THE CASE FOR CHINA, by Marc Faber
The rise of China as Asia's dominant economic and
political power raises a number of issues. It is obvious
that with a population of 1.2 billion, China will be the
largest consumer in the world for most goods and services.
Already today, China has more refrigerators, mobile
phones, TVs, and motorcycles than the United States, and
it is only a matter of time before it will have huge
markets for just about any product. As a result, its
resource requirements will rise very substantially, and
Chinese purchases of oil, coffee, copper, grains, and so
on will move commodity prices dramatically.
Just consider the following. Asia, with a population of
approximately 3 billion people, consumes 19 million
barrels of oil daily. By comparison, the United States,
with a population of 285 million, consumes about 22
million barrels of oil - that is a per-capita consumption
more than 10 times that in Asia. However, consumption in
Asia is now rising rapidly. China's oil demand has doubled
over the last seven years to around 4.5 million barrels a
day.
But it is not only in the oil market that Chinese economic
growth will be felt. Take, for instance, the per-capita
consumption of food in China - which I won't compare to
food consumption in some Western countries where a large
percentage of the population suffers from obesity. If we
look at consumption of meat, milk, fish, fruits, and
poultry in China, Taiwan, and Hong Kong, it becomes
obvious that the rising standard of living in China will
lead to very meaningful increases in its purchases of
agricultural products in the years to come; sometime in
the future, it will have a similar per-capita consumption
pattern to those in Hong Kong and Taiwan.
Or compare the per-capita consumption of coffee in China
with that in Western countries. Annual per-capita
consumption of coffee in Germany amounts to 8.6 kg, in
Switzerland to 10.1 kilograms, and in Japan - where coffee
consumption has increased rapidly in the last 30 years -
to 2.3 kilograms. In China, per-capita consumption is just
0.2 kilograms. If China's per-capita consumption rose to
just 1 kilogram (a little less than in South Korea), then
China would have a total consumption of 1.2 billion
kilograms compared to a total consumption of around 70
million kilograms in Switzerland!
What I wish to emphasize here is that if standards of
living continue to rise in China, the country will have a
huge impact on the world's commodity markets and is likely
to push up commodity prices very considerably. In fact, I
regard the purchase of a basket of commodities as the
safest way to play the emergence of China as the world's
dominant economic power.
You may, of course, question my optimism about China's
growth prospects and point to the large number of problems
China is facing. These problems relate largely to its
financial system, large bad loans at state-owned banks,
underfunded pension fund liabilities, corruption, and the
growing wealth inequity between its rural and urban
populations. But I believe that, while substantial in
scope, China's problems can be dealt with.
However, I remain convinced that, sometime in the future,
China will experience a serious financial crisis, which
will then force its policymakers to deal with the bad loan
and pension fund issues. You, however, should not be
overly concerned about this financial crisis. The American
economy of the 19th century also experienced a series of
crises, and even a civil war, and yet its economy
performed admirably well between 1800 and 1900. Moreover,
all rapidly growing economies experience terrific
temporary setbacks from time to time.
But in terms of China's long-term prospects, I should like
to remind you that the U.S. economy also expanded rapidly
in the second half of the 19th century - and (this) in a
deflationary environment. This was due to several factors,
including a rapid increase in its population (rising from
37 million in 1867 to 76 million in 1900), the opening of
new territories facilitated by the railroadization of the
country, and the application of new inventions to
manufacturing, which boosted productivity dramatically.
Thus, when we compare the U.S. economy in the second half
of the 19th century to China at present, we should not
overlook the fact that, in 1850, the U.S. economy was well
behind the United Kingdom and the Continent in terms of
industrialization. Therefore, a catching-up effect came
into play.
This is evident when we compare the growth of industrial
production in the United States, Germany, and the United
Kingdom from 1875 to 1890. In the case of the United
States, industrial production grew on average by 4.9% per
annum, compared to just 1.2% for the United Kingdom and
2.5% for Germany. America's strong growth in the second
half of the 19th century was typical of an emerging
economy and is comparable to strong per-capita GDP growth
in China between 1978 and 1995, averaging more than 5% per
annum, while the world's per-capita GDP growth only
averaged 1.11% over the same period.
Moreover, by 1885, the United States, which had hardly any
industries at the beginning of the century, led the world
in manufacturing, producing 28.9% of the world's
manufactured goods, while Britain had been displaced to
second, with 26.6%, and Germany to third, with 13.9%.
Also, while the United States had produced hardly any
cotton around 1800, its plantations supplied five-sixths
of the world's cotton by 1860!
The point is simply this: if the United States could
become the world's dominant economic power by the end of
the 19th century from extremely humble beginnings, I think
that, with the acceleration of the pace of change that
allows regions that open up to industrialize in no time,
it is quite probable that within just 10 to 20 years China
will be by far the world's most important economy - no
matter how many crises it will have to deal with in the
interim.
Regards,
Marc Faber,
for the Daily Reckoning
P.S. One problem I can foresee, however, is that, because
of its size and increasing economic and military
importance, China will grow out of proportion for a
harmonious balance of power in Asia. When, in the future,
China has become Asia's largest trading partner, with
respect to both its exports and imports, it will not only
be an economic hegemon, but will also replace the United
States as Asia's most influential political power. That
such a transition will at some point lead to serious
tensions between the United States and Japan on one side
and China on the other is obvious, but the trend towards
China's dominance in Asia is well established and, in my
opinion, unstoppable.
P.P.S. At the same time, as discussed above, China is
becoming a major buyer of commodities and will become, in
due course, Asia's largest trading partner. The emergence
of China as a major buyer of commodities should support
commodity prices, and if, in the future, the global
economy should resume 1980s-like synchronized growth,
commodity prices could soar.
In fact, grain prices, after having built an extended base
since 1998, have been rising explosively since June. We
therefore still believe that commodity prices are
bottoming out and will outperform Western financial
markets in the years to come. The purchase of commodity
futures, including coffee, cotton, rubber, copper, gold,
silver, sugar, etc., is recommended.
Editor's note: Dr. Marc Faber is the editor of The Gloom,
Boom and Doom Report. Dr. Faber has been headquartered in
Hong Kong for nearly 20 years, during which time he has
specialized in Asian markets and advised major clients
seeking down and out bargains with deep hidden value -
unknown to the average investing public - with immense
upside potential. |
