Middleweight to Heavyweight? The Growing Importance of Asia in the World Economy

Asia's rise has been Australia's economic gain. The rise of Japan, followed by South Korea and Taiwan, Singapore, Malaysia, Thailand and other non-communist countries of Southeast Asia had provided significant export markets for Australian commodities, though not a sustained structural increase in their value. Then along came China, changing everything. Not only did rapid Chinese demand increase the prices Australia received for its exports, but also Chinese manufacturing production helped to decrease the price of Australian imports. Manufactured goods made (or assembled) in China became significantly cheaper. Chinese competitive pressures also helped to keep in check the prices manufacturers throughout the world could charge for their goods.

Currently there are several narratives about Australia’s economic future. The first is an acceptance of Australia’s role as a resource exporter built on the back of long-term Asian demand and a high exchange rate. Alongside this story is one about a growing Asian middle class, which will be increasingly receptive to utilising Australian services. This view means that there will be an alternative market for Australian exports after the Asian giants become less resource intensive economies as they progress up the income ladder.

All of these positive narratives are based on a projection that Asia's remarkable rise over the past half century will continue over the next half. The possibility that Asia may not continue its rapid economic rise is largely dismissed as a narrative, although the likelihood that Asia will become conflict-ridden is common in international relations, foreign policy and security studies.

To understand where Asia might be headed we need to fathom how far it has come since the end of World War II.

This post shows that if current GDP trends were to continue, even at a moderated pace, Asia will become the world's most important economic region and China the world's largest economy. Emerging market and developing economies have overtaken the advanced economies on a purchasing power parity basis. The major component of this GDP convergence has been the rise of developing Asia, particularly China. Asian GDP (both developed and developing) is now approaching the GDP of the European Union and the United States combined.

Economically, a continuation of present trends would provide amazing opportunities for Australia, although politically it might heighten concerns amongst Australians about the implications of Western and American relative decline.

The Great (Re)convergence

The rise of developing Asia has been a major component of the so-called rise of the rest, which has led to the reversal of the great divergence between the advanced and developing economies that began with the industrial revolution. The great convergence is profoundly reshaping the world economy. Given that the world economy on the eve of the industrial revolution was dominated by Asia - particularly China and India we should perhaps consider the current period as the great reconvergence.

Gregory Clark in A Farewell to Alms outlines the Malthusian world (from the Stone Age to 1800), which he argues exhibited “a counterintuitive logic” where:

anything that raised the death rate schedule –war, disorder, disease, poor sanitary practices, or abandoning breast feeding – increased material living standards. Anything that reduced the death rate schedule – advances in medical technology, better personal hygiene, improved public sanitation, public provision for harvest failures, peace and order – reduced material living standards. 

In other words, vice equalled virtue and virtue equalled vice. Even gradual improvements in technology increased population and therefore did not lead to lasting increases in living standards. Hobbes, Clark contends, was wrong; man was better off in his natural state. 

The Industrial Revolution, whose most remarkable feature is the “all-pervading rise in incomes per person”, changed all that and led to a remarkable divergence between rich and poor countries. The gap between the living standards of the rich and poor countries grew from 3-4:1 before 1800 to 40-50:1 in the late twentieth century.

World Economic History

Source: Clark

The commercial revolution from the late fifteenth century shows that global economic weight is not necessarily an indication of global power. Asia's dominance of the world economy until the early nineteenth century could not stop it from being overrun by European colonial powers from the sixteenth century. Economic dominance was overcome by military superiority. 

Gross economic weight is clearly not everything, but there can be no doubt that economic relativities are changing, which provides the possibility that the West's period of dominance is coming to an end. 

Growth in Asia since the 1960s has been nothing short of remarkable. Economic success, however, was far from universal. Until the late 1980s, authoritarian capitalist states and authoritarian communist states divided Asia. Countries under US tutelage embraced an authoritarian form of capitalism with a strong developmental ethos. The success of capitalist economic development provided a stark contrast to the failures of the socialist centrally planned development model. 

