China gravitate towards a Pax Sinica in the foreseeable future or whether China will follow the path of Japan. Japan was also once expected to become No. 1 worldwide, but it ultimately failed to meet this challenge.
 
Again, let’s leave econometrics alone and, as Austrian School economists recommend, let’s focus on qualitative analysis.
 
The main factor encouraging us to be optimistic about further economic expansion of China is the strong ability of the Chinese people to adapt to changing economic conditions. The 2008 global crisis is an apt illustration. Instead of mass demonstrations, protests against layoffs, as a number of analysts predicted, the Chinese rushed to seek out opportunities to make money and feed their families under the changing conditions. And, as we see right now, their efforts paid off. At the same time, Europe faced mass disorder in response to social program downsizing. As a matter of fact, the Chinese government also provided support to the economy, as, for example, the United States. But China took these steps using not borrowed, but its own financial resources. And at present China is reducing rescue programs and excess liquidity in an aggressive manner, while the “green shoots” in the US withered and turned into QE2.
 
Strictly speaking, this ability to adapt made it possible for China to avoid the repetition of Japan’s fate. As we have seen, regardless of its reputation of being the bulwark of socialism, China does not stop local companies from laying off workers when needed and restructuring and turning around their business structures. Chinese authorities do not try to save the unviable and badly outdated status quo at any expense.   
 
Entrepreneurship is one of the pillars that underscore this versatility. This is precisely what makes great empires. It is enough to recollect what the United States was like in the 19th century. Its population was committed to making their life better and this is what made it possible for the United States to turn from the former European colony into the richest and most powerful country in the world. By the way, it is worth noting that neither Social Care nor Medicare existed at that time and people had to rely only on themselves, which contributed greatly to the economic growth that continued to hum along unhindered by various economic crises. 
 
The famous statement made by Deng Xiaoping that “Poverty is not socialism. To be rich is glorious” put China on the same path which the United States pursued in the 19th century and China is by no means going to abandon this path in the foreseeable future.  
 
According to data provided by the Global Entrepreneurship Monitor 2009, 18.8% of the Chinese population aged between 18 and 64 years old are managers and at the same timer owners of their own business set up not more than 42 months ago while 17.2% of the Chinese population manage and own companies established more than 42 months ago. In the US, similar metrics are equal to 6.3% and 6.8%, respectively.
 
More impressive figures are available on the so-called informal investments. Any start-up, whether a food store or Facebook, needs seed capital. In most cases the seed capital is provided by the business founders and the so-called 3Fs (Family, Friends and Foolhardy Strangers).  The contribution of venture funds is miniscule even in the United States. It is hard to overestimate the role this type of investments play. But for such investments, small business would be virtually non-existent, which would adversely affect the national economy by driving the number of people out of work considerably higher. This indicator, shown as percentage points of GDP, amounts to 11.3 in China and to 1.5 in the US. The most striking thing in these figures is that, in absolute terms, the volume of unofficial investments in China is three times higher than in the United States (USD 649 bn vs. USD 215 bn, respectively). It should also be noted that the level of savings in China continues to rise not only in absolute terms but even in relative terms (as a percentage of GDP). From 1990 until 2008, this ratio increased from 40% to nearly 55%.
 
In my opinion, the trend is obvious. China is poised to become the world’s number-one economy. It is still a matter of conjecture when exactly this is going to happen.  In 2020 or in 2035. But this won’t have any meaningful effect on the outcome. Thus, the essence will eventually fit the name of the country. Translated verbatim, the characters 中國(China) mean “Middle or Central Kingdom”.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.