China’s Double Whammy

I intended to blog about this months ago, but never had a chance to do so and thought I missed an opportunity. But with China’s real estate market still peaking, albeit recent slowdowns, the below argument is still valid.

1st argument: China is printing more cash than US or printing a tremendous amount of cash. 
2nd argument: China is following US’s economic cycle, but on a much accelerated rate.
3rd argument: China is in trouble.

China is flooding itself with liquidity by printing an excessive amount of cash. I am not completely certain about the purpose of this proposition but it is plausible that the printing is done to alleviate any potential liquidity crisis, which is gradually taking form, also in the form of a real estate bubble, but probably a much more severe version with the inflation bubble fueling the level of severity. In 2008-2009, China’s interest rates remained rock solid at relatively low level of 5.31%. The low interest rate spilled over to the housing market in which consumers purchased real property like there is no tomorrow. The word on the street is that in Shanghai, if you intend to purchase a real property, do so immediately because once you hesitate, someone else would purchase that same property. Now, what caused such buying frenzy, assuming there is in fact such frenzy. Naked Capitalism recently published a document that investors have no other viable investment alternatives aside from real estate. However, I believe that easy credit is the main thrust behind this frenzy. However, one might still argue that China has imposed a multitude of measures to raise the cost of credit. Yet, all those measures, including interest rate hikes, sterilization, bank reserve requirement ratio (hereinafter, RRR), Central Bank Bills (government bonds VOLUNTARILY bought by commercial banks), credit quotas, and credit ceilings collectively accounted for less than 10% of China’s liquidity. At 10%, those measures would not even put a dent to the overall liquidity. The question becomes, what about the remainder 90%? The answer is quite simple, as I believe – a cash printing spree. Evidently, though despite that China intends to or might have already lowered the credit ceiling from $8.0 trillion to $7.5 trillion, subsequently and at least on paper, raising the cost of credit, the ratio of money supply versus GDP is still at a mind boggling 190%. For comparative purposes, I struggle to find any money supply versus GDP ratio (calibrated as M2) over 110%. The key point is, with so much liquidity, any efforts to raise to cost of credit is simply mitigated or even overcame, thus lending credence to lax lending standards, which is of course now one of the confirmed lynchpins of the financial crisis. Chinese banks are lending like there is no tomorrow. If so, then what’s next? US lent like there is no tomorrow starting in 2002 – 2003, the housing market peaked in 2006 – 2007 and the market completely collapsed by 2008. With the housing market still peaking and probably wouldn’t reach the peak until say 2014 and with the above proposition that China is on an accelerated US economic cycle, we might see a complete collapse by 2015 or 2016. However, the key point is that by flooding the market with so much liquidity, could China avoid such complete collapse and basically, print itself out of a crisis? It does seem like such is taking shape. Or at the very least, China is already creating or has created a stimulus package to weather another potential liquidity problems.

Further, with Basel III bound to take effect in the not too distant future, FX value is bound to rise and with China’s currency to remain relatively stagnant, People’s Bank of China (PBC) must issue more RMB to balance its FX. But let’s consider an opposite argument. Though China participates in monetary sterilization and given its massive US reserves, it is absolutely irrational for China to impose robust sterilizations. With the lack of robust sterilization, it would lead to inflation and economic overheating and therefore, the government would have every incentive to reduce money circulation, which would be at the expense of the current argument of preemptive action against a liquidity crisis. With probably a lackluster sterilization effort, inflation would be an immediate concern. The concern is only exacerbated when you consider that China is printing cash to flood its market with liquidity. Do recall that inflation is another concern second to the possible housing crisis and inflation is a direct result of China’s possible method to deal with a possible housing crisis. So at this point, it might be safe to presume that China’s method of dealing with a possible housing crisis comes at the expense of an inflation bubble. If China intends to print its way out of problems, it has to suffer with inflation, which I don’t believe printing will solve the issue.

