2011 April 24 Sunday
China Economy To Surpass America In 2016?
The International Monetary Fund projects that in Purchasing Power Parity terms China will surpass the United States in 2016.
According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.
Put that in your calendar.
I mourn the passing of the country I was born into. So much has been lost and so much more will be lost. We live at the end of an era in more ways than one. As Brett Arends points out, the change has come very rapidly.
Just 10 years ago, the U.S. economy was three times the size of China’s.
Whether this happens so soon depends in part on whether the Chinese can soft-land their enormous real estate bubble. Jim Chanos is skeptical and other observers think China's growth rate can't be sustained. But the US isn't going to grow very either.
In 2009 China surpassed the US as the world's top energy consumer. It did this using coal, which accounts for % of their total energy production. This makes China much less vulnerable to high oil prices.
The IMF is also projecting world economic growth of about 4.5% per year over the next 5 years. As Stuart Staniford explains at that link, that's so not going to happen. That level of economic growth would require world oil production to grow at 3% per year. Yet oil production is about where it was in 2005 and International Energy Agency chief economist Fatih Birol says the age of cheap oil is over. Only recession can lower energy prices. The economies of the world are becoming increasingly constrained by resource limitations. US economic growth has slowed to only 1.8% due to high energy and commodity prices. This is the new resource-limited normal.
So what's the net effect of resource limits on the relative standing of the US and China? The Chinese have one thing going for them: Oil makes up a much smaller percentage of their total energy usage than is the case with the US. So the Chinese economy is less dependent on oil. China's heavy reliance on coal makes Peak Oil much less a problem for China than it is for America.
Coal makes up 71 percent of China's total primary energy consumption, and China is both the largest consumer and producer of coal in the world.
China's 18+ million per year car production (and growing) is making the Chinese more vulnerable to oil price shocks. But China's economy is still not structured around oil unlike America. For this and other reasons I expect China to continue to catch up and eventually surpass the US as an economic power.
China also has shitloads of natural gas which is good for feeding both fixed and mobile power plants. I'll be interested to see if they issue a command-economy style direction that all new motor vehicles be fuelled by LPG instead of petroleum. They have such a young vehicle fleet that is going to grow very rapidly that such a direction would benefit the whole Chinese economy.
The US also has plenty of natural gas, so it might well become a great test case of competing economic theories: Will it be the market or will it be a command-economy that find the least painful way to avoid the worst of peak oil.
China is moving off of coal rapidly, hoping to replace it with natural gas. Coal is primarily used for electricity production, but the environmental fallout is becoming much in major urban areas:
If China was moving off of coal then China's coal consumption would be dropping. In fact, if China's economic growth continues then just in 2011 China coal consumption for electric power will rise 9%.
The Chinese government is trying to put a cap on coal consumption - but mainly to make domestic reserves last longer. That cap won't be reached for a few years yet and it is not clear then cap will really be enforced. The pause in the Chinese nuclear program suggests there'll be greater pressure to let coal consumption to grow more until enough nukes get built.
On the bright side, slowing growth in construction looks set to lower the growth in demand for metallurgical coal:
Growth in Chinese demand for steel
may ease to 2.6 percent to 4.6 percent annually through 2015 as
the economy slows, the China Iron and Steel Association said.
With China "moving off coal" really means "try to satisfy more of the growth in electric power demand using other sources". They are a long way away from a decline in coal consumption. It'll go higher before it goes lower - unless they finally get hit by a severe economic contraction.
Pardon me while my head explodes. Why is it that just about everybody gets the analysis on China wrong?
Look, China has four big State Banks. They issue Yuans debt free into their companies. They then let their companies beat each other up, competing for market share. Some companies have huge debts on their internal ledgers, and then the Chinese government forgives the loan. This loan popped into being debt free, so no big deal. Those Yuans that were spent into the economy are not inflationary if the money supply grows at the same rate as the economy. Since there are 1B people moving up the wealth curve, this can go on for awhile. The debt free money left behind real infrastructure that has inherent cost advantage to that which is created with debt money in the Western system.
Debt free money is a large part of the Chinese money supply. That is why a bicycle costs $75 at Target, and China still makes a profit. Are the Chinese starving? I think not, things are much cheaper in their economy and they need less money as they are not chasing debt. Their money does not consist of debt that is buried in every transaction. We are the dumb ones with our bankers strangle hold on our throat with their damnable debt money system.
China is strategically sucking jobs out of our country. By pegging the Yuan to the dollar, it makes it attractive to shift our industry over there. China’s government also puts us into debt bondage when they trade out a Yuan for a dollar, and recycle that dollar into a treasury instrument. They have a psychological hold on our dumb congress critters who then bow and scrape to the Chinese. Let’s not offend our creditors. Servicing debt on the treasuries is a form of wealth transfer. We borrowed against tomorrow to consume today. And to boot, we exported the jobs for today’s consumption. Wall Street looks like a hero with temporary profits, but eventually you are a zero when your job is gone.
With regards to their housing bubble, I call BS. That was debt free money that built that infrastructure. Where is the debt? Pay attention economists, their system is not like ours. So now they have infrastructure in place and have put people to work. There are plenty of people moving off of the farm and would like to live in those houses.