China attempted to collectivise and control economic development from the centre, Vietnam struggled with war and its aftermath, and India fostered autarkic import substitution policies that led to stunted growth. Even before the end of the Cold War, the Communist and insular states realised that shifts in economic direction were vital if they were going to replicate the high growth rates of capitalist Asia. China began its long march to capitalist dynamism in 1978 and Vietnam switched economic direction in the mid-1980s. 

By the early 1990s, Japan appeared to be set to overtake the US economy, but unfortunately the 1990s were a decade of stagnation after the excessive property and stock market boom of the late 1980s. In the late 1990s, the region suffered a severe financial crisis which threatened to derail Asia’s rise, but by the early 2000s it was clear that the crisis was only a temporary set back on Asia’s phenomenal economic rise. 

From the mid-1990s, China became the major economic story in the region because of its sustained high growth rates. China's continuing growth during the economic crisis that began in 2007 cemented Asia's place as the centre of world economic dynamism. Growing regional production networks initially developed by Japan in the 1980s, followed by South Korea, Taiwan, Singapore and Hong Kong and now centred on the Chinese economy have reinforced Asian dynamism. Despite assertions about decoupling, final goods demand from outside the region still matters for Asian growth. 

In recent years, many analysts have argued that India will join China as a major Asian success story. Developing Asia has been joined by other emerging economies to transform the world economy since the 1980s. The countries of Eastern Europe, Brazil and South Africa have led to the great reconvergence. 

Emerging market and developing economies now account for over 50 per cent of the world economy on a PPP basis, surpassing the total weight of the developed economies. This is a remarkable change from 1990 when the emerging market and developing countries accounted for a little over 30 per cent. Since 1990 emerging and developing economies have been on an ever-upward trajectory, with the global crisis beginning in 2007 thus far affecting mainly the United States and Europe.

All Graphs

Gross Domestic Product (Purchasing-Power-Parity)
Share of World Total
Percent

Source: IMF World Economic Outlook (see here for definitions of country groups)

The bulk of the increase in the emerging and developing country share has been accounted for by developing Asian economies, particularly China. 

The Asian economies combined - both developed and developing - are approaching the economic weight of the European Union and United States combined. Given projected relative growth rates Asia should overtake the EU and US in the near future. The EU and the US combined has declined from 55.8 per cent of the total in 1980 to 37.4 per cent in 2013.  

The rising economic weight of Asia has mainly been a result of rapid growth in China, although India and the ASEAN 5 have also contributed. China's increased weight has been at the expense of Japan. (Developed Asia includes Japan, South Korea, Singapore, Taiwan and Hong Kong)

Comparing the top 5 plus the EU we can clearly see the significant changes to relative weights since the early 1990s. These trends have been strengthened since the global crisis. The advanced capitalist countries have lost ground to China and India.

The Future

Ideas about an Asian ascendancy are not new. US President, Theodore Roosevelt, writing in 1903 argued that: “The Atlantic era is now at the height of its development and must soon exhaust the resources at its command. The Pacific era, destined to be the greatest of all, is just at its dawn.” (Yahuda) War and the dilemmas of decolonisation made Roosevelt’s prediction premature, but the post-war world has seen Asia rise to the world’s most dynamic economic region. The general assumption today is that the Asian ascendancy will continue, even if the breakneck speed of growth moderates in coming years. 

In 1994, Paul Krugman compared the growth of the newly industrialising countries of Asia to Soviet growth in the 1950s and 1960s, a period when it appeared that the Soviets were on the brink of challenging the United States economically as well as militarily. He argued that ‘perspiration not inspiration’ had been the major factor. He saw Japan, however, as different: 

Japan, unlike the East Asian “tigers”, seems to have grown both through high rates of input growth and through high rates of efficiency growth. Today’s fast-growth economies are nowhere near converging on US efficiency levels, but Japan is staging an unmistakable technological catch-up. 