Now, China’s banking sector is extremely unhealthy with its big 4 banks, ICBC, Bank of China, China Construction bank, and Agricultural Bank of China boasting 46% of non-performing loans. At a staggering 46%, there seems to be a lot of debt forgiveness. That combined with the Chinese’s traditionally high savings rate essentially represents a transfer of wealth from the private to the banking sector, resembling a large hidden tax on household income. In fact, that high savings rate lowered consumption, which the 12th 5 Year Plan ironically intended to raise, and this collectively produces an unsustainable growth model with decreasing consumption. Now, the Chinese government has every incentive to encourage a high saving rate, despite the popular belief of a need to raise consumption. The Chinese government’s power rests in its control of money and therefore, increasing consumption would actually divest their power and stronghold over the Chinese people. And even if this first argument does not attract your attention, low consumption might serve as a partial offset to the inflationary pressures. Furthermore, China has been rumored to impose a price ceiling on food prices, that would certainly alleviate some inflationary pressures, though a price ceiling has historically suffered tremendous downfalls. Now even if there is an offset to the inflationary pressures and assuming that it is less of a concern at this point, that low lending rate and debt forgiveness are still serious areas of concern. To summarize, this is basically BAD DEBT and as we had grown too familiar with that concept by now, it is one of the critical triggers of the financial crisis.

Further, China’s GINI coefficient, representing the inequality between rich and poor, in which the higher the coefficient, the more sever the inequality, is sitting at a staggering 0.47 and for comparative purposes, US and France’s GINI coefficients are in the range of 0.31 – 0.35. Do note that 0.4 is the threshold for sever inequality. With that said, it is prudent to discuss the inequality model as another prong to the financial crisis. The inequality model centers around high default risk and consumption, but as already stated, consumption is low in China and therefore, this model might necessarily lend as much credence as the above analysis, though it still merits consideration as at least on paper, China is targeting higher consumption and such model is certainly a method to do so. Under this model, the wealthiest 5% of the population lends to the bottom 95% so that the 95% could maintain levels of consumption relatively close to the top 5%. If the bottom 95% are consuming beyond their means, it greatly increases the probability of a financial crisis. The 46% non-performing loans is a pretty good indication of high default risk. Here is the real problem presented by this model, the top 5% would continue to consume and invest in financial instruments or investments other than real product investments where the money invested would recycle to the bottom 95% to feed their consumptions. In actuality, the bottom 95% is leveraging to maintain its consumption and therefore, without going any further, a greater risk of default and that risk could spillover and devastate the system as we had formerly witnessed. Now, there are two solutions to this concern while still maintaining adequate levels of consumption, in which China is conducting one of the two. The first solution is to reduce debt and lower savings rate but this is not sufficiently robust to absolve wide spread default risk as its effects would be far too minimal. Even so, China does not adopt this solution as lowering savings rate is not in the party’s best interest. The second solution, as adopted by China is to increase the bottom 95%’s income. By doing so, the bottom 95% could reduce its reliance on leverage and attain greater power to demand foreign goods. But the problem is with increasing income, inflation would once again be a concern. So is the solution to consume less? Not likely, given the current bullish real estate market that is in fact growing irrationally.

But what really drives fear is the fact that China’s possible solution to a potential housing crisis fuels an inflation bubble, which if the bubble bursts, consequences could be rather severe. Inflation might be offset by low or lowered consumption and forget about the 12th Five Year Plan for a second, for concerns of power, the Chinese government might be interested in keeping consumption low as above mentioned. But if China keeps printing cash while keeping its currency artificially low and keeps fighting inflation with low consumption, it would eventually spur the wrath of foreign nations. If China decides to let its currency rise faster or even free its currency, which I believe at this stage is quite implausible, we might witness a complete currency collapse due to high inflationary pressure and if that is even a concern, too much liquidity or unhealthy liquidity. A housing crisis might be averted but this comes at the expense of heavy inflationary pressure which would drive China back for years or even a decade. But the concern is if China does not flood itself with liquidity and a housing crisis emerges, with Chinese psychology of fear, censorship, and their known aggressiveness, bank runs might be much more severe than the ABCP run witnessed prior to Bear Sterns’ collapse. In fact, the bank runs might even turn bloody. I dare not say it, but the panic might overspill and blossom into a four letter word starting with a “R” and ending with a “T.”

