The Daily Reckoning PRESENTS: As the Great American Consumer Economy continues to sputter, all eyes turn toward rapidly maturing China. How will China weather the problems besetting its financial system? "It is quite probable that within just 10 to 20 years, China will be by far the world's most important economy," Dr. Marc Faber concludes below.
THE CASE FOR CHINA By Marc Faber
The rise of China as Asia's dominant economic and political power raises a number of issues. It is obvious that with a population of 1.2 billion, China will be the largest consumer in the world for most goods and services. Already today, China has more refrigerators, mobile phones, TVs, and motorcycles than the United States, and it is only a matter of time before it will have huge markets for just about any product. As a result, its resource requirements will rise very substantially, and Chinese purchases of oil, coffee, copper, grains, and so on will move commodity prices dramatically.
Just consider the following. Asia, with a population of approximately 3 billion people, consumes 19 million barrels of oil daily. By comparison, the United States, with a population of 285 million, consumes about 22 million barrels of oil - that is a per-capita consumption more than 10 times that in Asia. However, consumption in Asia is now rising rapidly. China's oil demand has doubled over the last seven years to around 4.5 million barrels a day.
But it is not only in the oil market that Chinese economic growth will be felt. Take, for instance, the per-capita consumption of food in China - which I won't compare to food consumption in some Western countries where a large percentage of the population suffers from obesity. If we look at consumption of meat, milk, fish, fruits, and poultry in China, Taiwan, and Hong Kong, it becomes obvious that the rising standard of living in China will lead to very meaningful increases in its purchases of agricultural products in the years to come; sometime in the future, it will have a similar per-capita consumption pattern to those in Hong Kong and Taiwan.
Or compare the per-capita consumption of coffee in China with that in Western countries. Annual per-capita consumption of coffee in Germany amounts to 8.6 kg, in Switzerland to 10.1 kilograms, and in Japan - where coffee consumption has increased rapidly in the last 30 years - to 2.3 kilograms. In China, per-capita consumption is just 0.2 kilograms. If China's per-capita consumption rose to just 1 kilogram (a little less than in South Korea), then China would have a total consumption of 1.2 billion kilograms compared to a total consumption of around 70 million kilograms in Switzerland!
What I wish to emphasize here is that if standards of living continue to rise in China, the country will have a huge impact on the world's commodity markets and is likely to push up commodity prices very considerably. In fact, I regard the purchase of a basket of commodities as the safest way to play the emergence of China as the world's dominant economic power.
You may, of course, question my optimism about China's growth prospects and point to the large number of problems China is facing. These problems relate largely to its financial system, large bad loans at state-owned banks, underfunded pension fund liabilities, corruption, and the growing wealth inequity between its rural and urban populations. But I believe that, while substantial in scope, China's problems can be dealt with.
However, I remain convinced that, sometime in the future, China will experience a serious financial crisis, which will then force its policymakers to deal with the bad loan and pension fund issues. You, however, should not be overly concerned about this financial crisis. The American economy of the 19th century also experienced a series of crises, and even a civil war, and yet its economy performed admirably well between 1800 and 1900. Moreover, all rapidly growing economies experience terrific temporary setbacks from time to time.
But in terms of China's long-term prospects, I should like to remind you that the U.S. economy also expanded rapidly in the second half of the 19th century - and (this) in a deflationary environment. This was due to several factors, including a rapid increase in its population (rising from 37 million in 1867 to 76 million in 1900), the opening of new territories facilitated by the railroadization of the country, and the application of new inventions to manufacturing, which boosted productivity dramatically.
Thus, when we compare the U.S. economy in the second half of the 19th century to China at present, we should not overlook the fact that, in 1850, the U.S. economy was well behind the United Kingdom and the Continent in terms of industrialization. Therefore, a catching-up effect came into play.
This is evident when we compare the growth of industrial production in the United States, Germany, and the United Kingdom from 1875 to 1890. In the case of the United States, industrial production grew on average by 4.9% per annum, compared to just 1.2% for the United Kingdom and 2.5% for Germany. America's strong growth in the second half of the 19th century was typical of an emerging economy and is comparable to strong per-capita GDP growth in China between 1978 and 1995, averaging more than 5% per annum, while the world's per-capita GDP growth only averaged 1.11% over the same period.
Moreover, by 1885, the United States, which had hardly any industries at the beginning of the century, led the world in manufacturing, producing 28.9% of the world's manufactured goods, while Britain had been displaced to second, with 26.6%, and Germany to third, with 13.9%. Also, while the United States had produced hardly any cotton around 1800, its plantations supplied five-sixths of the world's cotton by 1860!
The point is simply this: if the United States could become the world's dominant economic power by the end of the 19th century from extremely humble beginnings, I think that, with the acceleration of the pace of change that allows regions that open up to industrialize in no time, it is quite probable that within just 10 to 20 years China will be by far the world's most important economy - no matter how many crises it will have to deal with in the interim.
Regards,
Marc Faber, for the Daily Reckoning
P.S. One problem I can foresee, however, is that, because of its size and increasing economic and military importance, China will grow out of proportion for a harmonious balance of power in Asia. When, in the future, China has become Asia's largest trading partner, with respect to both its exports and imports, it will not only be an economic hegemon, but will also replace the United States as Asia's most influential political power. That such a transition will at some point lead to serious tensions between the United States and Japan on one side and China on the other is obvious, but the trend towards China's dominance in Asia is well established and, in my opinion, unstoppable.
P.P.S. At the same time, as discussed above, China is becoming a major buyer of commodities and will become, in due course, Asia's largest trading partner. The emergence of China as a major buyer of commodities should support commodity prices, and if, in the future, the global economy should resume 1980s-like synchronized growth, commodity prices could soar.
In fact, grain prices, after having built an extended base since 1998, have been rising explosively since June. We therefore still believe that commodity prices are bottoming out and will outperform Western financial markets in the years to come. The purchase of commodity futures, including coffee, cotton, rubber, copper, gold, silver, sugar, etc., is recommended.
--
/ dave /