Krugman argued that while Japan was experiencing an unmistakable ‘growth slowdown’, he underestimated the extent to which Japan would stagnate over the rest of the 1990s and early 2000s. If Japan had continued to grow at the rates achieved over the period, 1963–73, he predicted it would have overtaken ‘the United States in real per capita income by 1985, and total Japanese output would have exceeded that of the United States by 1998!’. Krugman also noted the differences of the Chinese growth story to that of the Asian tigers. Significantly, he pointed out that, ‘its population is so huge that it will become a major economic power if it achieves even a fraction of Western productivity levels’. By the early 1990s, it was clear that China’s shift in direction was leading to rapid and sustained economic growth. 

The Japanese story should at least alert us to the dangers of the belief that the recent past and the present provide clear guides to the future. While the Asian challenge to Western dominance will probably be the issue of the twenty-first century, we should be wary of substituting a possible future for the present. Asia still has a long way to go and many hurdles to negotiate before its global economic influence matches its growing economic weight. 

The contemporary structure of the world 'political' economy has been shaped by the advanced economies, particularly the United States. This liberal economic order has 'allowed' the rise of developing countries, who are now demanding a larger say in global economic institutions such as the World Trade Organisation. 

But domestic political developments could be just as important. Over the next generation, how the advanced countries deal with challenges to their economic supremacy and counter the negative domestic consequences of globalisation will shape the future trajectory of the world political economy. 

Protectionist responses to relative decline and growing inequality in developed economies would be damaging in an integrated and thus interdependent world economy.Global and regional production structures would exacerbate the impact of protectionist responses, although their existence could also make any shifts toward protectionism more costly and therefore less likely. Whatever the case, the ability of the developed world to influence structure remains paramount. An ironic, if unlikely, turn away from globalisation in the advanced economies would negatively affect export-oriented economies disproportionately.  

Asia's ability to avoid conflict.will also be paramount for a continuation of current trends. Asia’s current situation is unprecedented. Three major powers – China, Japan and India, together with the United States – will shape the future of the region. Australia has alliances with two of the powers, is an important contributor to China's economic rise and has much to offer India as well. Australia stands to benefit greatly from continued economic expansion in Asia and to lose enormously if economic crisis, political instability or environmental catastrophe override economic development. 

Australia has a role to play in helping to establish the regional institutions and diplomatic environment for peaceful relationships. Bilateral relationships will also be very important. But much of the action will take place regardless of our wishes. Australia needs to prepare for the possibility of conflict and economic downturn, while working and hoping for the best. If peaceful development continues, Australia will be fortunate to be geographically adjacent to the world’s most dynamic economic region. Australia’s prosperity is now dependent on continuing Asian economic growth. What happens in Europe and North America still matters for Australia, but nothing matters to us more than Asia. 

Notes

IMF definitions 

Advanced economies
Composed of 35 countries: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States.

Major advanced economies (G7)
Composed of 7 countries: Canada, France, Germany, Italy, Japan, United Kingdom, and United States.

Other advanced economies (Advanced economies excluding G7 and euro area)
Composed of 14 countries: Australia, Czech Republic, Denmark, Hong Kong SAR, Iceland, Israel, Korea, New Zealand, Norway, San Marino, Singapore, Sweden, Switzerland, and Taiwan Province of China.

European Union
Composed of 27 countries: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Romania, and United Kingdom.

Emerging market and developing economies
Composed of 153 countries: Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, The Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bhutan, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Brunei Darussalam, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Comoros, Democratic Republic of the Congo, Republic of Congo, Costa Rica, Côte d'Ivoire, Croatia, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Eritrea, Ethiopia, Fiji, Gabon, The Gambia, Georgia, Ghana, Grenada, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Hungary, India, Indonesia, Iran, Iraq, Jamaica, Jordan, Kazakhstan, Kenya, Kiribati, Kosovo, Kuwait, Kyrgyz Republic, Lao P.D.R., Latvia, Lebanon, Lesotho, Liberia, Libya, Lithuania, FYR Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Marshall Islands, Mauritania, Mauritius, Mexico, Micronesia, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, Nicaragua, Niger, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russia, Rwanda, Samoa, São Tomé and Príncipe, Saudi Arabia, Senegal, Serbia, Seychelles, Sierra Leone, Solomon Islands, South Africa, South Sudan, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Sudan, Suriname, Swaziland, Syria, Tajikistan, Tanzania, Thailand, Timor-Leste, Togo, Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Tuvalu, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vanuatu, Venezuela, Vietnam, Yemen, Zambia, and Zimbabwe.