To summarize:

1. Cash printing could avert a potential housing crisis, but would grow the inflation bubble.
2. Non-performing loans drive down consumption, alleviating some inflationary concerns.
3. Inequality model drives consumption, leading to inflation, thus offsetting the alleviation done by non-performing loans, which isn’t a healthy economic form anyways.
4. Inflation bubble, if the above is correct, could trigger a currency collapse and major domestic disorders.

My economic analysis might be flawed. I would appreciate any form of input.

China Mobile Competition Could Heat Up

China’s government has begun testing a policy allow mobile subscribers to switch carriers without changing their phone numbers in two locations, the eastern coastal metropolis of Tianjin and the southern island province of Hainan–potentially bringing the long-anticipated move toward full number portability closer to reality and adding to mounting competition for telecommunications giant China Mobile.

Zuma Press A mobile user holding a newly-issued SIM card (L) together with his original SIM card, after he switches from China Mobile to China Unicom with his original number, at a China Unicom service center in Haikou, capital of south China’s Hainan Province, Nov. 22, 2010.

State-owned China Mobile, which had about 570 million subscriber accounts as of September, has long been China’s preferred carrier. But the company’s subscriber growth has slowed as the government has rolled out efforts to restructure the industry and make it more competitive.

The most recent move may provide a boost for China’s two other carriers, which are also state-owned: China Unicom, which had about 160 million subscriber accounts as of September, and China Telecom, which had about 86 million mobile subscriber accounts as of October. China Unicom has been hoping to make the most of some competitive advantages, including its license to operate a mobile network using WCDMA third-generation technology, which is compatible with in-demand handsets like Apple’s iPhone.

So far, many Chinese users have chosen not to use China Unicom’s service even if they do have WCDMA handsets, in part because they didn’t want to change their phone numbers. Enabling users to keep their numbers when switching carriers would make the transfer more tempting.

China Mobile operates a TD-SCDMA network, which was developed in China and its high-speed data services are not compatible with 3G handsets designed for other markets. The carrier has expressed a desire to sell iPhones and iPads to its customers, but hasn’t announced any plans to do so. Other handset makers including Nokia, Motorola and HTC have launched TD-SCDMA handsets for China Mobile.

Read More

Stamp Duty Bump to Cool Hong Kong Housing?

The government’s latest measure–which includes charging a stamp duty fee of 15% on properties sold within six months of purchase, 10% on those sold within six to 12 months, and 5% on those sold within one to two years–is meant to subdue the market by combating speculation.

But previous initiatives haven’t done much to corral prices, rising at a 20% annual clip over the past two years. In the past year the government has tried increasing the land supply and temporarily suspending real estate from the Capital Investment Entrant Scheme, which offers visas to those making qualifying investments in Hong Kong, and still the market charges ahead.

Some say Hong Kong could be on the verge of a bubble burst that could sink housing prices as it did in the late 1990s and early 2000s.

Denise Yam, an analyst at Morgan Stanley Asia Limited, and Albert Wong, senior executive director of Midland Holdings, face off whether the latest effort will be effective.

Ms. Yam: Government Measures Will Curb Speculation

“We welcome the latest anti-speculation package, which will hopefully serve to curb destabilizing speculative activities amidst capital inflows and preempt painful adjustments when conditions reverse. We believe the latest measures could slow the surge in property prices, but should not bring about a sharp correction, as we see limited impact on the fundamental supply/demand conditions.”

Read More

Hong Kong Headed for Record Holiday Sales?

With retail-sales growth in the double digits every month of 2010 so far, Hong Kong retailers are looking forward to a very merry Christmas: This December is poised to draw the largest retail sales in years.

Christmas sales typically make December the highest-grossing month of the year for Hong Kong retailers, outselling Chinese New Year and October 1 Golden Week. Last year, December sales totaled 29.4 billion Hong Kong dollars, or $US3.8 billion, according to the Census and Statistics Department, growing 28% from November that year, and 16% from the year earlier.

January-to-September sales this year are up 17.9% from the same period in 2009.

In December, “our tenants usually do twice the number in sales of an average month,” said Karim Azar, assistant general manager of retail leasing for the IFC mall in Central.

IFC is expecting a 20% or more increase in traffic in December over last year, with expected total spending in the mall to be up 30%.

Other malls are setting similar forecasts. Maureen Fung, general leasing manager for Sun Hung Kai Properties, said that its 33 shopping centers are all expecting about a 10% sales increase from a record season last December.

