China on Course to Overtake US Economy

Friday, February 11, 2005 | 06:42 AM

Here's a stat to get the old ticker pumping first thing in the morning:

Past 25 Year Growth Rates:

China: 8%+
U.S.     3%

on an inflation-adjusted average annual rate

Does that place a recent meme circulating on Wall Street (particularly from right-leaning economists) that the increase in Oil prices is due to "speculators" into some context?

Consider this from the WSJ:

Wsj_china_01232005191041_2Understanding this trend is far from academic, with an impact likely to shake up businesses and governments and today's U.S.-driven world order. Having the world's largest economy will give China a greater say in global affairs. Its currency, which is now pegged to the U.S. dollar, will join the yen and the euro as globally traded currencies and in doing so will erode the dollar's position as the world's default coin of choice. China's military, which has enjoyed double-digit budget increases for much of the past 15 years, is likely to grow larger, bolstered by the huge economy.

The Central Intelligence Agency, for one, is taking note. A research arm, the National Intelligence Council, issued a report last month likening China's emergence and its impact on the world to that of the U.S. in the last century and Germany in the 19th. The report says that by 2020 the world's geopolitical center of gravity will tilt toward Asia, especially China, the economy of which will have surpassed Japan's to become second only to that of the U.S.

Events could knock China off course. The country is beset by deep-seated problems, from shortages of energy resources and water to severe environmental degradation and an enlarging gap between the prosperous and poor that could generate widespread unrest. Some economists argue that to sustain long-term growth, market economies require political freedom -- something the communist government shows scant intention of bestowing. (emphasis added).

The obvious conclusion is that we are entering a period of global competition for resources, and our biggest competitor will be China (pop: 2 Billion), followed closely by India  (pop: 1 Billion). Indeed, China has already surpassed Japan to assume the position of No. 3 trader in the world, behind the U.S and Germany.

I have been thumbing through two books  on the subject:  The Chinese Century by Oded Shenkar, and China, Inc. by Ted Fishman, the latter of which I will be dragging on a vacation/business trip at the end of the month.

The Journal optimistically notes that China's historical periods of dominance tend to be self-defeating:

"China also has a history of economic supremacy, having been the world's largest economy for much of the 700 years starting around 1000. In an echo of today's capital and technology transfers, the introduction of early-ripening rice and later of New World crops like maize and sweet potatoes created food surpluses, allowing the buildup of porcelain and silk industries that dominated global trade, says Kent Deng, an economic historian at London School of Economics. As late as 1730, historians say, the country produced a third of the world's manufactured goods. China currently dominates about 12% of world manufacturing.

Yet history provides another lesson that puts the Chinese economic leviathan in perspective. Despite its dominance, the country was quickly eclipsed by the rapidly industrializing Western European nations and the U.S., in part because it failed to develop systems of scientific research and ways to commercialize findings. Much the same criticism is leveled today at Chinese companies and government, whose research and development spending trails that in wealthier nations."

The implication is that unless the communist capitalists move towards a more market based (versus centrally planned) economy, its only a matter of time before they make a fatal error. I'm not all that convinced this is a persuasive argument. Consider in tandem with that thought our market based economy in the United States:  How highly manipulated (i.e., non-market forces) is the US economy?

For the full blown China paranoia, however, we need to go to  321 Energy's discussion on "China’s Master Plan to Destroy America:"

"The final war for the planet’s resources has already started. You name the commodity and China’s buying it and consuming it in HUGE quantities. Last year they consumed nearly half of the world’s cement, twice the world’s consumption of copper, and nearly a third of the world’s coal, 90% of the world’s steel plus nearly every other commodity you can think of has been in greater demand by China.

However in order to propel such furious economic growth, there is one key commodity you need above all the others. And if you can’t get enough of it, having all the other resources won’t matter. The most prized and sought after commodity which makes the world tick is oil. With out it, you have nothing. Your economy would be frozen and your military would be left inept.

