Will China become the world's dominant super power! The US, crippled by foreign debt and social decay, has fallen off its perch as the pinnacle of global economic and military might. Just 20 years ago this scenario would have been unimaginable, but after more than a decade of exponential economic growth and a massive military modernisation effort, strategic thinkers, military planners and politicians are re-casting strategic policies to accommodate a much more assertive and capable China.
Comparing China with US Current GDP of USA is 14.660(2011) trillion dollar and China have 10.09 (2011) trillion dollar. Per capita of US is $46000, and that of China -$7500.So the per capita is the big difference between them. It means that the US people are more productive from Chinese people. But this condition is not always same because if we look into the GDP growth rate, here we see the difference situation. The current GDP growth rate of USA is 2.8%, on the other hand China has 8.9% and that will bring difference in upcoming future.
Since USA has already reached the pinnacle of success we assume that growth rate will continue with 3% annually and corresponding Chinese GDP growth rate will be 7.5%. Here is a question that why growth rate of USA is less from China? We to analyse a country we require=Household consumption+ Total investment + Government Spending +net export (export-import).
So, we can easily understand that Chinese population is helpful to grow them. More population means more consumer and more consumer will play vital role to increase investment which fill their demand of consumption. This in turn also increases consumption. Similarly government taxes collection will grow and net export will also increase if land and resource are available.
The graph clearly indicates that in 2021 China will overcome USA, and in 2030 it go far away from US. (Assuming US average growth rate 3% and that of China’s 7.5%). Why can’t China use its surplus for internal consumption? •From the viewpoint of increasing domestic demand, China's exports can just as much be replaced by raising China's domestic investment as by increasing consumption. Indeed whether, and in what proportion, should China's domestic demand expand in terms of investment or consumption is a crucial economic policy choice. •China's economic policy during the last period took as a key aim raising consumption – i.e. living standards.
This indeed should be economic policy's aim – the target was maximizing the sustainable rate of increase of consumption. But unfortunately this became confused with a different idea of sharply increasing the percentage of consumption in China's GDP. These two goals are actually contradictory as GDP growth, which is largely fueled by investment, underpins sustainable consumption. Sharply increasing consumption's percentage in GDP cuts investment levels, thereby inadvertently leading to lower GDP and consequently lower consumption growth.
•The practical consequences of this confusion were clear in 2012. To attempt to raise the share of consumption in China's GDP, wage increases far above the economy's growth rate were raised by 20-23% •Such measures increased inflationary pressures in China's economy and squeezed private and state company profits, helping create in the first half of 2012 a trend accurately termed 'profitless growth'.
Falling profits in turn led to investment reductions, with fixed asset growth declining from 25.0% in August 2011 to 20.2% in August 2012. Falling economic growth also reduced government tax receipts, pressuring the state budget. •This process illustrates why the phrase 'consumer-led growth', sometimes used in China, is fatally confused. In a market economy production does not take place because there is a demand for consumption. It only occurs if production is profitable. As profits declined in 2012 investment fell, the economy slowed, and consumption's growth rate therefore declined.
The growth rate of retail sales, before adjusting for inflation, fell by 4.9 percent between December 2011 and August 2012 while the CPI fell by 2.2 percent. Real retail sales growth, the main factor in consumption, therefore fell. Predictably, attempting to sharply increase consumption's percentage in GDP led to the population's consumption rising more slowly! •But while consumption was boosted the government initially did not use available policy tools to halt the decline in fixed investment .The right pattern in which economic growth
should be driven is through consumption, investment and exports.
Currency Comparison : RMB vs Dollar From 1950’s, the dollar has remained to be the most preferred reserve currency. United States economic benefits from dollar hegemony
•In order to stack up dollar reserves US had to be an open economy and had to purchase a growing quantity of goods. This demanded the US dollar to be kept higher than the value of other currencies.
This was in order to cheapen the price of imported goods and thus increasing the demand. This arrangement led to an ever-growing current account deficit. The US consumption has also been subsidized and fuelled the growth of the US economy. China served as a financial investor subsidizing US consumption in the intention of fuelling its demand for imports.
