Monday, April 25, 2011

Make Way For Mainland China: IMF Expects Its Economy To Be Biggest By 2016

I'm sure you've heard claims that the mainland Chinese government undervalues its currency to gain a trade advantage. Well, the IMF has published an unthought-of implication: the mainland Chinese economy is much larger than official statistics indicate. As Brett Arends passes on, the institution has valued mainland China's economy using a purchasing-power parity measure for the renminbi's "true" value; based upon that revaluation, and current trends, the IMF has forecast that mainland China will have the world's largest economy by 2016. Just in time for it to become an issue in the Presidential election after next.
According to the IMF forecast, whomever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.

Most people aren’t prepared for this. They aren’t even aware it’s that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.

But they’re miscounting. They’re only comparing the gross domestic products of the two countries using current exchange rates.

That’s a largely meaningless comparison in real terms. Exchange rates change quickly. And China’s exchange rates are phony. China artificially undervalues its currency, the renminbi, through massive intervention in the markets....
Arends also goes into the implications for geopolitics. The last transition of economic leadership was from the U.K. to America. Both countries have a common language, similar systems of government and cultures. China has none of those similarities or commonalities. That disjoint will result in a transition that will be bumpier than the last one.

Of course, mainland Chinese are different from Americans in another way. Not having an extensive social-security system, they save a lot more than their American counterparts. They also love gold, whereas many Americans don't.

America has a better-developed financial system; geopolitically, it's still the hegemonic power. I know this is a mercantilist age, but economic dominance does not necessarily translate into geopolitical dominance. What does translate is military dominance.

As long as the American hegemon is still one, America will still be the world's leading financial centre. The U.S. Treasury has benefitted a lot from America being the king of the financial hill. As the history of the U.K. demonstrated, financial and military supremacy can endure for a long time after economic supremacy fades.

That is, if the hegmon's finances are in order at the time of transition. The U.K. government's were; the American government's aren't. As a result, the economic shift will appear to bite America in a way that the shift to American economic supremacy didn't bite the U.K. Sadly, U.S. government fecklessness will add to nationalistic and protectionist sentiment that will be inflamed by mainland China becoming the #1 economy.

Speaking of gold, Arends ends by saying it's not much of a surprise to see gold go up in these turbulent times.

No comments:

Post a Comment