Will China's Economy Overtake the United States?

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Will China's Economy Overtake the United States?

JOHANNESBURG (Business Day) -- Michael Power from Ivestec Asset Management says that China will become the world’s biggest economy, but he may be conservative in saying it’s going to take the next three decades to get there. Here is an interview by Classic Business Day with Michael Power from Investec Asset Management and Lavan Gopaul from Cortex Securities.

DAVID WILLIAMS: Michael, you’ve had some interesting views of China overtaking the US as the world’s biggest economy within just three decades - that sounds almost conservative, because China has been growing so fast!

MICHAEL POWER: Yes, I think the difficult thing is that just looking at the comparative growth rates - even there, there is a big distinction between the 10% of China, and the 4% of the United States. What will also happen is the units that we measure those economies by - which ultimately comes down to exchange rates - will also adjust over the next couple of decades. If you think that Japan grew incredibly fast in GDP terms between let’s say between 1972 and 1993 - also that the yen went up 323% against the dollar in that time - you have two factors at work here that actually bring about the acceleration, and perhaps one overtaking the other.

DAVID WILLIAMS: Are there any catches here? People say that China is not a democracy, it’s not as open as it could be as an economy, there’s too much demand. Yes, there’s enormous demand for commodities, yes, there’s enormous growth, a very good education system with hundreds of thousands of Chinese children learning English in order to make them accessible to the global economy - is there a catch here that could undermine all this?

MICHAEL POWER: I think there is a catch here that could undermine this - I think politics is one dimension of that, the other thing is that the Chinese themselves are beginning to realise that the sort of growth that they’ve been generating is in a sense easy growth, but also potentially the wrong type of growth - particularly in terms of inequalities that are rising in China, and the environmental consequences of the sort of growth they’ve been generating. So one could look for a very different sort of emphasis coming out of the Chinese government over the next decade in terms of the sort of growth they want to generate - it will be much more consumer-oriented, and much less producer-oriented.

LAVAN GOPAUL: Michael, I wonder if you could help us understand some of the many assumptions that you’ve made in coming to your conclusion, as well as some of the dangers that could stop this process?

MICHAEL POWER: I think that ultimately it’s for China to slip up, and that’s the issue. I think that the U.S. - and that’s another issue - may itself slip up of its own accord in the next two decades, and particularly the U.S. dollar. But let’s assume that doesn’t happen - and we all know the stories behind that - it’s for China to make a mistake. The issue at the moment is somehow to keep this extraordinary economy together - which they appear to be doing against all our best expectations at the moment - and basically drive the modernisation that is happening everywhere you go in China at the moment just about, but particularly in the eastern states. If you think about it, for the last 900 hundred years China was the largest economy for 700 of those years - so in a sense it’s only just returning to where it naturally belongs.

DAVID WILLIAMS: Compared to countries like Britain, America, the European Union, and South Africa for that matter where we have enormous transparency now in our economy with data coming out of our ears - every week there are new statistics to look at, radio and television shows, and online discussion forums with discussion of economic issues - one gets the impression that the Chinese are more secretive. Do you know that you’ve got all the right numbers in making these assessments?

MICHAEL POWER: You don’t know you’ve got the right numbers - to be honest as we saw yesterday you can be as likely to be under as over in terms of your estimations. I think that we can be reasonably confident that the numbers are becoming harder as time goes by, and there are some measures that we’re starting to look at now, and rely more upon than others. Things like electricity consumption has always been regarded as a rather harder measure than let’s just say top-line GDP growth....

DAVID WILLIAMS: What about the overheating issue? People say they’re growing at such a rate that something’s got to give, and the latest data appears to suggest that this is not the case?

MICHAEL POWER: I think that there will be some hiccups in the Chinese growth path in the next two decades - just as there was a massive hiccup in the U.S. growth path between say 1865 and 1914 - but the inner momentum is such that after an 18 month period of consolidation, and catching its breath, it will pick itself up and charge forward again. I think the thing that we ought to also watch out for here is India, not that I think necessarily India is going to surpass China - at least not in our lifetime - but India itself is starting to gather pace at the moment, and we’re talking about another 1-billion people economy starting to motor at a reasonably high rate. I think where that puts SA in terms of our resource consumptions is in an incredibly sweet spot - not that there aren’t necessarily things to watch out for as a result of that, but we could have a double whammy on our cards over the next decade in terms of demand for our resources.

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