Coatings World - May 2011

ceiling. Neither political party has offered a plan that will result in significant changes in the short-term thus making the distinct possibility of China overtaking the U.S. economy much more likely.

Financial projections

IMF data has calculated that in five years, using gross domestic product (GDP) figures based on “purchasing power parity,” that the Chinese economy will represent just over 18 percent of the world total, up from around 14 percent right now. According to the IMF’s projections, China’s adjusted GDP will rise from about $11.2 trillion in 2011 to $19 trillion by 2016.

On the other hand, the $15 trillion U.S. economy, which currently accounts for almost 20 percent of global GDP, will decrease to about 17. 7 percent of the international total by 2016, said the IMF. During the next five years, according to the IMF forecast, it will grow by a mere $3.5 trillion. That is if the U.S. can curb its spending, get unemployment back to a reasonable level, reform a number of entitlement programs and stop the erosion of the housing market, among other issues, none of which are likely to be addressed in the current U.S. election climate.

An historical perspective of China’s foreign exchange reserves You might be wondering how this could ever happen. Wasn’t it just a few decades ago that China was rationing its Foreign Exchange Reserves (Forex)? Looking back to the late seventies, at the start of the reform era by China—end of 1978—China’s Forex reserves were minimal at $1.6 billion, but enough to cover the requirements of a country with a very small import bill. As China moved into the early 1980s, export growth contributed to an initial rise in Forex reserves to a peak of $17.4 billion by 1984. Unfortunately, high trade deficits in 1985 and 1986 seriously eroded the reserves in those years. In 1987 the surplus on trade in services slightly exceeded the merchandise trade deficit, producing a small current-account surplus, and a comfortable net capital inflow helped push up reserves to $16.3 billion. The reserves were held above this level for the next two years.

When China joined the World Trade Organization (WTO) in 2001 this contributed to a rapid growth in imports, but exports also expanded at a fast pace, while foreign direct investment (FDI) inflows exceeded $60 billion a year by 2004-2006.

“The phenomenal growth that China has enjoyed for the past several decades did not come without a price and the price paid appears to be very, very high indeed.

Even with all its growth it is obvious to any observer that China lags behind its Asian neighbors in so many measures that matter to the people that live here.”

In October 2006, China’s Forex reserves exceeded $1 trillion for the first time. By the end of September 2008, the reserves topped $1.9 trillion, equal to nearly $1,500 per head for the entire population of China. It remained around this level until the end of 2008 as trade growth slowed and foreign investment inflows declined. Then, as 2009 progressed, the upward march resumed, with reserves rising above $2 trillion in April and reaching a record $3 trillion in April 2011.

Big is not always better Most would think that this phenomenal wealth accumulation along with seem-

ingly endless growth would be a good thing for China. Think again. Sometimes, too much of a good thing is bad.

According to recently published comments, Zhou Xiaochuan, governor of the People’s Bank of China, said that China’s huge stockpile of foreign exchange reserves have become excessive and the government must diversify investments using the reserves. “Foreign exchange reserves have exceeded our country’s rational demand, and too much accumulation has caused excessive liquidity in our markets, adding to the pressure of the central bank’s sterilization,” he said.

Obviously this statement was a not so subtle hint aimed at the U.S. dollar. The intent of this statement was confirmed by the State Administration of Foreign Exchange (SAFE) which said that the U.S. government should take responsible measures to protect the interests of investors. “U.S. Treasuries reflect the credit of the U.S. government and are an important investment product for domestic and international institutional investors,” the ministry said in a statement carried on SAFE’s website. “We hope the U.S. government takes responsible measures to protect investor interests,” the ministry went on to say. The Chinese shouldn’t hold their breath waiting for the U.S.’s politicians to get their act together and do something about debt and spending, especially in a major election year.

Notwithstanding its concern about having too many U.S. dollars, China’s remarkable growth and attempts to remake itself into a global powerhouse may sound like the stuff that fairy tales are made of but unfortunately, in China’s situation, there does not appear to be a “happy ending” to this story. The phenomenal growth that China has enjoyed for the past several decades did not come without a price and the price paid appears to be very, very high indeed. Even with all its growth it is obvious to any observer that China lags behind its Asian neighbors in so many measures that matter to the people that live here.