Once they have world class industry and capability they can easily turn on internal consumption. Also, China has to rocket up the wealth curve in one Generation as their population will invert in about 30 years due to the one baby rule. There is precedent; we turned on internal consumption after WW2 as we had efficient industry in place after the war. We also spent money into our infrastructure cheaply at 3/8 of 1%. This is very analogous to what the Chinese are doing.
REN, your analysis is all wrong. "Debt-free money" is irrelevant: base money (in any form) is an interest-free loan to the government, and bank accounts are loans to banks, which may or may not pay nominal interest.
Newly-issued yuans are not inflationary? Try telling that to Chinese folks, who are now seeing 8%/yr inflation in retail prices (and comparable increases in nominal wages). Of course, given the nominal exchange peg, this strengthens the real exchange rate between Yuans and USD, which will eventually constrain the Chinese's ability to supply cheap goods and "suck jobs out of the country".
Yes, China's government and banks hold our debt, and will eventually exchange it for real US goods, services or assets. In the meantime, we can consume more, and the US government gets to run huge deficits. These heightened debt levels were a choice on our part; in the end, it's pretty much a wash.
Base money in the U.S. is rebated at 85% from the FED,so it is not debt free. Secondly, there are two ways to spend base money. One, the government can use it to SPEND and consume items from the private sector. TWO, the government can spend into the private sector on infrastructure, or jobs. This can be viewed as benefitting the private sector. At the same time, the extra (inexpensive) base money is used in lieu of expensive credit money, benefitting the people. The extra deficit spend base money is necessary for the private sector to have savings. We did this in WW2 by the way.
This is also exactly what Canada did from 1932 to 1974, and the savings in the private sector became so great, industry started self financing. Of course the international banksters bought out the Canadian bank in 74 by promising politicians the world, and now Canada is in debt like we are.
I didn't say that Yuans were non-inflationary. I said that if the economy grows at the same rate as the money supply it is non-inflationary. China will have to cut back on issuance, or drain the supply if they get inflation. But, they are still growing year on year and stealing our industry.
Also, the way Obama and the current critters spend base money, they both consume and spend it into banks. On both counts this is wrong. The bank sees entering base money as extra reserves, and puts the money on the overnight market. This drives interest rates DOWN, especially since there are no takers. (We are in a balance sheet recession, so what banker will give a new loan to somebody who is upside down?) The low interest rates are then used for a carry trade and are also used to distort markets causing another debt fueled bubble. The smart thing to do would have been to spend directly into labor, bypassing the banks. Labor could then have the income to pay down their housing balance sheets. The other way would have been to give the banks a haircut. Who cares what the numbers on their ledgers are, they have already made enough profit. Adjust the ledger and don't make base money enter the supply to compensate for their screw up. Also, the too big government needs to stop consuming so much wealth from the private sector. More and bigger government steals opportunity from the private sector.
My chief complaint about economists is that they don't understand the nature of money, nor do they follow the money path and find out where it goes. Because of this we have all kinds of distortions that are bad for American's and are causing us to loose our economic freedom. Without economic freedom we cannot stand up to tyranny.
"Yes, China's government and banks hold our debt, and will eventually exchange it for real US goods, services or assets. In the meantime, we can consume more, and the US government gets to run huge deficits. These heightened debt levels were a choice on our part; in the end, it's pretty much a wash."
My answer to that is why should they? The bank of england only recently paid of the debt to the napoleonic war. If you can make debt peons of a population, and roll the debt over forever, then that is permanent gravy. Also, consider the strategic implications of the psychological hold it has on the debtors. China recycles dollars into our treasuries in order to remove dollars from the money supply. The objective is to keep the Yuan low relative to the dollar. The real wealth is not money, it is industry, business, and know-how. We are exporting that in spades simply because accountants do not understand terms like opportunity cost. What is the opportunity cost to exporting whole industries, and intellectual property, so you can make a quick buck? In the case of the U.S. it is long term decline as we export our real wealth. Money is not wealth, it is a stand in for wealth.
It would be a simple matter to quantitative ease the Chinese. The FED has two accounts for each country. One account is analgous to a Savings account (interest bearing Treausuries) and the other is like checking (it holds dollars).
All we would have to do trade out dollars for their treauries. In effect, their savings account would go down, and their checking account would go up by the same amount. China would not have any less money on hand, just that the mix would change. Then we tell them, spend money in our economy like you should have been doing all along. We are in a balance sheet recession and we need that money to circulate. If they couldn't understand that, then they are not a country we would want to trade with long term. It would expose their game and show their true face.
But, instead we have little Timmy Geithner going to China and begging them to borrow money on our bond markets and put us more in debt. A sovereign issuer of currency like the U.S. does not need to be in debt to anybody. Even at the highest levels our economists either are confused or they are playing us.
Correction, little Timmy was begging them to buy our TBills, which means taking Chinese dollars our of circulation. In other words, our dollars buy a Chinese good and then a Chinese manufacturer is then holding your dollar. That dollar can return to the U.S. to buy a treasury, essentially driving up the value of the dollar (supply and demand) by reducing the supply.
We never have a bond failure, we don't need the Chinese to buy our bonds. Even Japan, who has much higher debt levels than us, never has a bond failure and never will.
Hope my posts weren't too confusing. Most of what we see as American's is smoke and mirrors. Following the money allows us to see the true picture. The reason we are in decline is because our private money system has captured our government. We actaully produce plenty of wealth, and every American should be fairly well off.