•US government debt: The high demand for American bonds has enabled nations to invest huge amounts into a stable asset. Thus US government debt has made US Treasury bonds the centre of the foreign exchange market and the most widely held form of dollar reserves.
The use of the US Treasury securities in currency reserves has created an almost unlimited demand for US debt to posses’ dollar reserves. This artificially high demand allowed US to issue those bonds at even low interest rates, especially relative to its national debt and overall economic profile. Calling of its debt also didn’t take place fearing that it may devalue the rest of its dollar holdings. •The Euro crisis has further increased dollar hegemony as investors flock to the dollar’s safe haven and divest from the euro.
The Chinese Yuan meets these criteria as it is the second largest economy in the world and its trade is as large as that of the U.S.A’s. •A currency’s stability may be evaluated based on fluctuations in inflation and exchange rate volatility. Given that the RMB’s exchange rate is pegged to the US dollar, its stability is also tied to the dollar. This connection is so deep that it is said “China is estimated to control nearly half of all U.S. treasuries in the hands of foreign owners”. •RMB – US dollar relationship. It could diminish the status of the US dollar as a reserve currency as well as imbalance its inflation rate, while at the same time increasing the value of the Yuan.
Major Concerns for China to replace USA •China urgently needs to rebalance its economy by shifting from public investment and exports towards public and private consumption. In the short run, some of its savings need to be invested in real assets abroad, and not just parked in US Treasuries. But, in the longer term, Chinese households excessive propensity to save must be reduced by developing a social safety net and consumer credit instruments.
•The major reason for the decline in geopolitical hegemony can be attributed to the rapid growth and rise of developing economies especially China. If we look at the 2011 trade figures between the US and China, which is also the biggest source of inputs for the US, it stood at $503 billion out of which the US faced a trade deficit of $296 billion. In 2011, China’s holdings of US treasury securities amounted to $1.15 trillion, which also makes it the largest foreign holder of US securities.
These two statistics have also given rise to the fact that the US is highly dependent on the Chinese economy to fund its current deficit. Even when it is perfectly clear that China is artificially devaluing its currency by buying billions of dollar, the US has not been able to quantify its threats to China in the form of trade sanctions, which also contributes to the declining geopolitical hegemony.
•The balance of growth is swinging decisively towards the emerging economies especially the BRICS nations. Goldman Sachs argues that the economic potential of Brazil, Russia, India and China is such that they could become among the four most dominant economies by the year 2050. The thesis was proposed by Jim O'Neill, global economist at Goldman Sachs.
These countries encompass over 25% of the world's land coverage and 40% of the world's population and hold a combined GDP of 18.486 trillion dollars. On almost every scale, they would be the largest entity on the global stage. These four countries are among the biggest and fastest growing emerging markets. Below figure denotes the measure in GDP of the ten largest economies in the world from 2010 to 2050.
•Although, these four countries are not a political alliance (such as the European Union), they have taken steps to increase their political cooperation, mainly as a way of influencing the United States position on major trade accords, or, through the implicit threat of political cooperation, as a way of extracting political concessions from the United
States. •Moreover to take over USA, China requires a currency in which foreigners want to invest. That means introducing full convertibility and creating a deep and liquid financial system, a stock market for raising financial capital, and a market rate of interest for loans. And while china has talked of “internationalizing” the renminbi, it has done little so far. •Another major problem that china faces to overtake USA is the political scenario. China’s political values will emerge as a problem in competition to USA. China’s further ascent will depend on dismantling such classic communist policy icons as public-asset ownership, population control, and financial repression.
•The historical legacies limit the extent to which China will be able to share in global leadership, which requires some degree of compatibility between Chinese and Western values. The west claims that its values are universal, and the US and Europe will not cease pressing those values on China. It is hard to see this process going into reverse, with China starting to export its values. On the whole we conclude that the new world will see two major super powers USA and China.
References: http://www.economywatch.com/world_economy/world-economic-indicators/global-economy/global-economic-trends.html http://ablog.typepad.com/key_trends_in_the_world_e http://www.cfr.org/economics/five-economic-trends-watch-2012/p26903