With the West mired in financial and economic paralysis, some observers are thinking aloud that China's mounting $3.2 trillion foreign exchange reserve might help save the world. This idea has inspired one of my fellow bloggers to refer to Spenser Johnson's popular book ‘Who moved my cheese?’.
With a fifth of the world’s mice population, China needs to find a lot of cheese. She had forced herself into accepting many painful adjustments in order to join the World Trade Organization and has since been a main beneficiary of globalization. Now as the country's labour and resource-intensive export margins shrink, she is decidedly turning course to find new cheese in a new Five Year Plan (2011-15). The goals include much higher domestic consumption, a renewed effort to conserve energy and protect the environment, and supporting high tech industries like next-generation informatics, biotech and high-end manufacturinggoing.
This momentous shift should likewise offer much new cheese for Western environmental technologies and consumer brands.
Even before this new direction, China’s “mass affluent” with annual household income RMB100,001 to RMB 200,000 (equivalent to $80,000 in purchasing power parity) was expected to jump from 9.8% of total in 2005 to 36.4% by 2025, according to a special report in McKinsey Quarterly (June 2006). China’s “global affluent’ with annual household income above RMB 200,000 reached 1.6 m in 2008. This cohort is expected to grow to 4.4 million by 2015. Even with the current economic slowdown, ''global affluent" households are likely to increase by 16 % annually for the next 5-7 years. 80 % of the nouveau riche are under 45 years of age, compared with 30 % in the US and 19 % in Japan.
More and more anecdotal and research-based evidence is coming to the fore. For example, in 2010 alone, Yum! Brands opened 500 new restaurants in China, including one new KFC restaurant every single day. According to the World Luxury Association’s 2010-2011 annual report, China accounts for 27 % of the global luxury market, ahead of the United States at 14 % and right behind Japan at 29 %. The report estimates that China will be the world’s largest luxury market in 2012.
All the while, China has been imploring the West to sell her more high technologies to help upgrade her industries. In addition to more imported consumer goods, this should help restore some of the trade imbalance with China. However, owing to mistrust, these pleas have often fallen on deaf ears.
Meanwhile, China is the biggest buyer of the West’s commercial aircraft, although China is now on track to roll out her own production of regional planes – the 70-100 seat AJ-21 in the footsteps of Brazil’s Embraer.
Despite all the hype, however, China will be lucky to save herself if Europe implodes and the US economy continues to sink. Morevoer, China has to contend with surging domestic inflation, rising non-performing loans, continuing corruption, worrying ecological constraints, a water crisis, increasing global resource and food scarcity, growing inequalities and an impending leadeship transition.
In a way, the $3.2 trillion cash pile is China's insurance policy, as more and more factories have to close to upgrade the country's industrial and environmental structure and as a nascent lower middle class struggles to balance consumption with the need to save for their future.
As for the RMB, China is likely to continue to manage its gradual appreciation and long –term convertibility with extreme care. For the RMB is much more than a currency. It is a powerful tool in addressing the myriad domestic and external upheavals China is bound to face as she navigates through the turbulent waters of the second decade of the 21st century.
Meanwhile, China is vigorously internatgionalizing the RMB and pushing more capital overseas to acquire assets, resources, technologies and markets. With the value of the greenback continuing to be debased by successive ''quantitative easing", China is in no huury to buy ever more US treasuries, even though there is little choice at the moment (Paul Krugman's 'Dollar Trap").
In any case, with rising consumption and opting for slower (and hopefully more sustainable) growth, a lower trade surplus and foreign exchange reserve will follow over time. Hence there should be less imperative in the future to sanitize a bulging foreign exchange reserve by buying more treasuries. At the moment, China’s policy on US treasuries is likely to be slanted towards a "Don't Sell, Don't Buy" scenario.
But more Chinese capital to invest overseas should present timely opportunities for the West to leverage such investments to create jobs, stimulate growth and build a more trustful trade and investment relationship with the world's second largest economy.