Developing Asia
Composed of 28 countries: Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao P.D.R., Malaysia, Maldives, Marshall Islands, Micronesia, Mongolia, Myanmar, Nepal, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Tonga, Tuvalu, Vanuatu, and Vietnam.

ASEAN-5
Composed of 5 countries: Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

My definition of Total Asia includes Developing Asia plus Japan, Korea, Taiwan, Hong Kong and Singapore. 

Recent Charts on Globalisation, Asia and Australia

Asia-focused private equity with surplus funds looking for investment opportunities. 

Deficits on the increase in the developing world

Australia's relatively excellent economic performance ...

A much more informative graph for this would involve making the pre-crisis high the starting point for all countries. Such a graph would show that most countries have not returned to their pre-crisis levels of GDP per capita or otherwise.

Global investment from a Speech by Philip Lowe, Deputy Governor, Investment and the Australian Economy. 

Australian investment buoyed by mining but now on the way down.

Investment in other sectors flat or in decline ... 

Hope is that non-mining investment can pick up to underpin GDP growth.

This from Glenn Stevens' speech a little while ago showing trend and actual performance of household assets.

And the same for income and consumption. Clearly consumption is well below its trend from the mid 1990s to mid 2000s and is unlikely to recover soon.

The World's Most Important Economic Relationship? US-China Trade and Investment

The economic relationship between the United States is one of the world's most important. The trade balance is considerably in China's favour and is matched by huge Chinese purchases of US debt securities. Although it has grown significantly in recent years, Chinese foreign direct investment (FDI) in the United States is still negligible at considerably less than one percent and US FDI in China constitutes about 10 per cent of the total.

While it is true that US-China trade as a percentage of China's total trade has been in decline over recent years, the United States and Europe (i.e. most of the developed market economies) remain key elements of final demand for products exported from China, but often sourced from other countries in Asia and from the United States itself.

The Trade Relationship

The trade relationship is marked by tensions as politicians in the United States seek to blame China for US economic woes. A Romney ad states: "It’s time to stand up to the cheaters and make sure we protect jobs for the American people." Meanwhile an Obama ad responds: "Romney’s companies were called pioneers in shipping U.S. manufacturing jobs overseas. He invested in firms that specialized in relocating jobs to low-wage countries like China. Even today part of Romney’s fortune is invested in China. Romney’s never stood up to China. All he’s done is send them our jobs."

Mutual suspicions about security issues increase the potential for economic conflict. But generally candidates are more critical during election campaigns, downplaying the rhetoric and action when in office.

US merchandise trade with China have grown markedly in importance since 1980 as the table below makes clear. [trade figures are generally divided into merchandise and services trade and services trade figures are often not included even though this is often unstated.]

The United States and China trades reestablished diplomatic relations and signed a bilateral trade agreement 1979, while most-favored-nation (MFN) status was granted in 1980.

My source: http://www.fas.org/sgp/crs/row/RL33536.pdf

In 2011 merchandise exports to China increased to $103.9 billion, up 13.1% over 2010 levels.  China is now the United States' 3rd most important export market, replacing Japan after 2007.

According to Morrison

From 2000 to 2011, the share of total U.S. exports going to China rose from 2.1% to 7.0%. The top five merchandise U.S. exports to China in 2011 were waste and scrap, oilseeds and grains, aircraft and parts, semiconductors and other electronic components, and motor vehicles  China is also a significant market for U.S. exports of private services, which totaled $21.1 billion in 2010 (the most recent year available), which was a 35.3% increase over 2009 levels, making China the seventh-largest export market for U.S. private services.

This means, according to the US-China Business Council (from Morrison) that the "total market for the sale of U.S. goods and services in China (i.e., U.S. exports and sales by U.S.-invested firms in China) could be as high as $200 billion annually." [For up-to-date statistics see the US Census Bureau Stats on Foreign Trade].

