We Are Simply Too Full of Ourselves

China is taking over the economic leadership of the world and we are simply too full of ourselves to see what is happening. Actually we are just acting as typical humans who look at past events and extrapolate in a straight line into the future. However, this approach misses many key variables of the China Equation that will result in exponential change.

So what are the variables that need to be thrown into the China equation?

China's real GDP is 2 to 3 times larger than what is officially reported when examined on a purchasing power parity basis.

China's savings rate (49%) and foreign account balances ($2 trillion +) are extremely high.

In 2007 when the global economy over heated, China wisely raised bank capital requirements as well as interest rates, thereby avoiding the excessive financial leverage that helped to ruin our economy and thus allowing their banks to expand leverage today. (This is happening while our banks must de-lever and our government must act as the borrower of last resort.) China's banking institutions are growing stronger and more sophisticated while our banks are in a state of severe shock and disarray.

While China's bank loans have been criticized as excessive and creating new bubbles, do you really think they are allocating capital less efficiently than our Federal Reserve and deficit spending programs?

Their people have tasted the good life and are hungry to move up the economic ladder. Their labor force works harder and their students study harder.

China's economic policies are very rational (or "scientific" as their leadership prefers to say). They are not burdened by the bureaucratic regulatory/judicial delay mechanisms that discourage new investments in the Western World. They are not hindered by populist rhetoric, leftist anti-growth policies or right wing "balance the budget at all costs" dogma. They have already shown that they can move quickly to stimulate their economy and can adjust quickly to avoid inappropriate bubbles and excesses from forming.

The population for the most part is compliant - Eastern cultures view their leaders as benevolent "father figures" and defer to the leader's "sound and wise judgment" to care for their best interests. (How else can you explain a nation like North Korea existing)

The Chinese culture has demonstrated excellent business acumen in locations through out the world such as Taiwan, Singapore, Hong Kong, Canada and the United States.

There is huge pent up demand for goods and services. Already China consumes more cars, computers, cell phones, steel, cement, etc. etc. This consumption will only grow. Their domestic market is huge. Their population is over 4x and labor force is over 5x that of the USA.

Already China businesses are taking a leadership role in the manufacture (and design) of many leading edge technologies; Li batteries, LED chips, airplane assemblies just to mention a few.

The value added component of the Chinese economy is growing exponentially. Already China is undergoing a shift where low cost, low skill jobs are moving "offshore" while high skilled, high technology jobs expand.

While the United States is in its period of decline, China is ascending. China will dominate the 21st century and beyond. China has planned for this day for over 20 years although I suspect it has come to pass much earlier than they had expected.

We do not understand and will continue not to know what has hit us until after the fact as these changes(both China's ascent and the United States descent) are occurring too rapidly for us to comprehend. Further, much of this change is hidden under a blanket of improperly valued currencies - the Dollar is valued too high and the Yuan is valued much too low.

At some future point in time, China will rationally assess that it is in their best interests to promote a strong national currency and to transform the Yuan into a global currency.

Why? Because once their technical knowledge and fundamental business/economic/financial infrastructures are well established, and as they continue to consume an ever increasing share of the world's commodities and natural resources to feed and satisfy the consumer demands of their huge population, they will find that a strong currency is in their best interests.

In the meantime China will continue to aggressively establish a domestic demand component to their economy and promote the development of new export markets through out the world that will take the place of the permanently faltered USA consumer. This is already apparent in their actions to purchase and stockpile key commodities and to arrange long term loan agreements in exchange for future oil and natural gas production with emerging market economies.

We are simply too full of ourselves when we think that our problems are going to bring down China.

Yes these problems may put a damper on China's growth in the short-term but if anything they will accelerate China's ascension because, as their co-dependency relationship with the USA falters, they will need to learn to be self sufficient and march forward on their own two feet.

China has clearly shown that have the means and the will to do just that!