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When China Becomes The Biggest Economy?

June 10, 2012 1 comment

The future of China is taking up a lot of time in the West – and in China, too.

The China-US currency tango  |  Cartoon by Jim Morin; on August 20, 2010; source & courtesy - seekingalpha.com  |  Click for image.

The China-US currency tango | Cartoon by Jim Morin; on August 20, 2010; source & courtesy – seekingalpha.com | Click for image.

The last 30-years has seen China emerge a huge exporting nation. This export-bias was reinforced by the devaluation of the yuan against the dollar – under a system termed by 2ndlook as USCAP. This game-plan has run its course and China has been put on a diet of currency appreciation.

Like Europe, Japan, Asian Tigers have been in the past.

This devaluation-appreciation cycle has given China a huge economic boost – and made it dependent on exports to the US.

After the internal settlement rate was abolished the authorities continued to devalue the currency, to a rate of RMB3.2 by mid-1986 and then, in a single step on July 5, 1986, an additional 15 percent, to RMB3.7 (Lardy 2002, 49). A further devaluation in December 1989 took the rate to RMB4.7. Over the next four years the government devalued the currency until it reached RMB5.8 at year-end 1993. Then on January 1, 1994, the government unified the official and swap market rates by moving the official rate to the then prevailing swap market rate, RMB8.7. Over the next 18 months the government revalued the currency until it reached RMB8.30 in June 1995, and then slowly moved it to RMB8.28 by October 1997.4 From that time until the reform initiated on July 21, 2005, the nominal value of the currency vis-à-vis the dollar fluctuated in a very narrow range around RMB8.28. (from 1 Evolution of China’s Exchange Rate Regime in the Reform Era.).

Can China eclipse USA in the short-term - say 25 years?  |  by David Horsey on December 28, 2010 at 6:55 pm; image source & courtesy - http://blog.seattlepi.com/davidhorsey  |  Click for image.

Can China eclipse USA in the short-term – say 25 years? | by David Horsey on December 28, 2010 at 6:55 pm; image source & courtesy – http://blog.seattlepi.com/davidhorsey | Click for image.

As the experience in Europe, Japan and Asian Tigers has shown that withdrawal effects after this devaluation can be rather stagnating.

There is no question that as China’s share of the global economy grows, Chinese influence will grow in some respects as well.

It is interesting to contemplate what this might mean if China were to become economically dominant, because it is historically unprecedented; in the past, the world’s dominant powers have also been the world’s richest.

As a matter of geopolitics and power, the size of a country’s economy by itself is not a great measure. If it were, then China would have been the world’s strongest power in 1800, when it had the largest share of global GDP. So the next question is whether China can translate its economic power into geopolitical influence. Again, it will undoubtedly do so to some extent. But power and influence do not stem from economic strength alone, and China is already the best proof of this. Over the past couple of years, as the U.S. economy has been slumping and China’s has been booming, the United States has significantly improved its standing in East Asia and Southeast Asia, while China’s position has deteriorated. In fact, the more China uses its newfound muscle, the more it sparks a reaction in the region, which then looks to the United States for succor.

The fact that China is the top trading partner of all these countries does not necessarily increase China’s clout. As many have pointed out, in 1914 Germany and Britain were each other’s largest trading partners too. (via The Rise or Fall of the American Empire – By Robert Kagan, Gideon Rachman, and Daniel W. Drezner | Foreign Policy).

How does China see itself?

Below is an extract from globaltimes.cn – a Chinese online publication, with links to the Chinese Government. Global Times is seen by most in the media business as a spokesman for the Chinese public policy.

China has great respect for the American model of governance - and frequently blames its own 'stage of development' for various social and political issues.  |  Cartoonist Liu Rui in Global Times on July 27, 2011 21:52; source & courtesy - globaltimes.cn  |  Click for image.

China has great respect for the American model of governance – and frequently blames its own ‘stage of development’ for various social and political issues. | Cartoonist Liu Rui in Global Times on July 27, 2011 21:52; source & courtesy – globaltimes.cn | Click for image.

On July 13, the Pew Research Center published its latest global opinion poll. It shows that the US now faces a new challenge, since superpower status is increasingly doubted worldwide. In 15 of 22 nations, people believe that China either will replace or has already replaced the US as the world’s leading superpower.