The Office for the United States Trade Representative reports that:

U.S. goods and services trade with China totaled $539 billion in 2011. Exports totaled $129 billion; Imports totaled $411 billion. The U.S. goods and services trade deficit with China was $282 billion in 2011. China is currently our 2nd largest goods trading partner with $503 billion in total (two ways) goods trade during 2011. Goods exports totaled $104 billion; Goods imports totaled $399 billion. The U.S. goods trade deficit with China was $295 billion in 2011. Trade in services with China (exports and imports) totaled $36 billion in 2011 (preliminary data). Services exports were $25 billion; Services imports were $11 billion. The U.S. services trade surplus with China was $13 billion in 2011.

While US exports to China have slowed in recent years in comparison to US trade with the rest of the world over the 10 years from 2002-2011 "U.S. exports to China increased by about 471% (the overall growth in U.S. exports over this period was 213.6%)."

According to the US-China Business Council, the United States was China's biggest trading partner and export market and the 4th biggest import source in 2010.

 However, while China is only the third largest export market for the United States, the US deficit with China is by far and away its biggest deficit.

This headline figure fuels the ire of American protectionists, but masks the extent to which China's 'exports' are re-exports from elsewhere. The iPhone provides a neat illustration of this distortion. According to Yuqing Xing

Using the total manufacturing cost $178.96 as the price of the iPhone, China’s iPhone exports to the US amounted $2.0 billion in 2009. Assuming that the parts supplied by Broadcom, Numonyx and Cirrus Logic, valued at $121.5 million, were imported from the US the iPhone alone contributed $1.9 billion trade deficit to the US, about 0.8% of the US trade deficit with China ...

But 

most of the export value and the deficit due to the iPhone are attributed to imported parts and components from the third countries and have nothing to do with China. Chinese workers simply put all these parts and components together and contributed only $6.50 to each iPhone, about 3.6% of the total manufacturing cost (e.g. the shipping price). The traditional way of measuring trade credits all $178.98 to China when an iPhone is shipped to the US, thus exaggerating the export volume as well as the imbalance. Decomposing the value added along the value chain of the iPhone manufacturing suggest that, of the $2.0 billion iPhone export from China, 96.4% is actually the transfer from Germany ($326 million), Japan ($670 million), Korea ($259 million), the US ($108 million) and others ($542 million). All of these countries are involved in the iPhone production chain.

If China’s iPhone exports were calculated based on the value added, i.e., the assembling cost, the export value as well as the trade deficit in the iPhone would be much smaller, at only $73 million, just 3.6% of the $2.0 billion calculated with the prevailing method.

Morrison also points out that US trade with China has mainly replaced trade with other Pacific Rim countries. [Pacific Rim countries include Australia, Brunei, Cambodia, China, Hong Kong, Indonesia, Japan, South Korea, Laos, Macao, Malaysia, New Zealand, North Korea, Papua New Guinea, the Philippines, Singapore, Taiwan, Thailand, Vietnam, and several small island nations.] In terms of manufactured imports in 1990 47.1% of the value came from Pacific Rim countries (including China), while in 2011 the same countries accounted for 46.1% of the total.  US manufactured imports from China increased from 3.6% to 25.3% over the same period!

While the US-China trade relationship is an important component of each country's trade, the US does not have as much to lose as other countries if Chinese growth slows. Chinese imports make a significant contribution to growth of a wide range of countries, including Australia.

According to Mackenzie "0.6 percentage points of Germany’s 3 per cent GDP growth for 2011 — or, about a fifth — was courtesy of its exports to China ... There’s a certain irony here in that Germany is simultaneously importing less from some eurozone peripherals, to a degree that could be harming their prospects of recovery." For the United States "Chinese imports also contributed to 0.1 percentage points" of 1.7 per cent GDP growth in 2011, which while appearing like an insignificant number is actually "almost 6 per cent of US GDP growth."

