Chinese Fortunes (Part 3)

Is China destined to overtake us?

That’s what the trends indicate. If you take the average Chinese economic growth rate and the average US rate over the past 20 years and apply these rates to the future, China’s economy will equal our economy by 2025. Are we ready for this?

Yes, if China grows 8% faster than the US for the next fifteen years, it will indeed have a larger economy than ours. That’s just mathematics. But the only constant in the world’s economy is change. What could slow Chinese growth?

First, China needs to develop internal consumption by investing in social infrastructure. Such investment may encourage internal markets, but it isn’t as productivity-enhancing as building roads and bridges. Internal consumption makes sense, but it delivers a slower growth rate.

Second, China has been pursuing a mercantilist export policy. This works as long as imports are cheap and export markets expand. But slowing growth and in Europe may have a leveraged effect on China, which has relied on increasing market penetration. And contracts for raw materials are often renegotiated when in the sellers’ interest. That could mean higher import prices for China.

Finally, environmental issues may cramp Chinese growth. At some point, unhealthy air and water become an economic concern China may face this issue as they grow. Almost every nation has. China is unlikely to be the exception.

These are some of the reasons why the past may be a poor predictor of the future. The economic path between two points is rarely a straight line.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T19:52:06+00:00 July 25th, 2010|Global Market Update|0 Comments

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