The typical investor is probably behind the times when it comes to understanding the implications of China’s rise. No doubt they recognise that it has a huge economy – the world’s largest by one key measure – and that it is starting to open up as an investment destination. But there is more to China’s ascendance than that.
As I outline in my article in our Asia special report (see p44) there are numerous channels through which China influences the world. Its export machine is a huge supplier of finished goods to the world. These goods embody components and raw materials from all over the world. That means Chinese enterprises are central to the global supply chains that inter-connect the world. It also means that Chinese demand is central to the overall health of the global economy.
Outside of trade, there are other important ways in which China has influence. It is, for example, one of the largest holders of US sovereign debt. The international importance of the renminbi, although way behind the dollar and the euro, is also growing.
It is hardly surprising that most investors are only dimly aware of these developments. China’s influence is often indirect.
For example, when someone buys an Apple iPhone it is probably not at the forefront of their minds that it is assembled in China and many of the components are produced there. Meanwhile, investors in US Treasury bonds are unlikely to dwell on China’s huge holdings in the asset class.
None of this is to suggest there is a Chinese conspiracy to economically dominate the world. On the contrary, its influence has risen organically in parallel with the growth of its productive capacity.
Indeed, it is no exaggeration to say that even in the 2000s the world economy was heavily dependent on China. Back then, there was much talk of a ‘vendor financing’ relationship in which China was already recycling its trade surplus to buy US Treasury bonds. In effect, Chinese purchases of US debt helped to subsidise an American consumer boom.
“Chinese purchases of US debt helped to subsidise an American consumer boom”
Following the collapse of Lehman Brothers, the Chinese authorities also played a key and largely unsung role in stabilising the global economy. China’s massive stimulus helped create global demand when it was sorely lacking.
Yet in the intervening decade, China’s share of global output has increased from about 12% to almost 19%. If China’s role was vital a decade ago, it is even more important now.
Investors may choose not to follow key developments in China but, whether they like it or not, they will be affected by the rise of the Asian giant.
Daniel Ben-Ami, Deputy Editor