Over the past 15 years, the United States has become the world’s sole superpower, dwarfing every other nation in terms of economic and military might. And while Japan, Russia, and the EU have fallen further behind, one nation has emerged to join the U.S. as the primary driver of global prosperity: China. In astronomical terms, we might envision the U.S. and Chinese economies as two stars revolving about each other, while accelerating and pulling a host of planets along with them.
This trend has emerged so quickly that few people really understand it. Consider that, over the past four quarters, the world economy has grown at nearly 5 percent — its fastest pace in two decades. That growth has been enabled by two factors:
1. America’s loose monetary policy, which has encouraged consumers to keep spending.
2. China’s unprecedented investment boom.
As a result, America and China together generated almost half of global growth over the past year. It’s important to recognize that these two drivers are not independent, but mutually reinforcing. The Yuan is pegged to the Dollar. China’s higher interest rates have attracted large inflows of capital that have inflated domestic liquidity, encouraging intensive investment and excessive bank lending in some sectors.
This means that, in the short-term, we are not faced with a meltdown like the one that occurred in the early 1990s. Fortunately, the Chinese economy is not as overheated as it was then, when investment, credit, and inflation were all growing much faster. Furthermore, the authorities have acted much sooner to correct imbalances.
As a result, we’re likely to see Chinese economic growth slow for a soft landing, which most economists are defining as 7 percent annual GDP growth. This Chinese slowdown is also likely to slow the pace of global growth, but nothing like the shock of the Asian economic bubble collapse of a decade ago.
But what’s going to happen in the longer-term? As investors, business professionals, and Americans, what can we expect to happen? And, what can we do to make the most of it? To answer those questions, we need to look at why China is suddenly making such a large impact on the global economy.
As The Economist recently reported, most of China’s growth over the past...