As China’s Master Plan to Destroy America manifesto outlines, the multifaceted battle plan recommended by the Chinese military has taken shape . . .

Frankly, destroying the biggest buyer of your goods doesn't sound like much of a brilliant plan. But get past the paranoic ravings, and the discussion on energy competition is quite insightful.

Also, the CIA has quite a few things to say on the subject. The full report is linked below, but I had to include at least one graphic:

click for larger graphic:
China_economy_1

source: CIA, Mapping the Global Future

Lastly, a friend did an absolutely brilliant analysis of how China is securing their energy future in Russia and Venezuala; If I can dig it up, I'll post it later . . .

>>

Sources:

Mapping the Global Future: Report of the National Intelligence Council’s 2020 Project
NIC 2004-13
CIA, December 2004
http://www.cia.gov/nic/NIC_globaltrend2020.html
http://www.foia.cia.gov/2020/2020.pdf   (PDF version)

China and the Final War for Resources   
Bill Ridley
321 Energy, February 9th, 2005
http://www.321energy.com/editorials/winston/winston020905.html

China May Be on Course To Overtake U.S. Economy
By CHARLES HUTZLER
THE WALL STREET JOURNAL, January 24, 2005; Page A2
http://online.wsj.com/article/0,,SB110651152358433393,00.html

Friday, February 11, 2005 | 06:42 AM | Permalink | Comments (11) | TrackBack (4)
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Listed below are links to weblogs that reference China on Course to Overtake US Economy:

» Carnival Of The Capitalists from Right Mind
[Read More]

Tracked on Feb 14, 2005 9:43:01 PM

» Will China overtake US power in 20 years? from Alex Jacobson
Big Picture forecasts China overtaking the US in GDP in 20 years. Resource competition for econmic growth will dominate relations over this time. I think China has a good story simply because of the size of their population. I am less optimistic becaus... [Read More]

Tracked on Feb 15, 2005 1:57:53 PM

» Will China overtake US power in 20 years? from Alex Jacobson
Big Picture forecasts China overtaking the US in GDP in 20 years. Resource competition for econmic growth will dominate relations over this time. I think China has a good story simply because of the size of their population. I am less optimistic becaus... [Read More]

Tracked on Feb 15, 2005 2:01:42 PM

» the higher price of oil from observations and particulars
Here is a good read as well. The demand for many commodities is driven by China. Not only physical use, but when China acquired Hong Kong they got the traders. The Chinese have become a force for all to see. [Read More]

Tracked on Apr 2, 2005 8:09:06 AM

Comments

Gotta chime in here, first not a China expert, just a spectator who is long natural resources.

China can join the first world and work its way towards USD$27,000 per capita GDP like the first world, but it is gonna be tough.

Looking to history, great societies that are not city/states (Hong Kong comes to mind) typically have a couple of things in common in addition to freedom (self determination, at least for the ruling class) 1. A strong base of agriculture that makes them almost self sufficient for food, and 2. A strong banking system.

We could argue for hours about China's ability to feed herself but were it not for the high savings rate in China the shortcomings of the banking system would be laid bare.

Those issues must be addressed for them to project the growth rate of the past 25 years 25 years into the future.

Have no doubt that the teeming millions joining the middle class around the world are going to make the price of stuff we take for granted go up, up, up (think India, Iraq, Brazil, Eastern Europe in addition to China). Now it is energy and hard natural resources, soon it will be cocoa, coffee, bananas and some grains. I don’t even want to think about what the price of a filet mignon is going to be in the year 2015 if the Chinese can upgrade their palate.

Probably a good stretch of time to be a farmer here in the good ole US of A.

Structurally the USA has problems because of the emergence of China, but they pale in comparison to what Germany and France face. Because our society is open and we practice creative destruction, we will muddle through.

Posted by: Scott Koser | Feb 11, 2005 4:46:01 PM

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