16 Aug 2010

Chinese dragon threatens world domination

In the 1980s it was Japan that was the rising tiger economy threatening world domination, but today three decades on, it’s the Chinese dragon that has firmly and forever displaced the Japanese Sumo.

In Shanghai signs of China’s new world status are everywhere. They are even looking into an underground 1000kph magnetic levitation vacuum train.

During the crisis, the joke in Shanghai was that we (the Chinese) are fiscally sensible enough to fund our own stimulus plans, as well as that of our American friends. (Though today’s latest Treasury International Capital data from America, show that China has marginally reduced its loans to America to $843.7bn).

In China however, it does appear that the experts are cautious rather than presumptuous upon its overtaking of its Asian neighbour. Linda Yueh, an Oxford University China expert points out: “China has a number of problems in the short term, a problem with overheating and inflationary pressures and this is because the government overstimulated the economy. In the longer term, structural problems, a lot of the growth impetus has come from its vast labour force, but that labour force is ageing so by 2015 China will have a vast ageing population that will slow down its growth.”

The ascent of China has been dramatic: just six years ago, it was only the world’s sixth largest economy. But as its trade of manufacturing goods surged in 2005, China overtook both France and Britain to become the fourth largest economy in the world. And then in 2007 it overtook the German economy too. Today, China pipped its Asian neighbour Japan as the world number two, two years ahead of the predictions of Goldman Sachs’s Jim O’Neill, author of the Brics concept.

And almost all economists expect its rise to the top is a matter of time, and will probably happen by 2023-2029.

So only about 15 years before the USA is usurped as the world’s biggest economy by the China growth machine.

Perhaps even more relevant is that by 2050 China’s economy is predicted to be nearly double the size of America’s: $71bn versus $38bn (versus $5bn for the UK).

Yet that isnt the whole picture…

When you adjust for population – the size of the economy per head – China is still quite poor. It doesn’t get in to the top 100 countries, poorer than Algeria and Albania. And as I found last year, and the Economist reported last week , the pact between the Chinese government and the migrant workers is beginning to fray.

And wheras China has been immensely successful lifting 600 million rural poor out of poverty since 1981, right now it is facing some growing pains, chiefly fears that a rampant property bubble is about to burst. After the post-Lehman collapse in world trade, China’s jumbo stimulus helped keep the world economy turning.

China’s economy is still in a type of adolescence. Despite the ‘YangShan Free Trade Port’ sign outside China’s biggest port, it’s not really free trade when China’s government deliberately boosts exports by weakening its currency. America and Europe are already pressurising China to export less and consume more. The question now: whether a growing China can still benefit the rest of the world.