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Is China’s Global Economic Dominance Inevitable?

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Is the recent trade war President Donald Trump has waged against China set to go down in history as the West’s last stand in a losing battle to maintain the geo-political and economic status quo in place since the beginning of the industrial revolution? That concern might be а case of accelerating or exaggerating the situation more than is justified but the broader question remains. Is China’s current path of economic development, and the political and social culture that stands in stark contrast to Western capitalist democracy underpinning it, inevitably leading to an inversion of the global balance of economic, political and military power? Many seem to think so. Or that if not a complete inversion, a significant rebalancing of world power is now almost set in stone. But is that really the case?

Ian Morris’s hefty and uniquely broad history Why The West Rules – For Now argues that the history of human civilisation is a cyclical one over which economically prosperous societies and political regimes have always risen and then collapsed, overtaken by the rise of a new dominant power. The thrust of the tome’s argument is that the series of events that led to the West’s industrial revolution and subsequent cornering of global power and export of its particular form of capitalist democracy came about somewhat randomly.

He puts the current world order down to the result of factors such as climate change and historical outcomes that could conceivable have played out differently but for the variations of chance. Our international economic, political and cultural dominance is not, believes Morris, the result of anything inherently unique or ‘better’ about the West’s culture. And as such, the balance of power could and may well shift East again with China’s more autocratic and less individual socio-political model demonstrating it too has its advantages.

It would be overly simplistic to say Morris forecasts the rise of China as the new global power, overthrowing the West, currently led by the USA over the next several decades. However, he does forecast climate change and competition for resources, also strongly influenced by global warming, leading to a “global weirding”, that will see states fail and a new order rising.

Morris is a historian but countless economists and socio-political theorists and commentators have also speculated as to whether Western democracy and economic models, in their current form, can survive the rise of China. Will the global future be in our image as we tend to naturally assume? And if it’s not, what does that mean for the future of an economy most of us have staked our financial futures on?

Investors, investing online in equities and other major international financial markets, have a responsibility to themselves to anticipate the broad macro trends that will shape the future landscape their portfolios will sit in. Spotting the technology trend towards digital cameras and then smartphones would have saved investors in Kodak from losses. The company failed, unable to find a new place in a changed economy that didn’t include much demand for photographic film. Similarly, if the buying power of the Western consumer is locked into a slow decline in comparison to the Chinese consumer, it would make sense for investors to start to gradually reposition their investment portfolios towards exposure to the Chinese market.

Should you be selling shares in Alphabet and buying into Baidu? Amazon for Alibaba? Apple for Huawei?

There is a strong body of evidence that China’s undoubted success in evolving into a global economic powerhouse of the past four decades does not necessarily mean that process will continue to the point it inverts the West’s current dominance. It may but it may well also falter. In the 1980s a rising Japan, having reinvented itself as a technology and productivity hotbed following defeat in the Second World War, seemed on course to challenge the economic might of North America, Australia and Western Europe. In the 50s the Soviet Union, in a period of rapid economic growth, was bullish about its own prospects. In both cases the mistaken assumption was that recent periods of sustained growth would continue.

They didn’t. Yes, Japan is a major economic power to this day but not in way that has really challenged the West. It is a valued partner to the world’s developed economies, representing a different culture, but not in a way that seeks to disrupt. The former USSR? Despite Putin’s agitations and posturing in geo-politics, Russia is a huge country but a relative economic backwater. Despite a population that is more than twice that of the UK, Russia’s GDP is almost 40% lower and wealth is very concentrated in a narrow circle of mega wealthy oligarchs. The other now independent countries that made up the former USSR are considered to be emerging economies at best and several are practically failed states.

Independent researcher Capital Economics argues that despite the fact that despite China’s proven ability to sustain rapid economic growth and plenty of remaining potential to improve its per capita productivity, it could be on the verge of a period of painful growth deceleration. Its recent policy of huge investment in the economy, fuelled by the quick accumulation of heavy debts, leave it, like Japan in the 80s, now vulnerable to a sharp slowdown. The crux of the argument is China’s investment rate of 44% of GDP is unsustainably high. Returns on that investment have already stalled. Export-driven growth has also slowed and average income per capita is still lower than neighbouring fast growth economies in east Asia. The country’s working age-demographic is also in decline.

For over a decade now China has pinned its hopes on a significant rise in consumer spending but household consumption still only accounts for 39% of GDP. In the UK consumer spending makes up over 66% of GDP. In the USA that figure stands at around 68%. There is not currently any obvious catalyst that will see China close the gap on the West in terms of average household incomes and consumer spending. Capital Economics also forecasts India’s GDP growth to be considerably higher than China’s over the next two to four decades. In fact, between 2023 and 2027 it expects India’s growth rate to be more than double China’s at 6.2% compared to 3%. India needs a lot of policy reform but its current relative poverty in terms of GDP per capita leaves huge room for growth and the country has an entrepreneurial culture and mindset.

Many economic analysts also foresee a scenario in which the rise of robotics and AI over the next couple of decades will offer a new boost to productivity in the West, centred on the U.S. There is a school of thought that the Trump presidency may also act as a watershed and act as a catalyst to the rise of a more socially inclusive brand of politics that re-stimulates economic competition and reinforces the fabric of civil society.

Of course, China may defy the doubters and remain on course, sustaining economic growth at a level which would flip the axis of global dominance and a re-drawing of political and cultural norms internationally. But if bookmakers were to draw up odds based on statistical likelihood of a China-dominated world a century from now, taking all of the evidence and known factors into consideration, they would be long.

As an investor, China’s economy and the growing international influence of its biggest companies certainly represents an opportunity but it also entails a significant level of risk. India might represent an even better bet on future growth. And it would be unwise to discount the West just yet.

 




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