list member and economist anantha does not think so. this is from the
singapore business times.
china is pretty much all smoke and mirrors.
Tue, August 17, 2004 Singapore
Business Times - 17 Aug 2004
China can't fill economic void left by America
If the US dollar and US prosperity decline, looking to China to take
over as global economic locomotive would be misguided - the Asian
giant has too many problems of its own
By V ANANTHA NAGESWARAN
RECENTLY, I came across an interview with a legendary fund manager,
Jim Rogers, in which he predicted a free fall of the American dollar
and, with it, the end of American prosperity. He also happens to be
very bullish on China and commodities, in general.
Since the bearish view on America and bullish view on China are at
risk of becoming consensus (if they are not already), it might be
worthwhile to indulge in some contrarian thinking on the issues
Prognostications on the impending demise of the US dollar and American
capitalism remind one of what Mark Twain said on hearing rumours of
his own death. These predictions have been made before.
Most recently, they were made in the early 1990s when the US fiscal
deficit reached nearly 6 per cent of GDP. Yet, a budget that mandated
spending cuts and tax increases in 1993 did the trick and paved the
way for eventual surpluses. The situation has been reversed again in
the last three years. But there is nothing in America's history to
suggest that the trend is irreversible.
The second issue is the current account deficit. It is indeed nearly 5
per cent of GDP and given that the GDP itself is around US$11
trillion, the deficit, which needs to be funded, is well over US$500
billion. However, in the late 1980s, the US current account deficit
was over 3 per cent of GDP and thanks to a substantial depreciation of
the US dollar, the deficit turned into a surplus in the early 1990s.
No damage was done to American prosperity. Indeed, the decade of the
1990s was the decade of the American economy.
To be sure, the magnitudes are different and the US household sector
too is deeply in debt, along with the government. Further, interest
rates are too low to attract sustained funding of the deficit. Hence,
along with lower demand growth, a substantially weaker US dollar over
the next few years may be required, to rectify the problem.
If they do come about, a super-competitive US economy might emerge, to
the detriment of the mercantilist Asian nations, notably China. That
is what happened in the mid-1990s.
The US dollar weakened substantially and three years later, we had the
Asian crisis along with the Japanese economic stagnation of the 1990s.
No American spoke of a Japanese competitive threat to the US in the
1990s when such talk was the norm in the 1980s.
More than these economic problems, the potential threat to American
economic supremacy is the country's own attitude towards
internationalism and openness.
American prosperity would be in danger if the US closes itself to the
outside world. Immigrants have made that nation what it is, since
inception. If that openness were scaled back, it would mark the
beginning of the end of US dominance of the world economy.
Contrary to what I have written above, if America's problems are
serious enough to permanently threaten its prosperity, should it be
assumed that the problems that China faces would be no more than a
short-term blip on the country's march towards lasting prosperity?
My scepticism about the durability of China's ascent stems from three
factors. One is geo-political. America would not be a graceful loser,
if a collapse of the US dollar imperils American prosperity and if
China fills the void.
Recall Bill Clinton's speech at the recent Democratic Party convention
when he mentioned Chinese holdings of US Treasuries as a long-term
threat. If China does indeed pose a threat, geo-political tensions
The West is not short of reasons to gang up on China. The North Korean
missile programme and the Pakistani nuclear programme were both aided
and abetted by China.
There are also a slew of trade issues such as dumping and intellectual
property protection, where China stands accused of wrongdoing. An
article in the Financial Times on Aug 5 takes a harsh look at a recent
China ruling on Pfizer's patent for Viagra being invalid in China.
Second, China's own political transition would be nothing if not
messy. Chinese capitalists may be the best capitalists, but the same
cannot be said of Chinese communists. They are not going to give up
power easily. Nor might the resulting tensions be easily contained.
Then there is the Chinese bubble. The credit and investment bubble of
the technology era of the 1990s in the US and the credit and real
estate bubble of the last few years, again in the US and other
Anglo-Saxon countries, could be dwarfed by the current credit and
overinvestment bubble in China.
The most dangerous aspect of China's bubble is that no one knows its
exact magnitude. Data is so unreliable as to be practically useless.
Debt recovery mechanisms - an important part of any post-crisis
clean-up - are also weak. Recently, Standard Chartered Plc and other
creditors of Zhu Kuan Group, the bankrupt overseas investment arm of
the city of Zhuhai in China, failed to win a local court ruling to
help recover US$1 billion of debt.
Hong Kong-appointed provisional liquidators are investigating a series
of transactions between 2000 and 2003 that transferred about US$150
million in company land, shares and cash from Zhu Kuan to the
government and Zhuhai-controlled companies. Creditors in China may
well have to take, not merely a haircut, but a clean shave.
Therefore, the void left by a collapse of the US dollar and American
prosperity would not be neatly filled by China taking over. The more
likely outcome would be a dangerous vacuum in which there would be
many contenders, including both the US and China.
The assumption of the global mantle by the US from Britain in terms of
reserve currency, global economic leadership and so on, will not be
repeated. America was institutionally ready then. Neither China nor
any other nation is anywhere near ready now.
The vacuum would be inherently volatile and destabilising - both for
geo-economics and politics.
In politics, the disappearance of the bipolar world of the Cold War
gave way to the seemingly unipolar status of the US but, in reality,
it also gave rise to the forces of Al-Qaeda and other terrorist
Similarly in economics, the destabilisation of the US would unleash
many forces vying to occupy its place but without being quite ready to
This makes the case for safe-haven assets and resources compelling
because the fight for economic dominance would also be a fight for
resources such as energy and water.
But the case to buy China on weakness is not.
The author is an independent economist based in Singapore
Copyright Â© 2004 Singapore Press Holdings Ltd. All rights reserved.