By contrast, the United States saw a 0.3% drop in retail sales last December from the month before. Market research group eMarketer is forecasting a modest 2% to 3.5% growth for U.S. holiday sales from the year before.

Read More

Value of a Chinese College Degree: $44?

American college students facing the misery of an anemic post-graduation job market have company in an unlikely-seeming place: China.

Despite entering a robust economy that seemed to weather the financial crisis as if were it a middling squall, China’s college graduates on average make only 300 yuan, or roughly $45, more per month than the average Chinese migrant worker, according to statistics cited over the weekend by a top Chinese labor researcher and reported today by the Beijing Times (in Chinese).

“It’s the first time China has faced such a situation,” the paper quoted Cai Fang, head of the Chinese Academy of Social Science’s Institute of Population and Labor Economics, as saying Saturday at a conference on Chinese youth. “It’s hard to say how long this situation will last.”

By Mr. Cai’s calculations, college graduates have consistently earned around 1,500 yuan a month since 2003. Migrant workers, meanwhile, have seen their monthly wages rise from an average of 700 yuan to 1,200 yuan over roughly the same time period, MR. Cai said, according to the Beijing Times.

China has faced a surfeit of college graduates in recent years, thanks in large part to an enrollment boom that has seen the university student population swell by as much as 30% year-to-year over the last decade. High levels of unemployment among recent graduates—nearly six million 2008 graduates failed to find work in their first year out of school—are a major drag on the average wage figures. Meanwhile, labor shortages in manufacturing and construction have enabled migrant workers to demand higher and higher wages.

In a country where a highly competitive pursuit of higher education routinely forces families to spend fortunes, and children to sacrifice their childhoods, such statistics have to have many wondering, why bother?

In the nearly 1,800 comments the report has attracted at the Chinese news portal Sohu, that’s precisely what many are doing. While some readers took the news with a certain post-Communist irony (“Our society has made progress–no longer does a diploma determine social status,” wrote one), the vast majority were cynical about the value of a college education. “If you don’t test into one the top 50 universities, don’t bother doing to school,” one reader advised. “It’s useless.”

Read More

China Pushes Yuan Bonds in Hong Kong

China’s Ministry of Finance said Monday it will issue 8 billion yuan ($1.2 billion) worth of yuan-denominated government bonds in its second Hong Kong bond sale, signaling another step forward in China’s plan to internationalize the yuan.

The issue represents a 2 billion-yuan increase from its first bond sale in Hong Kong in September 2009, helping to set a benchmark yield curve for other yuan-denominated bonds to be issued in the city.

Also Monday, China opened its foreign-exchange market to the Russian ruble. The ruble joins six other currencies—the U.S. dollar, the Hong Kong dollar, the yen, the euro, the pound and the Malaysian ringgit—that are allowed to trade in China’s tightly controlled foreign-exchange market.

“The whole idea is to reduce dependency on the dollar, because currently when you trade between Russia and China, it’s usually denominated and settled in dollars,” said Daniel Hui, senior Asian foreign-exchange strategist at HSBC. “So you cut out the middle man…It will grow over time. But it’s not something that would have an immediate impact.”

To stabilize its currency, China keeps $2.6 trillion in foreign-currency reserves, mainly in assets denominated in U.S. dollars. It also tightly controls its currency, restricting the yuan’s use outside China’s borders. But officials in recent months have expressed interest in having the yuan used to settle more international deals.

Though Hong Kong is part of China, it is considered an offshore market in terms of currency trade.

China’s Ministry of Finance said it will allocate 5 billion yuan worth of bonds in Hong Kong with maturities of three, five and 10 years to institutional investors. The remainder will be offered to retail investors and have a maturity of two years.

Instead of selling the bonds via traditional book building, China’s Ministry of Finance will sell the sovereign bonds to institutional investors through CMU BID, a bond tendering platform operated by the Hong Kong Monetary Authority’s Central Moneymarkets Unit.

The HKMA said the platform allows more institutional investors to participate and helps increase transparency through the bidding process, underscoring Beijing’s effort to promote the steady development of an offshore yuan-bond market in Hong Kong.

