China’s economy has humbled many smart people in recent years.
It has defied those arguing it would slow, those predicting a hard landing, those saying its currency would surge and those concerned that social unrest would shake Asia’s second-biggest economy to its core.
Yet no one has been more outmaneuvered by China than the world’s two biggest economic powers: the U.S. and Japan.
As Japanese Prime Minister Shinzo Abe and U.S. President George W. Bush meet in Washington later this week, both leaders may think markets give a hoot. Abe and Bush may hope that by solidifying ties, investors will somehow feel the global marketplace is a safer, more prosperous place.
Together, the U.S. and Japan produce economic output of $17.8 trillion (Rs7,25,35,507 crore), while China produces just $2.6 trillion. That means investors and policy makers the world over should be comforted that the U.S. and Japan have arguably never been closer. Yet even independently, both economies should have tremendous sway over smaller, developing ones.
Not China. If officials in Washington and Tokyo have learned anything in the last few years, it’s that China won’t be pressured into changes or concessions it doesn’t feel ready for. While the examples include everything from democracy to human rights to piracy, the clearest demonstration of China’s resolve to go at its own pace is the yuan.
If anyone should understand that, it’s Henry Paulson. In June 2006, Paulson shocked Wall Street when he left Goldman Sachs Group Inc. to join the Bush administration. “What is he thinking?’’ was a common question as Paulson joined a lame-duck, scandal-plagued White House. Paulson’s stature and decades-long experience with China, many believed, would serve the U.S. well.
Almost one year later, Paulson has been even less successful than his predecessor, John Snow, in getting China to boost the yuan. Nor has he prodded China to open an economy that grew 11.1% in the first quarter from a year earlier.
Granted, Paulson hasn’t had much time in the job. Yet it was always the case that he needed to act fast to win concessions from China to placate U.S. lawmakers threatening tariffs. Just like Snow, Paulson has been outmaneuvered by China on the yuan and on winning friends in Asia. So has Japan.
Say what you want about China’s leaders — they are scoring huge points in Asia. China is producing rapid growth in a region that used to rely on Japan as its economic anchor. It also has been on a charm offensive to allay fears that its cheap labor and military ambitions are reasons for concern.
While this latter point is highly debatable, what’s not is that China is winning the public-relations war in Asia. That could be seen during Premier Wen Jiabao’s trip to Japan earlier this month, when he stressed China’s desire for better relations between the two nations.
The upshot of China’s growth and its charm offensive is that its economy is now more important to Asians than Japan’s, even if Japan’s is far bigger. Increasingly, investors are reading from the same script.
Within Asia, the international community continues to reference the universe of stocks it deals with as “Asia ex- Japan.’’ Mark Matthews, Singapore-based chief Asia strategist at Merrill Lynch & Co., wonders if it’s time to start referring to “Asia ex-China.’’
“Our predilection is that the term ‘Asia ex-Japan’ is now dated and irrelevant,’’ Matthews wrote in an April 24 note to clients. “Ask yourself this question: When was the last time you looked at the Nikkei or the Topix for direction? Really, today, the Asian markets are taking their cues from China.’’
China Versus Japan
It’s a good point, and one officials in Tokyo aren’t considering urgently enough. Traveling around Asia, one senses little interest in Japan’s recovery from 15 years of negligible growth. Japan is far too big to be irrelevant, and yet traders in Hong Kong, London and New York now react less to Japan’s economic or stock trends than to China’s.
The U.S. economy is far bigger and its health matters more to Asia. Even so, China has skillfully used the last six years to win more friends in Asia than officials in Washington realize. Distracted by its war on terror and invasion of Iraq, the Bush White House paid little attention to the world’s fastest-growing region. That neglect served China well.
That’s not to say it’s wise for Asia to embrace China as the new economic or political power just yet. It’s a developing economy with conflicting needs to slow growth to avoid inflation, and to expand rapidly to create jobs. It needs to figure out how it can build a market economy while controlling the Internet and limiting free expression.
Beating the System
China also must beat the system, so to speak. No industrializing nation has avoided major financial problems. The combination of untold numbers of bad loans, stock bubbles, limited transparency and worsening pollution should concern investors.
It should worry Abe and Bush, meanwhile, that a country that censors Yahoo and Google, limits human rights and supports dodgy African regimes like Sudan’s to get its hands on energy supplies appears to be building more trust in Asia than Japan or the U.S. has been able to do.
It’s food for thought as Abe meets with Bush this week. One can only hope both leaders digest it.
— William Pesek is a Bloomberg News columnist. The opinions expressed are his own