When considered in terms of share of total exports, Australia is the second most Chinese-dependent economy in the world. And as I've argued before, the negative impact on Australia of a growth slowdown in China will be felt indirectly as well through the impact on our second and third largest export destinations Japan and Korea. (China accounted for 24.6%, Japan 16.7% and Korea for 8.0% of total exports in 2011)

Similar to Australia, US policy-makers and business people see great potential for future trade with China as it becomes richer and as a growing middle class demands more advanced goods and services. Morrison cites a 2009 Boston Consulting Group report arguing that "China had 148 million 'middle class and affluent' consumers, defined as those whose annual household income was 60,000 RMB ($9,160) or higher, and that level is projected to rise to 415 million by 2020."

Although Chinese private consumption as a percent of GDP is much lower than that of most other major economies, the rate of growth of Chinese private consumption has been rising rapidly. For example, private consumption as a percent of GDP in China in 2011 was 34.0%, compared to 71.1% in the United States. However, the annual rate of growth in Chinese private consumption from 2002 to 2011 averaged 8.0%, while the U.S. annual average was 1.9%. 

The Investment Relationship

The investment relationship is also very significant for both countries and the wider world. A majority of Chinese investment in the United States is in public and private securities (including, according to Morrison, U.S.Treasury securities, U.S. government agency (such as Freddie Mac and Fannie Mae) securities,
corporate securities, and equities (such as stocks)." U.S. Treasury securities "are the largest category of U.S. securities held by China". Most US investment in China is foreign direct investment (investment of greater than 10 per cent in a company).

China's holdings of Treasuries "increased from $118 billion in 2002 to $1.15 trillion in 2011", although holdings declined by 0.7% in 2011. China replaced Japan as the largest holder of Treasury securities in 2008.

There is considerable debate about whether this ownership of treasuries gives China influence over China or whether it signals a so-called balance of financial terror. I've written before about these claims here and here, based on the work of Michael Pettis. To summarise, such claims are overblown. As Pettis points out: 

As long as China maintains its own currency and denominates all domestic transactions in RMB, the PBoC reserves cannot be used in China. They cannot go to pay doctors’ salaries, to build bridges, to lower taxes or to subsidize consumption. They can only be used to purchase or pay for things from outside China. This means that reserves ensure that China can import foreign commodities and other goods as long as it can pay for them domestically. It also means that the PBoC can ensure the availability of dollars to repay foreign debt and foreign investment.  ...

The US government does not need foreign buyers for its bonds. On the contrary, it is in Washington’s best interest that foreign central banks sharply reduce their purchases of USG bonds.

According to Murray and Labonte foreigners owned 56.9% of federal govt debt at the end of 2011, up from 53.5% at the end of 2007.

China holds the largest percentage with 23.1 per cent, followed by Japan with 21.2 per cent. The Luxembourg and Caribbean Banking centres are probably fronts for Middle Eastern buyers and Hedge Funds and in the past China has bought Treasuries through companies operating out of London.

Compared to the amount of foreign investment in securities FDI between the two countries is very small.

The Office of the United States Trade Representative reports that:

U.S. foreign direct investment (FDI) in China (stock) was $60.5 billion in 2010 (latest data available), a 21.4% increase from 2009. U.S. direct investment in China is led by the manufacturing and banking sectors. China FDI in the United States (stock) was $3.2 billion in 2010 (latest data available), up 171.6% from 2009. China direct investment in the U.S. is led by the wholesale trade sector.

The total stock of FDI in the US in 2010 according to UNCTAD's 2012 World Investment Report was $3,397 billion, which means that the stock of Chinese FDI in the United States as a percentage of the whole was 0.09%.

According to Morrison, the Bureau of Economic Affairs (the US equivalent to the ABS) adds FDI from China and for China through offshore centres such as Hong Kong and designates this calculation the “ultimate beneficial owner” (UBO) of FDI. This increases the amount of "China’s cumulative FDI flows to the United States through 2010 by 86% to $5.8 billion."

If we use this enhanced figure it means that China's percentage of  total FDI was 0.17% in 2010.

Even this UBO figure "would rank China as the 30th-largest source of total FDI in the United States through 2010.

The Rhodium Group (a private research consultancy and advisory company) estimates cumulative Chinese FDI flows to the United States through the end of 2010 at $11.7 billion and that the amount of new Chinese FDI in the United States in 2010 was $5.2 billion. 

