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China and United States - economic titans must learn to coexist
WE all like to be first. So perhaps undue attention has been given to the question of when the Chinese economy will overtake the United States' as the world's biggest. Depending on what growth assumptions you make, this seems likely to happen in the next decade. And, in purchasing power parity terms - in other words, what this GDP can buy locally - the IMF reckons that China is already ahead. China is certainly already ahead on a range of other trading metrics - for example high technology exports US$560 billion in 2014 against the US$147 billion for the US and foreign net direct investment inflows US$298 billion vs US$132 billion (Source: World Bank, World Development Indicators 2016).
But global economic development is not just a race. Economies are already highly interdependent: rather than looking at headline growth numbers, what is more interesting is to look at how they complement each other and can coexist in future. In other words, they need to work out how to cohabit with each other in the global house - while simultaneously building a nexus of relationships with other economies.
It goes without saying that the relationship between the Chinese and US economies is key to global economic health. In part, this is due to the contribution that these two relatively vigorous economies will make to global growth: we believe that, together, China and the US would deliver 1.6 percentage points (or half) of the 3.2 per cent global growth forecast for 2016. We forecast Chinese GDP growth to come in at around 6 per cent in both 2011 and 2017: US growth is put at 1.8 per cent and 2.0 per cent respectively. With many other major regions still growing only slowly, their contribution to global growth is particularly important.
The relationship between China and the United States is also important as they are both, in rather different ways, on a journey of transformation. The challenge for both is to maintain acceptable rates of growth now, while rebalancing their economies to allow sustained growth in future.
We tend to hear more about China's journey, as it seeks to move from an economy focused on investment and exports to one more focused on domestic consumption. Longer-term structural reforms are being accompanied by selective stimulus packages. As we are all well aware, the process will take time and will involve a complex balancing act between state control and market forces. This balancing act needs to run across the whole economy, but is most evident to outsiders in actions to liberalise and yet control stock markets - and to better integrate the renminbi in the global currency regime, while attempting to limit sharp exchange rate movements.
Do not forget, however, that the United States is on its own economic journey too. The issues here may appear to be rather different - with a focus on different sorts and sets of data - but the underlying issues are not completely separate. The United States, too, has to wean itself off state support for the economy, in the form of an inflated Federal Reserve balance sheet, and recent US political debates have also reflected the ongoing restructuring of the US economy and its implications for its labour force.
How should an international investor approach this China - US relationship? Our first point would be that you should not be complacent about either economy. Both countries' restructuring journeys are likely to be bumpy. Continuing uncertainty is reflected by investors' waxing and waning enthusiasm for China as data releases paint a varying picture as to the resilience of the Chinese domestic economy. Meanwhile, investors would continue to worry about the health of the US economy and its likely implications for Federal Reserve policy - and thus the world.
Our second point is that while the integration of Chinese financial markets into the global market system will continue, this will continue to lag real economic integration in many sectors (as evidenced, for example. in already highly-sophisticated high tech and other product supply lines with the rest of Asia and the United States). In this context, MSCI's decision in mid-June to further delay including Chinese A-shares in its indices was a disappointment but hardly a complete surprise. MSCI said, in justifying its decision, that international institutional investors had advised a "wait and see" approach. But the trend towards further integration is certain to continue.
Thirdly, you should keep an eye on how - and to what extent - China wants to integrate itself into global economic governance. Relationships with the IMF and World Bank will remain important but also look to China-driven initiatives - for example, the Asian Infrastructure Investment Bank launched at the start of this year.
To return to our first point, the important point is not which of these economic titans comes first in the global growth race. What is key is how they interact and help each other develop. For investors, this would create many opportunities - both in the short run and also in the longer-term as this fascinating relationship continues to evolve.
- The writer is regional head of portfolio management, Asia Pacific, Deutsche Bank Wealth Management