China's ascent is occurring faster than
anyone imagined. The first-quarter gross domestic
product (GDP) growth rate of 11.1% year on year
was a surprise for many, but not for all. China is
on fire, marking the fourth consecutive year of
double-digit expansion.
The Chinese
economy is inflating to a size that is
commensurate with its proportion of the global
population. Given that China has about 22% of the
world's population, the economy can easily
double
before reaching equilibrium.
This
expansion can manifest in one, some or all of the
following ways: growth, inflation, or currency
appreciation. Given that the government is
allowing the yuan to appreciate gradually and the
inflation rate is low, most of the expansion is
going to occur on the growth side. Therefore, we
should not be too surprised by the torrential pace
of economic activity.
Fortunately, the
global impact of the Chinese revival has been
positive. Global trade grew 15% year on year in
2006, reaching US$11.76 trillion. China led the
way, increasing exports 27% year on year. Imports
jumped 25% year on year, boosting the demand for
commodities and industrial products. Copper
imports surged 60% year on year at the beginning
of 2007, after experiencing a slump at the end of
2006.
Overall, China's copper demand is
expected to rise 8% year on year to 4.2 million
tonnes. However, the Chinese are importing more
than raw materials. In fact, Chinese exports fell
to third place in 2006, after Germany retook the
second position. The growing needs for machinery,
industrial products, consumer goods and luxury
items are forcing the United States, Germany and
Japan to increase their embarkations toward China.
Indeed, China is now Japan's largest
trading partner, representing 17% of exports.
China was the destination of less than 4% of
Japanese exports in 1990. Interestingly enough,
Japan is becoming less of an important trading
partner for the Chinese. In 1990, Japan
represented 17% of total exports. Today, the
figure is only 11%.
China's inclusion into
the World Trade Organization, its move into
higher-value-added sectors, and its integration
into the global marketplace have allowed it to
diversify its trade partners. This is the reason
the Japanese are adopting a more conciliatory
approach with the Chinese. Prime Minister Shinzo
Abe recently visited China, marking the first
Japanese state visit there in five years. It is
also the reason the Japanese are not allowing
their currency to appreciate against the US
dollar. It is not so much that they don't want to
lose competitiveness against the Americans. It's
that they do not want it to lose market share in
China - where the currency happens to be closely
linked to the dollar.
The ascendancy of
China is a good thing for many emerging-market
countries. Brazil is one of the main
beneficiaries. The burgeoning exports to China are
pushing up Brazil's international reserves. At the
end of last year, analysts speculated that
Brazil's international reserves could hit the $130
billion mark by the end of 2007. International
reserves were $113 billion at the end of February,
and they will probably crest through the $130
billion mark by the end of the first semester.
Other commodity producers, such as Argentina,
Russia, Peru, Kazakhstan and Chile, are also
thriving. This is creating an emerging-market boom
that is unparalleled, but it is not a fad.
Some numbers are alarming. The Shanghai
stock market was up 235% over the past year and a
half. The Shenzhen market was up 289% during the
same period. The Shenzhen market trades at a
multiple of 60, Shanghai 38 and the Dow 17.
Nevertheless, the Chinese market underwent a great
deal of deregulation over the past two years,
witnessed a tidal wave of new issues and ended a
five-year slump. Given the growth potential that
lies ahead, valuations may not be as lofty as some
argue. Unfortunately, a shakeout may be
inevitable.
Nevertheless, the baton is
passing to China. It is now setting the tempo for
the global economic orchestra. The transformation
is still in the early stages. China will soon move
into higher-value-added sectors, such as
automobiles, aerospace and pharmaceuticals. A
larger swatch of the population has to be
incorporated into the new economy. That means that
sunny skies lie ahead for most emerging-market
countries as they help feed the ravenous needs of
the new rising superpower.
(Copyright 2007
Walter T Molano, The Emerging Market Adviser.)
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