Read More

New Rules Hit Hong Kong Property

HONG KONG—Tougher-than-anticipated measures to curb Hong Kong’s soaring real-estate prices began rippling through the market Monday, driving down shares of property developers and prompting forecasts of declining home sales.

View Full Image

European Pressphoto AgencyHigh-rise commercial and residential Hong Kong properties. Hong Kong’s government on Friday tightened rules concerning the residential property market.

On Friday, the Hong Kong government slapped additional stamp duties on properties that are resold within two years and raised down-payment requirements on high-end home purchases. On Monday, government inflation figures showed Hong Kong property prices were up 15% in the January-September period, after a 30% surge in 2009.

Unlike previous measures enacted by the Chinese territory to cool prices, the new ones are considered more likely to have an immediate effect. DBS Vickers said it expects transaction volume could shrink 30% to 50% in the next three months as short-term speculators are driven out of the market. Other prospective home buyers, including genuine home seekers, are likely to adopt wait-and-see approach in anticipation of lower home prices.

“The new measures could immediately dampen sentiment,” said Francis Lun, general manager of Fulbright Securities. “Further measures could also be introduced if the desired results aren’t achieved.”

Hong Kong’s Hang Seng Index edged 0.3% lower Monday, but the Hang Seng property subindex fell 2.5% to a two-month low. Leading the drop were blue-chip developers Cheung Kong (Holdings) Ltd., which dropped 3.2%; Sun Hung Kai Properties Ltd., which lost 3.1%; and Henderson Land Development Co., which fell 2.3%.

Real-estate agency Midland Holdings Ltd. slumped 17% on concerns about a plunge in transaction volumes in the short term. This weekend, the first two days the stamp-duty increases were in effect, its Midland Realty unit reported an 80% drop in sales transactions compared with the prior weekend, according to Buggle Lau, Midland Realty’s chief analyst.

Read More

Nissan Puts Focus on China, Russia

Renault-Nissan Chief Executive Officer Carlos Ghosn said he is optimistic about the U.S. economy, but more bullish about growth in China and Russia.

In an interview with WSJ’s Joe White, Nissan CEO Carlos Ghosn discusses investments in China and Russia, the future of the electric car, and his belief that the recession is officially over.

Mr. Ghosn, in an appearance on WSJ.com’s “Big Interview,” said he sees the global economy healing.

“The crisis is behind us,” he said.

Growth in the U.S. economy appears to be sluggish in part because of business uncertainty about government policy, Mr. Ghosn said. In an interview at the Wall Street Journal CEO Council in Washington, D.C., Mr. Ghosn said “a lot of CEOs say their company is doing very well, they are making a lot of profit, but they are uncertain about policy.”

“I am very optimistic things will pick up,” he said.

“If I had to make a projection…the U.S. economy will pick up much quicker and faster than the economy in Europe or Japan.”

Nissan is adding jobs in the U.S., mainly to expand production of batteries and electric cars, he said. Nissan’s main focus for new investment is in emerging markets, particularly China and Russia.

“China .. is the largest market in the world. We need to keep up with the market at least to maintain our market share,” he said.

In Russia, Renault SA has a partnership with No. 1 Russian auto maker AvtaVAZ, which sells the Lada brand.

“The Russian market is picking up again,” Mr. Ghosn said. “The Russian market will be one of the largest markets in the world.”

Read More @ http://online.wsj.com/article/SB10001424052748704170404575624390952247342.html?KEYWORDS=china

Sinopec Suspends Diesel Exports

BEIJING –China Petroleum and Chemical Corp. (Sinopec), China’s largest oil refiner, said Friday it has suspended diesel exports to relieve shortages in the domestic market, the state-controlled Xinhua news agency reported.

Sinopec also said it is seeking to import 200,000 tons of diesel.

PetroChina Co., China’s largest oil producer, plans to import 200,000 tons of diesel. Some 35,000 tons of it has already arrived.

Insiders said China’s diesel output in the first nine months soared, prompting the two oil giants to expand exports.

Sinopec attributed recent hikes in the domestic price of diesel to hoarding, seasonal factors, transport factors and energy-saving measures, Xinhua reported.