Accepting this higher figure would mean that, like Australia, recent increases in Chinese FDI in the United States are significant but from a very low base. To put the US figure in context, the total stock of Chinese FDI in Australia at the end of 2011 was AUD13.3 billion.

US FDI in China ($60.5) billion as a percentage of the total stock in 2010 ($587.8 billion) was 10.3% of the total.

Conclusion

There is no doubt that Asia has outperformed the rest of the world over recent years. But the pertinent question to ask is whether it can continue to perform well if growth stays anaemic in Europe (the world's most important economic region), the United States (the world's largest economy) and Japan (the world's third largest economy). As Michael Pettis argues in his latest newsletter, what the world needs form China at the moment is not more growth, but more net demand.

A rebalancing Chinese economy that grows at a slower rate but a shift in wealth towards households will be good for the United States, but perhaps bad for Australia.

Recent Graphs on the World and Australian Economies

If you're ever looking for up-to-date graphs on the world and Australian economies, the Reserve Bank of Australia's Chart Pack is a great place to start.

For the world economy as a whole it is clear that growth has slowed over recent times. This is clearly the case for the advanced economies, but is also true for China, India and the rest of Asia.

The graph shows just how significant was the decline in growth in 2008. That rapid recovery there had a lot to do with government spending throughout the world. Increasingly it looks clear that governments throughout the developed world, but especially in Europe may have tightened fiscal policy too quickly leading to lower growth and ironically an inability to pay off debt through the increased tax receipts available when growth is higher. Britain and Ireland are great reminders of the wisdom supposedly learnt in the Great Depression: cutting spending during a recession leads to ... continuing recession! Ta da.

Japan's miserable growth performance continues.

 

High growth in East Asia has also decelerated.

As have the miracle economies of China and India.

Australia continues to do well considering the world economy.

The latest figures from the ABS show that growth in Australia in the December Quarter was slower than expected at 0.4 per cent.

Growth in Australia over 2011 was 2.3 per cent, which is below trend. 

All of those seasonally adjusted downturns went for one quarter only, which means they don't signify a recession.

In terms of contributions to growth, it seems surprising that manufacturing contributed more than mining in 2011!

The manufacturing sector's employment performance was not so good.

One of the consequences of austerity in Europe is higher unemployment. Sustained high employment is never a good thing in countries with strident Nationalist political parties.

 

One bright spot for macroeconomic policy is subdued inflation. Some commentators were warning that inflation was in danger of getting out of control in early 2011. This view now appears to be overly hawkish. 

 

Even worrying trends for higher inflation in China and India have reversed.

Inflation in Australia also remains subdued and is on the way down.  

 
As Gregory and Sheehan point out many of the price increases over 2011 occurred  in just a few categories:

Over the three years to the June quarter of 2011 five sub‐groups, out of a total of 90 in the CPI and accounting for about 12% of the index, have provided 40% of the growth in the CPI, and 44% of the growth over the past year. The five groups are lamb and mutton, fruit, vegetables, utilities and tobacco. These five groups in total have risen by 11.9% per annum over the past three years, while the rest of the CPI rose by 1.8%; over the past year the five groups rose by 16.7% and the rest of the index by 2.2%.

Bad luck for those who like lamb chops and three veg and some fruit for dessert (standard evening fair in my family in the 80s. 

China's fiscal and monetary stimulus has clearly come to an end.

What happens to that red line over the coming year will be significant for Australian exports of coal and iron ore.

Next post we'll consider Australian finance and trade. 

The Shift in Economic Power

Interesting stats from The Economist's Daily Chart.

Since the end of 2007 the developing world has grown by 20 per cent, while the developed world* has failed to get back to where it was. This has accelerated the shift in economic power towards the developing world.

But note the crossover is still a forecast.

*definition of developed economies based on 1990 data: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States.

Another chart shows just how bad this recession has been in the US compared to previous recessions ... 

All the more reason why the US needs to be less concerned about debt right now and more concerned about growth and employment.