Tuesday, 21 December 2010

How important is China?

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/home/opinion/5190-how-important-is-china

The 21st century has been called the “Asian Century.” The term was first used during a 1988 meeting between Chinese leader Deng Xiaoping and Indian Prime Minister Rajiv Gandhi.

We are supposedly in the “Asian Century” because of the population size and growth of Asia and the fact that the economic growth in the region has been stronger than the rest of the world for the last decade. Of course, when most people think and speak of Asia, they really mean China.

It would seem then that Asia’s time has finally come. But is that accurate?

In1800, Asia contained about 50 percent of the world’s population just the way it does now. In 1800, Asia accounted for approximately 50 percent of the global output of goods and economic activity. However, by 1900, Asia still held 50 percent of the world’s population but its contribution to global gross domestic product (GDP) had dropped to about 20 percent. This was due to the industrialization of the West in which Asia did not participate. You could argue that perhaps colonization by the West of Asia limited its industrialization. That may be only partially true. China and Japan were not colonies. However, the reasons Asia failed to modernize its economies are not vitally important. It is simply a fact that in terms of economic development, Asia did very little between 1800 and 1950. The balance of global economic power became unbalanced in favor of Europe and the US because Asia stayed out of the economic- development game.

If the 21st century is truly the “Asian Century,” it is because Asia finally decided to come out of a 150-year economic slumber.

The reason I offer this historical perspective is that over the last few months, many e-mail have mentioned that I seem to ignore the importance of China. One e-mail last week expressed this thought most clearly. From Mr. Chua: “We cannot always think of how the US economy’s domestic policies will affect the Philippine economy. This time, China has become too influential to ignore and its self-serving economic policy changes will surely affect Asian economies. Maybe we should also take this in consideration in your future analyses.”

Allow me to answer, Mr. Chua, by asking a question: What is the exchange rate between the Philippine peso and the Chinese renminbi (RMB)? Is the peso weaker or stronger against the RMB over the last year?

I would say that you do not have any idea what the answer is. In fact, if you look at the front page of the BusinessMirror, the list of exchange rates does not even mention the RMB. Why? Because the RMB is fixed to the US dollar.

The global economy is ultimately all about currencies. Successful and unsuccessful trade balances depend in large part on currency exchange rates. Foreign investment between any two countries must look at current rates and future projections of exchange rates.

Why has there been so much foreign investment in China during this “Asian Century?” A most important reason is that the Chinese government guaranteed that investors would not be subject to any instability of the exchange rate. Unlike in the Philippines where investors made money from peso appreciation, investors in China gave up the potential benefit of an appreciating RMB for a stable rate.

Of course, as the largest neighbor in Asia, the Philippines must keep an eye on China, its economy and its economic policies. But both eyes must be continuously focused on the US because of the dollar.

Another reason this is supposedly the “Asian Century” is that the wealth from Asian nations’ foreign currency holdings. Who holds the most dollars outside of the US? Number one is China (and Hong Kong) followed by Japan (2), Taiwan (4), India (6), South Korea (7), and Singapore (10).

Maybe the Philippines should look more closely at China. But I guarantee you, all the rest of Asia knows which country’s policy moves they need to watch.

As for being a big global economic force, China warrants a closer look to validate that assumption. In 2000, China accounted for 4 percent of the global GDP. The US share was 31 percent. By 2006, the US had dropped to 26 percent while China increased to 5 percent. As of 2009, China’s portion rose to 9 percent and the US fell to 22 percent.

The story of China’s economy is not the size but the amount of increase, which is immense. But even projecting current trends to 2015, the US percentage of global GDP will still be twice the size of China’s. Further, the G-7 countries, including Japan, will still make up almost 50 percent of the world’s economic activity, nearly five times as large as China.

None of this commentary is meant to underestimate the importance of the Chinese economy, particularly to its Asian neighbors. However, China must always be put in perspective.

As long as the dollar remains the world’s reserve currency and the US economy is the dominant player on the world’s stage, the US will remain the number one 800-pound gorilla in the room.

The Philippines must not make the same mistake with China that it did with the US. For decades, the US was the only consideration for our economic policies. We cannot allow that kind of thinking and mindset now to be switched in favor of China.



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