In China’s Orbit

“We are the masters now.” I wonder if President Barack Obama saw those words in the thought bubble over the head of his Chinese counterpart, Hu Jintao, at the G20 summit in Seoul last week. If the president was hoping for change he could believe in—in China’s currency policy, that is—all he got was small change. Maybe Treasury Secretary Timothy Geithner also heard “We are the masters now” as the Chinese shot down his proposal for capping imbalances in global current accounts. Federal Reserve Chairman Ben Bernanke got the same treatment when he announced a new round of “quantitative easing” to try to jump start the U.S. economy, a move described by one leading Chinese commentator as “uncontrolled” and “irresponsible.”

“We are the masters now.” That was certainly the refrain that I kept hearing in my head when I was in China two weeks ago. It wasn’t so much the glitzy, Olympic-quality party I attended in the Tai Miao Temple, next to the Forbidden City, that made this impression. The displays of bell ringing, martial arts and all-girl drumming are the kind of thing that Western visitors expect. It was the understated but unmistakable self-confidence of the economists I met that told me something had changed in relations between China and the West.

One of them, Cheng Siwei, explained over dinner China’s plan to become a leader in green energy technology. Between swigs of rice wine, Xia Bin, an adviser to the People’s Bank of China, outlined the need for a thorough privatization program, “including even the Great Hall of the People.” And in faultless English, David Li of Tsinghua University confessed his dissatisfaction with the quality of Chinese Ph.D.s.

You could not ask for smarter people with whom to discuss the two most interesting questions in economic history today: Why did the West come to dominate not only China but the rest of the world in the five centuries after the Forbidden City was built? And is that period of Western dominance now finally coming to an end?

In a brilliant paper that has yet to be published in English, Mr. Li and his co-author Guan Hanhui demolish the fashionable view that China was economically neck-and-neck with the West until as recently as 1800. Per capita gross domestic product, they show, stagnated in the Ming era (1402-1626) and was significantly lower than that of pre-industrial Britain. China still had an overwhelmingly agricultural economy, with low-productivity cultivation accounting for 90% of GDP. And for a century after 1520, the Chinese national savings rate was actually negative. There was no capital accumulation in late Ming China; rather the opposite.

The story of what Kenneth Pomeranz, a history professor at the University of California, Irvine, has called “the Great Divergence” between East and West began much earlier. Even the late economist Angus Maddison may have been over-optimistic when he argued that in 1700 the average inhabitant of China was probably slightly better off than the average inhabitant of the future United States. Mr. Maddison was closer to the mark when he estimated that, in 1600, per capita GDP in Britain was already 60% higher than in China.

For the next several hundred years, China continued to stagnate and, in the 20th century, even to retreat, while the English-speaking world, closely followed by northwestern Europe, surged ahead. By 1820 U.S. per capita GDP was twice that of China; by 1870 it was nearly five times greater; by 1913 the ratio was nearly 10 to one.

PEDESTRIANS WALK past the skyline of Shanghai’s financial district in October.

Despite the painful interruption of the Great Depression, the U.S. suffered nothing so devastating as China’s wretched mid-20th century ordeal of revolution, civil war, Japanese invasion, more revolution, man-made famine and yet more (“cultural”) revolution. In 1968 the average American was 33 times richer than the average Chinese, using figures calculated on the basis of purchasing power parity (allowing for the different costs of living in the two countries). Calculated in current dollar terms, the differential at its peak was more like 70 to 1.

This was the ultimate global imbalance, the result of centuries of economic and political divergence. How did it come about? And is it over?

As I’ve researched my forthcoming book over the past two years, I’ve concluded that the West developed six “killer applications” that “the Rest” lacked. These were:

• Competition: Europe was politically fragmented, and within each monarchy or republic there were multiple competing corporate entities.

• The Scientific Revolution: All the major 17th-century breakthroughs in mathematics, astronomy, physics, chemistry and biology happened in Western Europe.

• The rule of law and representative government: This optimal system of social and political order emerged in the English-speaking world, based on property rights and the representation of property owners in elected legislatures.

• Modern medicine: All the major 19th- and 20th-century advances in health care, including the control of tropical diseases, were made by Western Europeans and North Americans.

