Monday, February 27, 2012

New Global Economic Leadership

The USA was not always the global economic leader. It took its current place more or less after the world wars. Before the USA, the UK was the global economic leader. The Sterling Pound was worth a lot more than what it is worth today relative to the Singapore Dollar. I remember my parents and my grandparents keeping the Sterling Pound when I was a kid. The exchange rate was S$7 to a Sterling Pound, if I remember their accounts correctly. Today, it is S$2.5 to a Sterling Pound. Not as sterling as before. So, global economic leadership shifted from the UK to the USA.

Now, Jim Rogers has said this many times and I agree with him: economic leadership is shifting once more and the next 100 years will see Asia taking over the reigns of global economic leadership and he expects China to take the lead.

This is why I have also shared my views with friends that my favourite currencies, apart from gold, are the RMB and the Indonesian Rupiah. I've a bit of all three and intend to accumulate more gold. The RMB and the Rupiah are fiat currencies like the US$ but they have not been abused and are not as flawed. The RMB is backed by enormous reserves and the Rupiah is the currency of a country with abundant natural resources which the world demands. Untouched by CDOs, these countries' banks were unscathed.

The Chinese economy is large and dynamic. However, it has to undergo a huge behavioral and structural transformation for the Chinese to consume more and to rely less on exports. Why do I say this? Let us look at Indonesia. It has a population of 240 million, a far cry from China's 1.6 billion, and private consumption forms 60% of its GDP. In China, private consumption forms only 36% of its GDP.

Many might or might not know this but "China's consumption-to-GDP ratio has dropped by nearly 15 percentage points since 1990 and continues to deteriorate in the aftermath of the financial crisis. The sources of China's low consumption rate are both behavioral and structural." This was in a recent report by McKinsey.

Asia might be the future economic powerhouse of the world and China might become the leader but the journey has only begun. The transformation will take time.

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