Gold Forecaster
- Global Watch
Chinese growth: Japan overtaken,
U.S.A. next
Julian D.W.
Phillips
Oct 29, 2006
Since the entry of the U.S.A
into World War II the U.S. has been the most powerful nation
on earth. But how long will this continue. As another piece on
the changing shape of the global economy we show how China's
growth has moved even faster than we thought it would.
In this piece [again thanks
to the Economist] we will describe just how far China
has come and how dependent on China the $' strength really is
becoming. Yes, China needs a strong $, or it will endanger the
value of its reserves, whose real value currently lies in its
buying power in the world, not its exchange rate value to the
Yuan. Is there an 'unholy alliance' between the U.S. and China
over their investment of trade surpluses back into the U.S.$?
[If this is so the U.S. is resolving only a short-term problem
[Trade deficit] and China is ensuring it protects its long-term
development. The winner in the long run has to be China.]
In terms of the U.S.$, China
is passing the U.K. at the moment, as we said in our last piece,
but in terms of Purchasing Power Parity
[what is produced] China has already passed Japan and is well
on its way to equaling the U.S.A.
During the past five years
America has accounted for only 13% of global real GDP growth,
using purchasing-power parity (PPP) weights. The real driver
of the world economy has been Asia, which has accounted for over
half of the world's growth since 2001. Even in current $ terms,
rather than PPP, Asia's 21% contribution to the increase in world
G.D.P. exceeded America's 19%. But current $ figures understate
Asia's weight in the world, because in China and other poor countries
things like housing and domestic services are much cheaper than
in rich countries, so a $ of spending buys a lot more. If you
want to compare consumer spending across countries, it therefore
makes more sense to convert local currency spending into the
$ using P.P.P.' rather than market exchange rates.
Asia is running a combined
current-account surplus of over $400 billion, implying that it
is contributing much more to world supply than to demand. If
America's demand stumbles, the growth in Asia's exports and output
would also plunge, so the story goes, but is this true?
Since 2001 the increase in
emerging Asia's trade surplus has added less than 1% a year on
average to the region's average growth rate of almost 7%. Contrary
to the perceived view, the bulk of Asia's growth has been
domestically driven.
- It is true that domestic demand
(investment and consumption) has grown more slowly than G.D.P.
over the past year everywhere except in Malaysia (see chart 1).
But in most cases the gap has been small, especially in China,
India, Japan and Indonesia.
- It is true that exports account
for 40% of China's GDP, but those exports have a large import
component; only a quarter of the value of China's exports is
added locally. The impact of a slowdown in export growth would
therefore be partially offset by a slowdown in imports.
- It is therefore true that
China's GDP growth has come mainly from domestic demand, which
has been growing by an annual 9% in recent years!
Is China's consumer spending
feeble? Several recent reports highlight that according to official
figures spending has fallen from 50% of nominal G.D.P.
in 1990 to 42% today. But this partly reflects an even stronger
boom in capital spending. Real consumer spending has been growing
at an average annual pace of 10% over the past decade-the fastest
in the world and much faster than in America (see chart 2).
- There is also good reason
to believe that official figures understate consumer spending
in China because of their inadequate coverage of services China's
GDP was re-evaluated. Purchases of homes by the Chinese have
risen rapidly since they were first allowed in 1998, but these
are also excluded from the figures. If they are added in total
household spending has not fallen as a share of GDP.
- Is Chinese saving as high
as we all believed? The saving of Chinese households has in fact
fallen from 20% to 16% of G.D.P. over the past decade. The main
reason why China's total national saving rate looks so high (at
close to 50%) is that Chinese companies have been saving a much
bigger slice of their profits.
The I.M.F. estimates that in
Asia as a whole (including Japan as well as the emerging economies)
real growth in consumer spending has averaged a healthy 6.3%
a year in 2005 and 2006. This suggests that Asian consumers can
help sustain fairly robust GDP growth in Asia even if America's
economy takes a dive.
Not only is growth in China
and the rest of Asia chiefly domestically led but America's share
of Asia's total exports has fallen from 25% to 20% over the past
five years. Regional trade links within Asia have also deepened
thanks partly to growing Chinese demand. Goldman Sachs reports
that five years ago China's imports for domestic use were only
half as big as those for the assembly and re-export of products,
but now they are roughly the same size. So strong domestic demand
in China sucks in more imports.
China's exports to America
have fallen from 34% of its total exports in 1999 to 25% now
(adjusting for the re-exports which are made through Hong Kong).
Chinese exports to the European Union are now almost as big as
those to America and are growing faster.
H.S.B.C. estimates that slower
American growth will hurt China, India and Japan much less than
it will the smaller Asian economies, such as Singapore, Taiwan
and Hong Kong, that are more dependent on foreign demand. China,
India and Japan account for three-quarters of Asia's GDP and
so, given the deeper regional trade links, they should help to
support demand in the whole region. If America's GDP growth slows
next year to 1.9%, from 3.5% in 2006, as HSBC expects, then Asia's
growth is tipped to slow from just above 7% this year to just
below 6% in 2007. Weaker exports will badly hurt some industries,
but overall, the region will continue to grow at a reasonable
pace.
Could Asia withstand a sharper
American slowdown? Hong Liang at Goldman Sachs estimates that
if America's G.D.P. growth drops to zero by the end of 2007 then
China's annual export growth could plummet from 26% in early
2006 to a decline of 2% by late 2007. After taking account of
the impact of slower export growth on imports and domestic demand
(i.e. slower growth in investment), Ms Liang estimates that China's
G.D.P. would still expand by 8%. That is significantly down from
this year's growth rate of over 10%.
China is today tightening policy
so as to slow down its runaway economy: weaker external demand
could be partly offset by reversing these measures.
In summary, if America suffers
a slump, the economies of China and the rest of Asia would slow,
but they are unlikely to be derailed. More importantly, the steady
shift of wealth to the East has moved to the point where it is
not only unstoppable, it can be self-sustaining. Therefore, the
East has moved from dependence on the West to independence from
the West, already!
And gold in the picture? As we said in the last issue, the
benefits to the gold price will come from the destabilization
of the monetary system, as the structural shift in the balance
of power affects the monetary system. For years professional
commentators have been warning of the demise of the $. This would
require its sale by only a small percentage of surplus holders
in the day-to-day foreign exchanges. Just the prospect of this
is sufficient to take gold to new highs. Not only would investors
seek to buy but holders would be unwilling to sell.
Oct 23, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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