• The consumer society: The Industrial Revolution took place where there was both a supply of productivity-enhancing technologies and a demand for more, better and cheaper goods, beginning with cotton garments.

• The work ethic: Westerners were the first people in the world to combine more extensive and intensive labor with higher savings rates, permitting sustained capital accumulation.

Those six killer apps were the key to Western ascendancy. The story of our time, which can be traced back to the reign of the Meiji Emperor in Japan (1867-1912), is that the Rest finally began to download them. It was far from a smooth process. The Japanese had no idea which elements of Western culture were the crucial ones, so they ended up copying everything, from Western clothes and hairstyles to the practice of colonizing foreign peoples. Unfortunately, they took up empire-building at precisely the moment when the costs of imperialism began to exceed the benefits. Other Asian powers—notably India—wasted decades on the erroneous premise that the socialist institutions pioneered in the Soviet Union were superior to the market-based institutions of the West.

Beginning in the 1950s, however, a growing band of East Asian countries followed Japan in mimicking the West’s industrial model, beginning with textiles and steel and moving up the value chain from there. The downloading of Western applications was now more selective. Competition and representative government did not figure much in Asian development, which instead focused on science, medicine, the consumer society and the work ethic (less Protestant than Max Weber had thought). Today Singapore is ranked third in the World Economic Forum’s assessment of competitiveness. Hong Kong is 11th, followed by Taiwan (13th), South Korea (22nd) and China (27th). This is roughly the order, historically, in which these countries Westernized their economies.

Today per capita GDP in China is 19% that of the U.S., compared with 4% when economic reform began just over 30 years ago. Hong Kong, Japan and Singapore were already there as early as 1950; Taiwan got there in 1970, and South Korea got there in 1975. According to the Conference Board, Singapore’s per capita GDP is now 21% higher than that of the U.S., Hong Kong’s is about the same, Japan’s and Taiwan’s are about 25% lower, and South Korea’s 36% lower. Only a foolhardy man would bet against China’s following the same trajectory in the decades ahead.

China’s has been the biggest and fastest of all the industrialization revolutions. In the space of 26 years, China’s GDP grew by a factor of 10. It took the U.K. 70 years after 1830 to grow by a factor of four. According to the International Monetary Fund, China’s share of global GDP (measured in current prices) will pass the 10% mark in 2013. Goldman Sachs continues to forecast that China will overtake the U.S. in terms of GDP in 2027, just as it recently overtook Japan.

But in some ways the Asian century has already arrived. China is on the brink of surpassing the American share of global manufacturing, having overtaken Germany and Japan in the past 10 years. China’s biggest city, Shanghai, already sits atop the ranks of the world’s megacities, with Mumbai right behind; no American city comes close.

Nothing is more certain to accelerate the shift of global economic power from West to East than the looming U.S. fiscal crisis. With a debt-to-revenue ratio of 312%, Greece is in dire straits already. But the debt-to-revenue ratio of the U.S. is 358%, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9% of federal tax revenues to 20% in 2020, 36% in 2030 and 58% in 2040. Only America’s “exorbitant privilege” of being able to print the world’s premier reserve currency gives it breathing space. Yet this very privilege is under mounting attack from the Chinese government.

For many commentators, the resumption of quantitative easing by the Federal Reserve has appeared to spark a currency war between the U.S. and China. If the “Chinese don’t take actions” to end the manipulation of their currency, President Obama declared in New York in September, “we have other means of protecting U.S. interests.” The Chinese premier Wen Jiabao was quick to respond: “Do not work to pressure us on the renminbi rate…. Many of our exporting companies would have to close down, migrant workers would have to return to their villages. If China saw social and economic turbulence, then it would be a disaster for the world.”

Such exchanges are a form of pi ying xi, China’s traditional shadow puppet theater. In reality, today’s currency war is between “Chimerica”—as I’ve called the united economies of China and America—and the rest of the world. If the U.S. prints money while China effectively still pegs its currency to the dollar, both parties benefit. The losers are countries like Indonesia and Brazil, whose real trade-weighted exchange rates have appreciated since January 2008 by 18% and 17%, respectively.

