U.S. President Barack Obama has begun a nine-day tour of Asia at a time when the U.S. economy is struggling to emerge from a deep recession. But nothing looms bigger than China, the largest holder of U.S. debt (around $797.1 billion, up 10% this year), has emerged from the global economic downturn in an ever stronger position. When Obama sets foot in China for the first time, he will confront a dramatically altered balance of power between the two nations.
Two Decades of Explosive Growth
This seismic shift is driven by China's astonishing economic growth over the past two decades and has accelerated during the global financial crisis. Its 9% to 10% annualized GDP growth rate in the past two and a half decades is unprecedented in world history.
In 1992, Chinese gross domestic product (GDP) was less than 7% of America's GDP. By 2000, the figure topped 12%. When Obama won the election in 2008, the Chinese economy had grown to equal more than 30% of U.S. output. New data show that China is on track to grow more than 8% in 2009, driven by high industrial output and retail sales.
Impressive Stimulus Package…and Working
During this global recession, China's astonishing growth did slow down, but unlike most developed economies, China never entered a recession.
The Chinese have launched the world's biggest investment program (about $585 Billion) after the start of the financial crisis last year. Beijing's stimulus program is estimated to amount to about 13% of Chinese gross domestic product, making it almost twice as large as the U.S. program and close to five times the size of its German equivalent.
The government's massive economic stimulus program has transformed the country into an enormous construction site. As a result, China's industrial production rose 16.1% year-over-year in October, the most since March 2008 and a slide in exports eased to 13.8% the slowest pace this year. However, behind the impressive economic data, troubles might be lurking.
China Bubble Forming
China's purchases of dollars to prevent appreciation gave it foreign-exchange reserves totaling $2.3 trillion in the third quarter, the world's largest. Meanwhile, its sale of Yuan to keep it fixed to the dollar contributed to a 29% jump in its money supply, and the peg helped spur more than $150 billion in speculative funds from overseas in the past six months, according to China International Capital Corp.
China's main index, the Shanghai Composite, has gained 52% this decade and rallied 75% this year alone as government stimulus and record lending drove the nation's economic recovery. (Fig. 1) State-owned banks have begun issuing new loans, leading to a 150% increase in lending compared with 2008.
In addition to playing the stock market, a lot of the money is being diverted into houses and land. There are also reports of
excess capacity created by the aggressive stimulus effort. Record apartment prices and a high flying stock index this year are prompting warnings against "financial risks" and the development of bubbles in real estate markets.
Yuan-Dollar Peg Angers Many
Beijing has kept the Yuan pegged at about 6.83 per dollar since July 2008, seeking to help manufacturers battered by the collapse in demand abroad. The Yuan advanced 21% in three years from July 2005. (Fig. 2 & 3)
The discontent about China's currency peg to the dollar isn't confined to the U.S. Capitol Hill, corn growers, steelmakers, and textile companies. From Mumbai to Bangkok, Asian companies also say Chinese rivals have an unfair advantage because of the Yuan-dollar link.
