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China vs the US: A New Economic World Order?

智者靠己庸者靠人

A wise man makes his own decisions,
 
an ignorant man obeys public opinion.
 
(Ancient Chinese proverb)
 
 
 

In late April, the World Bank released figures confirming that this year China will supersede the US to take the position of the world’s largest economy. This development comes 5 years earlier than predicted, yet has global ramifications for centuries to come. It means economists will have to address a rebalancing of the global economy much sooner than they expected and most probably hoped. After all, economic power brings political power, something many in the world are reluctant to grant China at present. In this blog I will analyse how various stories in the media are feeding into this development, and what this new economic world order means for China, the US and the rest of us. 

The most remarkable finding from this new World Bank data is the rate at which the Chinese economy has grown in recent years. It achieved 24% growth between 2011 and 2014, which is over three times faster than the 7.6% growth of the US economy in the same period. The last time the World Bank produced a definitive ranking of world economies was in 2005. Therefore there are a couple of other notable, though unsurprising, shifts.

  • India’s jump from tenth to third place
  • Slow growth and high costs edging Japan and the UK further down the rankings

An article on this news story in the Financial Times makes a valid point: shouldn’t the changing prominence of the traditional economic players be reflected in the composition of the World Bank and IMF? Changes to the dynamics in these two organisations have been few and far between since they were set up in the late 1940s. As such, the key players reflect a very different world economic order present at the end of the Second World War. In fact the last significant shift in global order was 142 years ago, when the US took over the top spot from the UK.

This ties in to a more pressing story concerning businessmen around the world: the questionable state of the US economy. Many reputable analysts – not scaremongers – argue the economy could enter a period of severe correction. An even starker comment was made by the Swiss fund manager, Marc Faber, in Money News earlier this year, as he claimed the US economy “could burst any day”. The evidence doesn’t rule out such a scenario, as the P/E we see today in US stocks are still remarkably high, yet in the low interest environment we are hardly witnessing any steps to bring the behemoth federal, as well as state, debt back under control.

California is a good example to illustrate this point. We all know the state has been a melting pot of ideas, bringing the world such companies as Google, Apple and Disney, to name a few. If it were an independent country, California – with an economy about the size of Russia’s – would be ranked within the 10 largest economies in the world. However, the recent decision by Occidental Petroleum to relocate its HQ to Houston – after almost a century being based in Los Angeles – is a reminder to us all that those in the know realise all too well that the Golden State isn’t what it appears. Former San Diego councillor and current congressional candidate, Carl DeMaio, phrased it nicely: California is “a dead man walking”.

A review of last year’s publication, The Beholden State: California’s Lost Promise, summarises the various problems facing the state very well. “Out-of-control public-employee pensions are draining the state’s coffers, and the widespread and powerful unions want more. The green movement has hijacked the promise of the state’s abundant natural resources and made them inaccessible to investors and innovators; the untapped oil and gas in the Monterey Shale could spur a California energy renaissance — if Sacramento would allow it. The state’s universities, obsessed with diversity, have become bastions of bureaucracy, not economic freedom.”

But if California is losing its prowess; and the US stock market is on the brink of melt down; and the US dollar is not to be trusted, does economic sway transfer to China? I think the answer is: “very nearly”. The Chinese are almost in a position to assume responsibility, and the US are gradually realising they will have to recede the economic crown. The mega contract to supply Russian natural gas to China, which was more than 10 years in the making, became the first major international contract in the energy sector in living memory not denominated in USD. Russia and China, the world’s largest countries by area and population respectively, have finally reached an accord of trade that will no longer need to be cleared with greenbacks.

Nonetheless, the Chinese have to recognize that many are scared of what a “de-Americanised” world will bring. The foremost concern among economists is the tight reign the Chinese government wields over the renminbi. A fear of China is yet further demonstrated by Obama’s recent state visit to Asia, which – despite White House protestations to the contrary – was widely regarded as a “containment tour” of China. Obama visited Japan, Malaysia, the Philippines and South Korea, but omitted a visit to the world’s largest economy.

Finally it is important to note China has yet to reach its peak. Demand has yet to supersede supply, whilst a recent Economist Intelligence Unit report argues rapid urbanisation in China is set to continue for the next twenty years. Investment opportunities are still plentiful, and not just in Beijing and Shanghai, but in the growing network of mid-sized cities. For example, an article in the English-language paper China Daily last Tuesday reported the Chinese still rely on Britain to provide supplies and techniques in the health sector.

In conclusion, the world economy is still in a state of flux. China will soon be the leading global economy according to the figures, but it will take time before markets and politicians around the world are prepared to treat it as such. In the meantime, I would like to echo the warnings of my fellow economists: it is advisable to avoid investing in the dormant US market.

Once again I encourage you to look where growth will originate from in the foreseeable future: emerging markets. In particular, the opportunities offered by the richest and highly-populated country, China, as well as its northern neighbour. Russia may not be the darling of the international investment community in the present environment, but if the Chinese are prepared to offer her a USD 25 billion advance, perhaps there is something there worth considering. And if one should consider drastically reducing an investment portfolio’s exposure to US stocks, there should be an opening for a PE allocation, right?

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