Tatiana Dementieva
As numerous economic issues become more evident, investors keep pondering on the struggle between the USA and China for the status of the world’s most powerful economy. The USA has been the most powerful economy in the world for the last 70 years (it succeeded the weakened UK after WWII), adjusting the world for its own needs (from making the US Dollar the global reserve currency to spreading “democratic values” around the world, both in politics and culture).
However, everything changes. More and more experts start questioning the USA’s ability to preserve its global leadership. Maybe it is time for China to take over the initiative?
US Economy Will Lose Its Global Leadership Role: Supporters
Some Western experts (for example, Gideon Rachman, The Financial Times), not to mention numerous Russian analysts, are sure that the future belongs to Asia (China, in particular) while the USA will lose its global leadership role. Even Zbigniew Brzezinski recognizes China’s power and call it the USA’s successor. Numerous experts are sure that China will outpace the USA, thus becoming the world’s strongest superpower.
The only difference between their standpoints is the time ofsuch historical reshuffle. The OESD says it will happen until 2015. The IMF names 2015. This is the time when China’s share in the global GDP will increase up to 18% while the USA’s one will decline down to 17,7%. Obviously, as a result, the US economy will lose its status of the world’s major economy. Others say this will happen no sooner than in 2030 (the World Bank). Anyway, they say the US era is nearly over.
US Economy Will Lose Its Global Leader Ship Role: Adversaries
Another group of experts (including Fareed Zakaria, Ishaan Taroor etc) are sure that such gloomy sentiments are groundless.
Barack Obama disagrees with America’s 2nd place. Mitt Romney went as far as promising that the 21st century will belong to the USA.
As for investors, the given problem is fairly significant to them because they have to decide what assets to invest in (Dow Jones, SP 500, stock and indexes traded at NYSE, NASDAQ, MICEX, RTS etc). So let’s find out what is true and delusive about China’s strength and the USA’s weakness.
What is the strategic advantage of the US economy over the Chinese one?
· As opposed to China, the USA owns abundant deposits of natural resources – copper, uranium, gold, silver, oil, natural gas, timber etc. The world’s biggest coal reserves are located in the US (27% of the global reserves). Last year the US became a net exporter of fuels. China’s deposits of natural resources are relatively scanty. China imports a lot of raw materials and energy carriers.
· The US economy remains the world’s biggest one. It is capable of producing almost anything – from hamburgers to space shuttles.
· The working efficiency in the USA is 15 times as high as the one in China.
· The US GDP is 2.5 times as large as the Chinese one (However in 1980 it was 14 times as large).
· The US GDP per capita is $47.000, the Chinese one is $7.500.
· The living wage in the US is some $200 while it is equal to $17,347 in the USA.
There is big difference.
What is China’s tactical advantage over the US?
Indeed, today the Chinese economy still cannot be compared to the US one. However, the analytic team of Standard Chartered Plc assumes that China will outpace the USA within 8 years and will be twice as large in 2030 (24% of the global GDP against today’s 9%). What are the grounds? Let’s have a look at some of them:
· Firstly, it is about the high pace of economic growth. We know that China’s GDP grew by 10.3% on average in 2000-2010. Only last year the pace slowed down to 9.2%. China has already outpaced all its economic rivals except the USA. Since 2007 the Chinese economy has already boosted form 57% to 73% of the size of the US economy.
· China is the world’s major exporter.
· The biggest holder of the US debt (26% of the USA’s total public debt). This is a lending nation with the world’s biggest gold-and-currency reserves ($2,65 trillion). Dollar assets account for the major part of the reserves - $1,5 trillion. By the way, China once threatened to initiate a massive sellout of US bonds, thus making the US Dollar and economy collapse.
· China is the world’s biggest consumer of energy. The USA used to be the leader for over 100 years.
· China’s manufacturing industry is the world’s biggest one. It produces almost everything.
· China’s major advantage is its population – over 1.3B people (20% of the world population or 4.3 times as large as the US population). And it is not only about the world’s largest, cheapest, most industrious and disciplined labor power. It is about China’s consumer market, which is very attractive for investors. It is obvious that with China’s one-child policy, in a couple of decades the social burden will increase. However, the demographic situation in the US will be much worse. The thing is that the US birth rate has already declined for the first time in a decade, with “baby-boom” generation nearing retirement. Plus costly social security. As a result, numerous social benefits may exceed 40% of the US budget spending in the future.
· Another factor is education. They say the US education system is currently lagging behind its rivals. The USA may face a lack of gifted scientists by 2025. Anyway, China is planning to reach the US educational standards of 2009 only by 2025.
What are the tactical drawbacks of the US economy?
However, skeptics say that the US economy keeps developing under its own inertia, thanks to the achievements made in the 1950-60s. They say the US keeps losing its influence.