China was one of those 22 countries polled.

Indeed over the past decade, China’s economy has become the second largest in the world. If this could be sustained, China would have a chance to greatly narrow its gap with the US in the present decade. China’s economic prowess will be translated to the spheres of science and defence, as currently seen in its space and maritime development.

But, it would still be prudent not to unrealistically exaggerate China’s prospects.

While China is positively expanding its influence, its newly acquired strength and posturing has created distance with some of its neighbors. Beijing has a lot to reflect on in diplomatic matters.

Though the US is overburdened, underbudgeted, and overstretched, it is still a superpower. In those ares where China is weak but is catching up, Beijing still has a lot more to learn from the US, such as balancing interest groups at home, balancing various public interests between development and safety and sustainability, balancing accountability and effectiveness, and balancing hard as well as soft and smart power.

China is already an incomplete superpower.

China has not reached the level of global leadership, and will not for quite some time, especially without dealing fairly with its fragile domestic affairs. (via China remains a hopeful but partial superpower).


China and U.S. soften tone on yuan

The poor will pay a price ... as usual.

The poor will pay a price ... as usual.

Amid harsh rhetoric, Chinese Vice Commerce Minister Zhong Shan and U.S. Treasury Secretary Timothy Geithner sounded some conciliatory notes on Wednesday.Mr. Zhong, making a 30-hour visit to the U.S. to try to ease bilateral tensions, expressed confidence that politicians from the two countries “have the wisdom and ability to resolve existing problems.“Mr. Geithner said he be- lieved China would allow its currency to appreciate over time, according to a CNN interview transcript. While the U.S. “can’t force them to make that change…I think we can work through the tough things we have together,“ Mr. Geithner said.The stakes are high for both sides. The U.S. and China are among each other’s biggest trading partners, and numerous U.S. companies have investments in China. The U.S. is increasingly looking to China to cooperate on international strategic issues, such as nuclear nonproliferation and the fight against terrorism. (via WSJ ON YUAN – China and U.S. soften tone on yuan).

Let the games begin!

Rousing 'macho' WASP voters!

Rousing 'macho' WASP voters!

The Dragon and the Eagle are squaring off! An experienced US stalks China, waiting behind high walls of US$2500 billion foreign exchange reserves.

The US-China game has started in earnest. US, egged on by ‘macho’ voters and a cheering media, will:-

  1. Act tough
  2. Behave in a morally outraged and indignant manner
  3. Commentators will prescribe a trade war and sanctions

In parallel, analysts, academics, think-tanks, journalists will talk-up China. Like Greenspan talking-up the US dollar or Dow Jones. They will: -

  1. Hold up China an nation-exemplar
  2. Write books analysing on China. Such books will start pour out of our ears
  3. Make movies and novels about the ‘dominant’ Chinese in the US
  4. Study, extol Chinese culture /tradition /history, and hold forth as a shining example.

And China will be ‘uncompromising’! Act as though, they have a choice.

A certainty

The change in dollar-yuan exchange ratio will happen. Peacefully, or with violent side shows. Assuming that the dollar-yuan revaluation will happen smoothly, is fraught with risk. That it will happen, without any significant disruption, is one, big, huge, slippery assumption. What will follow the Chinese moment in the sun?

Economic mayhem?

What remains to be seen

What could set off economic mayhem in China? Crime in China (a simmering threat), terrorism in Xinjiang (remote possibility), real estate bubble (a real scenario)?

Will the Chinese Government be able to ride this storm? Without a war with India? Which side of the fence will China fall? Answers to these questions will be worth waiting for! And prepared with!

Last time …

It would do well to remember that last time when China had a problem, it resulted in the India China War of 1962. Just after the disastrous Great Leap Forward and before the equally disastrous Cultural Revolution.

The Great Leap Forward began in 1957-58, saw famine and hunger across China. After the Communist takeover of China, land seized from land owners, was given to peasants in 1949. Ten years later, in 1959, the Chinese State took away the same land from the same peasant. Food shortages, starvation followed. Western (questionable) estimates are that 30 million people died during this period. War with India followed in 1962 – a diversion from the domestic Chinese catastrophe.

What will it be this time?

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