#header-inner img {margin: 0 auto !important; #header-inner {text-align: Center ;} Fiji Coupfourpointfive: A perspective on Fiji's new best friend, China

Saturday, April 30, 2011

A perspective on Fiji's new best friend, China

LOOKING NORTH: Fiji's cup runneth over with Chinese dollars. What of the the future?

Can China Really Overtake the U.S. Economy by 2016? IMF Forecast:
By Martin Hutchinson, Contributing Editor, Money Morning

According to the International Monetary Fund (IMF) "World Economic Outlook," China's output will surpass that of the United States in 2016 - only five years from now.

But don't worry. The IMF calculation is based on "purchasing power parity" (PPP), which does not reflect real money. It relies on projecting China's stellar growth rates five years into the future. And it relies on Chinese official statistics, which are more than a little questionable.

(In fact, after the media storm that resulted, the IMF apparently even soft-pedaled its prediction that China would leapfrog the United States in just five years; in a subsequent interview, an IMF spokesman reportedly said that, by non-PPP measures, the U.S. economy "will still be 70% larger by 2016." A recent World Bank forecast concluded that China could overtake the United States by 2030.)

This prediction - and the attention it continues to draw - serves a useful purpose, particularly if it's given the scrutiny that it deserves.

For global investors with China-based holdings, it reminds us of that country's long-term potential - and the fact that such potential is always tempered by near-term risk. For the rest of us, it reminds us that China's ascendance is inevitable - in fact, is already happening - and will be with us for a long time, even if that Asian giant isn't immediately going to overwhelm the rest of the world.

And for the elected leaders in Washington, the IMF report - false alarm or not - should serve as a wakeup call to attack and address the many problems that threaten the US’s global leadership.

IMF Report: A Closer look
We had some problems with this prediction from the moment it hit the headlines. Let's start with the IMF statistics themselves. They measure gross domestic product (GDP) on the basis of "purchasing power parity," rather than by market exchange rates.

That makes sense if you're comparing living standards: If you are talking about what the typical China consumer can buy, he or she is about one-sixth as well off as his or her Western counterpart, not one-twentieth.

However, the use of the PPP measure makes much less sense when looking at international trade or political power. That's because individual purchasing power includes such items as haircuts, which are much cheaper in Beijing than in the West (except, doubtless, at a couple of very overpriced salons in Shanghai or one of the other burgeoning financial centers) and cannot easily be traded internationally.

On the other hand, goods that are traded internationally are subject to global market forces and are generally about the same price everywhere they are sold. In fact, some of those goods may even be cheaper internationally, since our distribution system is more efficient and our tariffs lower.

That's also true of large-scale armaments; you will be able to get the People's Liberation Army (PLA) squaddies to work for much less than their Western counterparts, but the cost of a fighter jet or a missile with certain capabilities is pretty much standard around the world.

So even if the IMF's 2016 forecast was an accurate one, there's no way that China would be able to project as much military power as say the United States, or to distribute as much foreign aid and subsidies to client states.
For at least a decade beyond 2016 - and probably more - China will be a substantial Number Two (2) ... a market that can't be ignored ... but not Number One.

The travails of Timing
When you are estimating future growth rates, the farther out you go, the more inaccurate your predictions become: If you were to take China's current growth rate and project it forward fifty (50) years into the future, the Asian giant would have absorbed the whole of world GDP and be starting work on Mars.

Even a five-year projection - such as the one the IMF put forth - does not allow for the possibility that China will experience an economic hiccup before that period ends. 

The recent news that China has just fired the head of its $270 billion high-speed rail network for embezzlement, and is now running the trains 30 miles per hour slower than before for safety reasons, indicates that - in a command economy like China's - much of the apparently soaring output may have been wasted.
The Economist diary (1990) claimed that the centrally planned East Germany was richer than the free-market Britain; as a native Australian that recently visited East Germany, I can tell you that this wasn't the case - in fact, it wasn't even close.

IIndeed, when the Berlin Wall came down, we saw the former Comecon (Council for Mutual Economic Assistance) economies lose as much as 60% of their GDP as factories closed because their output was uncompetitive in the free market. Similarly, up to half of China's GDP may be wasted: Think of all the empty offices and apartment blocks, developed by state-guaranteed companies, all of which are held as assets on the balance sheets of China's banking system.