But who now gains more from this partnership? With China’s output currently 20% above its pre-crisis level and that of the U.S. still 2% below, the answer seems clear. American policy-makers may utter the mantra that “they need us as much as we need them” and refer ominously to Lawrence Summers’s famous phrase about “mutually assured financial destruction.” But the Chinese already have a plan to reduce their dependence on dollar reserve accumulation and subsidized exports. It is a strategy not so much for world domination on the model of Western imperialism as for reestablishing China as the Middle Kingdom—the dominant tributary state in the Asia-Pacific region.

If I had to summarize China’s new grand strategy, I would do it, Chinese-style, as the Four “Mores”: Consume more, import more, invest abroad more and innovate more. In each case, a change of economic strategy pays a handsome geopolitical dividend.

By consuming more, China can reduce its trade surplus and, in the process, endear itself to its major trading partners, especially the other emerging markets. China recently overtook the U.S. as the world’s biggest automobile market (14 million sales a year, compared to 11 million), and its demand is projected to rise tenfold in the years ahead.

By 2035, according to the International Energy Agency, China will be using a fifth of all global energy, a 75% increase since 2008. It accounted for about 46% of global coal consumption in 2009, the World Coal Institute estimates, and consumes a similar share of the world’s aluminum, copper, nickel and zinc production. Last year China used twice as much crude steel as the European Union, United States and Japan combined.

Such figures translate into major gains for the exporters of these and other commodities. China is already Australia’s biggest export market, accounting for 22% of Australian exports in 2009. It buys 12% of Brazil’s exports and 10% of South Africa’s. It has also become a big purchaser of high-end manufactured goods from Japan and Germany. Once China was mainly an exporter of low-price manufactures. Now that it accounts for fully a fifth of global growth, it has become the most dynamic new market for other people’s stuff. And that wins friends.

The Chinese are justifiably nervous, however, about the vagaries of world commodity prices. How could they feel otherwise after the huge price swings of the past few years? So it makes sense for them to invest abroad more. In January 2010 alone, the Chinese made direct investments worth a total of $2.4 billion in 420 overseas enterprises in 75 countries and regions. The overwhelming majority of these were in Asia and Africa. The biggest sectors were mining, transportation and petrochemicals. Across Africa, the Chinese mode of operation is now well established. Typical deals exchange highway and other infrastructure investments for long leases of mines or agricultural land, with no questions asked about human rights abuses or political corruption.

Growing overseas investment in natural resources not only makes sense as a diversification strategy to reduce China’s exposure to the risk of dollar depreciation. It also allows China to increase its financial power, not least through its vast and influential sovereign wealth fund. And it justifies ambitious plans for naval expansion. In the words of Rear Admiral Zhang Huachen, deputy commander of the East Sea Fleet: “With the expansion of the country’s economic interests, the navy wants to better protect the country’s transportation routes and the safety of our major sea-lanes.” The South China Sea has already been declared a “core national interest,” and deep-water ports are projected in Pakistan, Burma and Sri Lanka.

Finally, and contrary to the view that China is condemned to remain an assembly line for products “designed in California,” the country is innovating more, aiming to become, for example, the world’s leading manufacturer of wind turbines and photovoltaic panels. In 2007 China overtook Germany in terms of new patent applications. This is part of a wider story of Eastern ascendancy. In 2008, for the first time, the number of patent applications from China, India, Japan and South Korea exceeded those from the West.

The dilemma posed to the “departing” power by the “arriving” power is always agonizing. The cost of resisting Germany’s rise was heavy indeed for Britain; it was much easier to slide quietly into the role of junior partner to the U.S. Should America seek to contain China or to accommodate it? Opinion polls suggest that ordinary Americans are no more certain how to respond than the president. In a recent survey by the Pew Research Center, 49% of respondents said they did not expect China to “overtake the U.S. as the world’s main superpower,” but 46% took the opposite view.

Coming to terms with a new global order was hard enough after the collapse of the Soviet Union, which went to the heads of many Western commentators. (Who now remembers talk of American hyperpuissance without a wince?) But the Cold War lasted little more than four decades, and the Soviet Union never came close to overtaking the U.S. economically. What we are living through now is the end of 500 years of Western predominance. This time the Eastern challenger is for real, both economically and geopolitically.

The gentlemen in Beijing may not be the masters just yet. But one thing is certain: They are no longer the apprentices.