Unstoppable China

Aug 18, 2010 Editorial

One surprisingly low-keyed headline, “China Passes Japan as Second-Largest Economy” and an editorial, “Return of the (US) Killer Trade Deficit”, in Monday’s New York Times pronounced on a rather seismic change in the present and future world order. While the headline was expected for some time, the editorial added weight to what the World Bank had announced just a few months ago: the Chinese juggernaut might forge ahead of the US economy within another decade. Up to then, most experts had speculated that the US might not be pipped until 2030.
The figures announced on Monday showed that the second quarter nominal GDP value of the Chinese economy was US$1.33 trillion versus US$1.28 for Japan. While the difference might appear to be small, the 0.1% growth rate of Japan, compared to the astounding 10%+ of China, ensures that China will leave Japan in the dust by quite some distance by year end.
While the US economy – almost three times greater than China’s at US$14 trillion in 2009 – might appear to possess an insurmountable lead, its continued trade deficits and its inability to get its economy on a sustained growth trajectory, make it vulnerable to the power of the compounded double digit growth-rate that China has sustained for some three decades. In June, the US trade deficit jumped to US$49.9 billion while China clocked in with a US$28.7 billion surplus. Significantly, the US bilateral deficit with China rose by 17%, to US$26.2 billion.
While everyone has been focusing on China’s massive export capabilities – it passed Germany last year as the world’s largest exporter – they have missed the phenomenal growth of its domestic market. A sign of the latter reality is the fact that last year China also surpassed the US as the world’s largest market for passenger vehicles. This domestic expansion has forced global corporations such as Caterpillar, General Electric, General Motors and Siemens — as well as scores of others – to expand exponentially into China, in some cases even moving research and development centres there.
In the midst of the global recession, China had responded to pressures from the industrialised west to stimulate its economy with a US$500+ billion program. Its economy grew by 11.9% in the first quarter of this year before coming down to the present 10%. China kept its foot on the gas even though its inflation rate rose to 5%. Its demand for raw materials – it uses more than half the world’s iron ore and more than 40 percent of its steel, aluminium and coal – to fuel that growth helped economies on every continent to grow: China is now the engine that drives the world economy.
Again responding to G-7 pressures, especially from the US, that its currency was undervalued, giving it an unfair advantage by making its goods too cheap, China announced in June that it would allow its currency to rise against the dollar – and it has.
Yet the surplus with the US keeps growing – without the latter seeming capable (or willing) to do much about it. American consumers are obviously unwilling to cut their purchases from China and increasing their savings rate.
In the face of the pleadings from G-7 not to resort to protectionist measures, but to keep the flag of free trade flying, some in the US Capitol Hill are yet taking the easy way out by seeking to impose punitive tariffs on Chinese goods. They ignore the new reality that the Chinese are in a position – with, among other things, US$2 trillion in reserves – that if they retaliate, the US would come out the bigger loser.
China has demonstrated that it is not only smaller nations – such as the “Far Eastern Tigers” – that can lift themselves out of poverty in a matter of decades. They have done so by debunking the fallacy fostered by the World Bank and the IMF, that there is a single path to sustainable growth. They have confirmed that whatever the path chosen, it demands sacrifice from the people in the early stages of growth. Evidently, “one cannot suck cane and blow whistle at the same time”.

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