Long-term, there's no question that China has great potential. At the same time, however, I think it very unlikely that China's economy will make it to 2016 without a major banking crisis, which will knock back its GDP for several years.

Mongterm potential, near term peril?
The IMF numbers aren't the only ones that I feel are suspect - so, too, are many of China's growth statistics. GDP figures are announced immediately after the end of each quarter, which given China's size and diversity means they must reflect the wishes of the leadership more than any measurement of reality.

Sometimes, of course, the leadership may wish to record lower growth, to show that some monetary or fiscal tightening is working. But we bet that most of the time, the temptation is to "round up," as opposed to rounding down.

Far too many Western analysts and observers spend most of their time in the major urban centers, where growth has been fastest, and therefore aren't aware of, don't get to see, or even purposely ignore, stagnant areas or places where central planning has wasted billions. 

The prolonged rapture about the Chinese high-speed rail plan by a number of Western commentators is one good example of a case in which too many reporters took too many of China's claims at face value and failed to examine the challenges and problems that were hidden by the hype.
So our guess is that, even now, China's GDP and growth rates are not as impressive as reported.

The bottom line: China is big, getting bigger, and its growth can't be ignored - especially given its long-term investment potential. But there are near-term challenges, many of them substantial. 

If China does not have a major economic trauma, then indeed by 2030 or so it will be close to overtaking the US. But the US has a lot more than five years in which to make the necessary adjustments. Can the Western leaders (particularly the US Leaders) see this as a wake up call for their economies.


Bubble said...

Before being too much exited about China, have a look to the video about the real estate crisis in that country on journeyman.tv. 75 millions apartments empty... when the bubble will crash, it will be terrible.

Wilson Tamanikaira said...

What price is development and prosperity at the cost of civil and individual liberties.

I'd rather live free in an underdeveloped and poor country rather than a rich authoritarian communist dictatorship that shackles individual talents and expressions.

Bainimarama is a fool and conman who is trying to buy our loyalties but selling out our heritage for self glorification.

SEMI MEO said...

Hydro and soon Nausori redevelopment will be funded by the Chinese private and state financiers ...only if our western neighbors stuck with us and not cut us off post Dec 2006.

We’ve never deserted them during ALL wars!!..NEVER!!

mark manning said...

@ Semi
There you go again, blaming others.
How about attributing the blame solely onto the shoulders of those responsible, you Fijians, one and all.
Or are you actually implying that Fiji is in a war now ?

The Regime has taken out loans from the chinese, not for the sake of Fijians, but to skim some money off the top for themselves and all the while, people like you Semi, continue to blindly support the very same people who have caused so much misery in your own Country.
Stop blaming the West for something you helped create, support and nurture.
You have the Government you deserve, an illegal, unaccountable one, lead by thieves and thugs.

Anonymous said...

Its all a matter of ethics and morality.You want to run a non-democratic regime you seek assistance from like minded powers.The China Government will "take care" of you very well.Your needs are but a pin prick that will be easily satisfied at a cost.The cost will eventually be revealed.

Meow Meow said...

The chinese are smart, basicaly buying Fiji with their soft loans.
Most of this money used for these projects go back to China by the way of loan interest, Chinese labour and all goods used for these projects must be sourced from China.

SEMI MEO said...

OOh boy, I love the rapid increase of my cheer squad, both amongst our own people and some senile foreigners barking from their foreign nursing homes.. I’m flattered..indeed I am..we are told that my posts rends then to forget their name, face and mind…look, I hereby sack all my local and foreign cheer members.h boy, I love the rapid increase of my cheer squad, both amongst our own people and some senile foreigners barking from their foreign nursing homes.. I’m flattered..indeed I am..we are told that my posts rends them to forget their names, faces and minds…look, I hereby sack all my local and foreign cheer members.I also command you NOT to vote for me in the 2014 electicians as I do not count invisible motod

Anonymous said...

Semi your a legend in your own mind! keep dreaming..

Mimi Meow said...

@Semi Meo, I think it's you that belongs at the nursing home going by your last comment.

Jieke said...


Irrespective of who gives the money we the people of Fiji want a bit of freedom like you do in Oz. So stop the bull shit.

SEMI MEO said...

@ all you've forgotten their name and how they look like...take a bath and get ready for constitutional referendum in 2012 and election in 2014..the rest of us 99.99% of Fiji with a face, pls pray for these lost ones in their nothingness..