power transition

My latest column for Newsweek International is now available.  It looks at optimistic and pessimistic modes of thought with regard to China's future, and suggests that they can both be right: 

I belong to the third camp—the one that believes that the Bubblers and the Extrapolators can both be right. My camp looks at China and sees the parallels with America's rise to global economic greatness during the late 19th and early 20th centuries. From an outsider's vantage point, America looked like a machine that could take immigrants and raw materials and spit out manufactured goods at will. By 1890, the U.S. economy was the largest and most productive in the world. As any student of American history knows, however, these were hardly tranquil times for the United States. Immigration begat ethnic tensions in urban areas. The shift from an agrarian to an industrial economy led to fierce and occasionally violent battles between laborers, farmers, and owners of capital. With an immature financial sector, recession and depressions racked the American economy for decades.

It is not contradictory for China to amass a larger share of wealth and power while still suffering from severe domestic vulnerabilities. From the perspective of the rest of the world, however, this is not a good thing.

As for why it's not a good thing, well, you'll have to read the whole article. 

FP readers have no doubt discerned that your humble blogger's #1 topic of interest for 2009 has been the relative rise of China, the relative decline of the United States and the effects of these power shifts on the global political economy.

That said, an emerging subtheme will be breathlessly hyped reporting that melodramatically exaggerates either shifts in China's power or shifts in Chinese preferences. 

For exhibit A, I give you the Financial Times Jamil Anderlini and Javier Blas , who report, "China reveals big rise in gold reserves."  Let's go to the lede:

China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.

Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.

The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.

Ooooh.... this could be a Very Big Deal!!  Gold could supplant the dollar!!  Hide the children in the basement!!

Well, let's crunch the numbers first.  Unless MS Excel's my math is way off, China's gold reserves are now roughly worth $30 billion.  Which means they constitute less than two percent of China's total reserve holdings.  Furthermore, China's doubling of its gold reserves in the past five years actually means that Beijing has diversified away from gold, since the total value of China's foreign exchange reserves has increased tenfold during the same period of time. 

No wonder, therefore, that buried deep down into this story you see the following passage: 

Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.

“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said.

China's power is undoubtedly increasing.  Not every action by Beijing, however, is indicative of attempts to alter the current global political economy. 

Hmmmm.... let's see what is on the commentary page of the World section of the Financial Times website.  See if you can spot the trend: 

1. "China sees European Union as a mere pawn:  Viewed from Brussels, China’s importance to the world’s security and economic systems has never been greater, writes Tony Barber. Viewed from Beijing, the European Union’s importance has rarely been smaller."
2. "Why brands now rise in the east:  For a long time, global products have been made in the image of what US consumers wanted, or dreamed. But what will western consumers make of it when Asia’s influence becomes apparent in products other than games consoles, asks John Gapper." 
3. "Beijing flexes new economic muscle at sea:  If Beijing continues to expand its seapower until it has a navy to match that of America it will raise awkward questions of the postwar balance of power in the Pacific that has been kept largely thanks to the US presence, writes David Pilling." 

As one reads what the Chinese economic elites are saying about the rest of the world's economies, one begins to wonder why they don't start blogging.  The snark level is rising fast. 

Consider China Investment Corporation head Lou Jiwei: 

Lou Jiwei, head of China Investment Corp, said he was pleased he did not make a single trip to Europe in 2008 after EU officials expressed concerns about his fund’s transparency and intentions.

But speaking at the Boao Forum for Asia, China’s riposte to the annual World Economic Forum meeting in Davos, he said he was considering investing on the continent again, now that European officials have been humbled by the global financial crisis. “I have to thank these European officials,” Mr Lou said. “They saved me a lot of money. Now they come to me without conditions and I am beginning to consider making investments in Europe again.”

Mr Lou did not mention CIC’s experience in the US, where the fund made controversial – and costly – investments in Blackstone, the private equity group, and Morgan Stanley on the eve of the crisis.

Actually, Lou could probably retort that since CIC held a lot of their overseas assets in liquid dollar investments, they did surprisingly well in the past year. 

To the wise investors, go the snark.