· In particular, the US share in the global trade keeps diminishing. In 2008 the USA declined down to the 3rd place in the list of global exporters (11%), while China moved up to the 2nd place (12%), which testifies to a decline in the US competitiveness in global markets.
· The US public debt has already reached the astronomic heights - some $15,3 trillion – thus exceeding 100% of the national GDP. The budget deficit has reached $1.5 trillion (11% of GDP). It is obvious that the Americans have been living beyond their means for decades. Yet there is no efficient solution to this problem, which only escalates the problem. Even Standard & Poor’s had to cut the US credit rating from AAA (the highest possible) down to AA for the first time since 1917.
· Another factor is deindustrialization. Over 75% of enterprises with some 500 employees have been closed without any wars or revolutions. The US motor industry is falling into decay. It is difficult to find a “made in the USA” product. Most products are exported. The USA keeps betting on Wall Street, consumption and service sector rather than manufacturing production. In other words, the USA keeps playing the same game that caused the global crisis in 2008.
· Slow economic growth. Last year it was equal to 1.7%.
· The income gap is widening. 1% of the US population earns almost 25% of the total income. Last year the USA shocked the world by revealing the info that 46 million American citizens (+12% against the previous year) received free meal tickets in the world’s richest country.
· The weakening US Dollar is another major factor. According to the experts of , if the USD index breaks below 79,35, it will cancel the bullish scenario - an upswing of wave level Daily. Otherwise, the uptrend will continue through the “Hound of the Baskervilles” pattern by Elder/MF up to 80,00 and 80,23.
What are the tactical drawbacks of the Chinese economy?
· Some experts (for example, the World Bank’s report “China 2030”) are sure that China’s economic growth may slow down and even turn into recession by 2030 if the country doesn’t see urgent reforms. They call it “average-income trap” or “middle-income trap”. When the income in the emerging economies reaches a certain level, they (the economies) start seeing a rapid slowdown. Mexico and Brazil got into such a trap in the past.
· USDCNY is still in long-term downtrend. According to the experts of , the price should break below 6.2900 in order to resume the downtrend.
· China’s poverty factor. Over 128 million Chinese live below the poverty line, earning under $1 a day.
· China’s export power depends on the USA. The US, Japan and Europe consume 55% of China’s total export. Taking into account that these countries are allies, it is not difficult to understand what will happen to the Chinese economy if these markets decide to do without Chinese products.
The USA has some strategic advantages:
1. The USA prints the US Dollar, the global reserve currency, and is considered the world’s financial center. The USA accounts for 70% of the global financial system and only 20% of the global economy.
The US controls the entire world through its national currency. Moreover, there is still no alternative to the US Dollar in these terms while experts start questioning its status and role. Some of them expect the US currency to lose its global influence. They say the Chinese Yuan may well replace it. The Chinese Yuan has already become a regional currency in South-Eastern Asia. However, optimists say this won’t happen within 10 years.
2. Military edge. The US military superiority over China is obvious at this point. Let’s consider the following stats:
The US military spending is equal to $700B. However, President Obama asked the Congress to cut it down to $614B in 2013.
The US troops are located at hundreds of foreign military bases around the world.
The USA accounts for 45% of the global export of arms.
At the same time, this year China is going to increase its military spending by 11.2% up to $110B.
Some experts say that China is close at the USA’s heels in terms of nuclear weapons.
Moreover, the USA keeps exhausting its military reserves in endless wars around the globe. Mass media report that the wars in Afghanistan and Iraq cost the US some $500 billion and $1 trillion correspondingly.
The USA doesn’t have enough strength to continue its current foreign policies any more. According to the Chinese Academy of Sciences, China’s military potential will be equal to the US one in 2050. China will need 20-30 more years to outpace the USA. It is necessary to take into account that China’s military modernization is much faster than expected.
3. Innovation. The USA is still the frontrunner in terms of innovation. It is the homeland of numerous Nobel Prize winners. The USA gave us computers, laser, solar batteries, robots, nuclear medicine etc. China has no chances of outpacing the US in the near future.
Outer space exploration is another major factor that determines a country’s security, economic and technological development. The USA is obviously the frontrunner in terms of space exploration. It is sufficient to say that roughly 50% of the satellites placed in Earth orbit are of US origin.
If we consider the Internet and IT sector, the USA is obviously the leader. However, some experts say that most future innovations will come from Asia. Not so long ago China presented its supercomputer Tianhe-1A, which is way more powerful than the USA’s supercomputer.
Some experts still believe that the US will remain the world’s strongest superpower. Others are sure that China will take over the initiative.
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
Will the USA manage to retain its position within a couple of decades?
Tatiana Dementieva
