During globalization's initial growth period many believed that the U.S.'s loss is China's gain. However, the compelling question for investors in globalization's next wave may very well be: Will China's gain be the U.S.'s gain, too?
The question is on the mind of investors and executives alike as the World Bank Thursday increased its 2009 GDP growth forecast for China to 7.2 percent from the previously-announced 6.5 percent, citing China's monetary and fiscal stimulus.
The World Bank added that it probably will not be necessary for China, the world's third largest economy in terms of purchasing power parity (PPP), to pass another fiscal stimulus package this year. Instead, the bank said China should hold off and retain the capacity for additional stimulus in 2010, if the global economy does not continue to recover and falls into a double-dip recession. In November 2008, China passed a $586 billion fiscal ($4 trillion yuan) stimulus package.
Goldman Sachs (GS) forecasts China's economy to grow 8.3 percent in 2009; Morgan Stanley (MS) sees seven percent growth, and UBS (UBS), 7.5 percent growth, Bloomberg News reported Thursday.
Meanwhile, Economist David H. Wang, whose specializations include China's economy, told DailyFinance Thursday he's sticking with his 6.5-7.5 percent GDP growth forecast, "pending the release of Q2 data on domestic consumption and other investment data." China's economy grew at an annualized rate of 6.1 percent in Q1.
Biggest contributor to global growth in 2007
China was the world's largest contributor to global growth in 2007, Wang said, with its economy boosted by strong demand for its exports, while the nation purchased hundreds of billions of dollars of commodities and raw materials needed to expand its industrial base and develop its economy. Further, without question, China, with a nearly $8 trillion PPP GDP, emerged as a global economic power during the previous eight years, but the growth was not without costs or criticism. China amassed a large savings/investment pool while developed economies, principally the United States and the European Union, amassed large, unsustainable trade deficits with China. The trade deficits, combined with a lack of domestic demand in China, prompted many economic and public policy officials to implore China to increase domestic consumption, among other reforms, to help eliminate structural imbalances in the global economy.
On Thursday, the World Bank agreed, arguing that the changed global economic landscape stemming from the global recession will require fewer China exports and more domestic demand from the economic giant. The bank said China must increase consumption, support domestic markets and permanent urbanization, and channel resources to sectors that will perform well in the next global growth era, not merely favor traditional sectors that have done well in the past.
The World Bank added that China can pursue these economic changes with confidence if they are supported by a well-functioning public financial system and a social safety net.
Economic Analysis: In general, the likelihood of stronger GDP growth in China is good news for the global economy, international trade, and for U.S. investors. Still, we have to go granular and await further data on the Chinese economy: most investors are aware that a 'frugal consumer' era has taken hold in the United States. That means the developed and developing worlds will need additional engines of growth, including new 'theaters of consumption,' to make up for increased savings and investment in the U.S. No one expects China's still-young economy to replace even 30 percent of that international consumption, but it must replace some. If it doesn't, it means a structural balance in the global economy is not being addressed adequately. If it does, it will be one sign that the global economy is becoming more balanced, and hence more capable of sustainable GDP growth.
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