That’s a question one often hears investors ask. Is it? In the below article, I take a look at some of the similarities.
One is size. They are the world’s two largest economies – the US economy is roughly $22 trillion (Dh80.5 trillion) in size, and China’s is roughly $14 trillion. Their financial markets are the world’s largest too. The US stock market is valued at $45 trillion, and China’s stock market is valued at $11 trillion. The next largest are Japan and the UK, at two-thirds and a third of China’s size respectively.
Of course, one reason their financial markets are so big is because their economies are big. But there’s another reason, which is that no other country has companies operating at the forefront of the digital economy that are the size and scope of those of the US and China.
These companies are a relatively new phenomenon. Ten years ago, three of the 10 largest American companies were technology companies, and today five of them are. In China ten years ago, no technology companies made the top ten, but today eight of them are.
This sea change shouldn’t come as that much of a surprise, when we think about how much of society and the economy have been digitised.
But the largest companies in the rest of the world are still for the most part the same financial, commodity and consumer companies they were before. The reason is because much of the “New Economy” in the world outside of China is dominated by the American giants.
That’s not to say the Chinese ones have less promising futures. For one thing, they still have a lot of growth at home. Per capita income in China, at around $10,000 last year in China, is a fifth of what it is in most developed countries. But also, the Chinese mobile phone makers and TikTok are increasingly ubiquitous around the world and show us the possibilities.
China’s “soft power” (the attractiveness of its culture to others) is deficient to that of the US. But as the quality of what it produces continues to improve, and with its huge population of talented people, it should become a cultural exporter too. Ten years ago, who would have thought that the world’s most popular pop band in 2021 would be the South Korean band “Blackpink”? (Combining album sales, digital song streams and interactions on social media, it is).
So China and the US have powerful “New Economies” in common. In terms of economic policy, something very interesting is happening. They seem to be trading places.
In 2009, at the tail-end of the global financial crisis, China initiated a fiscal stimulus programme equivalent to 25 per cent of its GDP. The programme has generally gone down in history in a negative way, due to the massive increase in public debt it incurred, and because much of that debt was used to finance infrastructure projects of questionable utility.
Fast-forward to the present, and on March 11, US President Joe Biden signed a stimulus bill that is 8 per cent of GDP. It follows the stimulus packages from last year that were 17 per cent of GDP. What an irony, that works out to the same number — 25 per cent — that China did a decade ago.
Only history will tell if this was a good or bad idea. But it certainly is a change from anything anyone in the US has seen, unless they are very old. Biden’s stimulus is far larger than necessary, given the previous two packages, the speed in Covid-19 vaccinations, and existing immunity as many more people were likely infected than the official confirmed cases show.
Democrats are changing the message from one of Covid relief to one of putting money in the pockets of ordinary people. And next up are big plans to spend money on the environment and infrastructure.
Last month, the self-described democratic socialist Senator Bernie Sanders compared President Joe Biden to none other than late former president Franklin Delano Roosevelt. He said “Like Roosevelt understood during the Great Depression, Joe Biden understands this country today faces a series of unprecedented crises. What President Biden concluded is that if his administration is going to mean anything, it has got to think big, not small and it has got to address these unprecedented crises in an unprecedented way.”
It is interesting to contrast the above to what China is doing. It began a de-leveraging campaign in 2015, that was withdrawn in 2020 during the Covid epidemic, but is apparently back on now. The recently-concluded 14th National People’s Congress in Beijing set clear priorities, including financial stability and preventing imbalances in the private sector.
While not saying so explicitly, most of the recent policy moves suggest greater prudence. Credit growth is decelerating, fresh curbs are being put in place in the property sector, and the official GDP growth target of 6 per cent for this year is a third less than what the private sector is forecasting.
Guo Shuqing, the chief financial regulator, said earlier this month “Developed countries with serious epidemics have adopted active fiscal policies and extremely loose monetary policies, which we can all understand. However, side effects have gradually emerged. The financial markets in developed countries are running at a high level, which is contrary to the real economy … We are worried about which day the financial market, especially foreign financial asset bubbles, will burst [and] are studying how to take more effective measures.”
But to return to what the two countries do have in common, they are big, and so they are increasingly bumping into each other.
Under President Biden, there is a clear repositioning of the issues, from trade to technology.
Here an analogy could be made to an earlier confrontation; the Cold War between the US and the Soviet Union in the 1960s, 70s and 80s. Of course, on the whole it wasn’t a good thing. But actually, the “Space Race” that was a subcomponent of it caused great advancements in technology.
Inventions we use today that came out of NASA’s Research & Development programmes include GPS systems, CAT scanners, wireless headsets, LED lighting and laptop computers, to name but a few. Perhaps they would have been invented anyway. But they probably wouldn’t have been invented so quickly, without that massive government push.
So to return to the original question “Is China the new USA?” perhaps the best answer is that the two are becoming more like each other.
If a dash for technology mastery compels them toward great inventions, then from an investor’s point of view, that is very interesting indeed. Although, we must pray that those inventions are used toward good-ends.