China and America's Economic Challenge
Image Credit: The White House (Flickr)

China and America's Economic Challenge

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In the United States, the world’s largest economy, President Obama has secured a second term as leader of the country.  In China, the second largest economy, by this time next week new leaders will likely have been confirmed as well. In both cases, the new leaders will officially begin their terms in 2013, even if Obama has the luxury of being already on the job.  The end of the leadership “contests” in both countries sees the end of a struggle for power which at times got pretty tough.

Obama has already been dealing with a sluggish post crisis-economy, and China’s incoming president and prime minister have also already been battling economic difficulties in their current roles in government.  For both countries, whilst by this time next week the political-leadership struggles may be over, from an economic and financial standpoint, the real challenges are yet to come.

For the United States, the most pressing issue is the impending “fiscal cliff”. This is the term used to describe an automatic package of tax increases and spending cuts with a combined value of appx. U.S. $600 billion.  Time is tight with only weeks before the deadline on 1st January 2013.   Without a deal to either increase the U.S. government debt ceiling, or an extension of the deadline, the U.S. will almost certainly fall into a double dip recession in 2013.

The Republicans have lost the presidential election, and have some pretty hard soul searching to do as to why.  Their control in the House of Representatives and ongoing ability to complicate matters in the Senate makes them extremely relevant though, especially since they can effectively kill any attempt to push the fiscal cliff further down the road.   

China’s new leaders, face an equally daunting task.  Whilst China’s growth rates still far outshine that of the U.S., the economy is facing structural issues which will take years, and a lot of political capital to resolve.  The investment heavy growth model is unsustainable, even if one more burst of investment stimulus may be tempting to a new president and prime minister looking to consolidate their power next year. 

China’s rebalancing must require households to get a larger share of the economic pie, allowing consumption to take over as a growth engine rather than debt-backed investment which is increasingly misallocating capital.  The main challenge for the incoming leaders if they are serious about rebalancing is going to be overcoming the opposition of “entrenched interests” as key policies are reversed. These interests include those linked to state owned enterprises, the export industries, any employers relying on cheap labour, and any firms addicted to what is effectively “subsidized” credit.

If the U.S. tumbles over its fiscal cliff, the outlook for China will become that much harder. A double dip U.S. recession will further batter China’s export markets (pain which will also be felt by countries in China’s manufacturing supply chains) and rebalancing for Beijing will be much harder in the resulting dismal international environment. 

One bit of good news for emerging markets is that Chairman of the U.S. Federal Reserve Ben Bernanke, whose looser monetary policies at the Fed have maintained a comfortable international liquidity situation, is now set to keep his job (whereas Romney had promised to remove him).  In addition, with the fiscal cliff line up now unchanged, it is more likely than before that Bernanke will have to offset a fiscal rooted slowdown next year with even more monetary accommodation.  Generally speaking, abundant liquidity in developed markets is positive for emerging market performance.

Hence neither the U.S. election result, nor the solidifying next week of China’s generational leadership transition will fully eliminate market uncertainties about two of the biggest economic issues facing the world today – China’s rebalancing and the U.S. Fiscal Cliff.

Comments
11
Gk
August 9, 2013 at 02:10

India is being roped off by military industrial mafia and The Reserve bank !!!!’

Jaques666
November 25, 2012 at 21:32

Yeah…what is China's Gini-coefficient? Haha. Did they stop publishing it because it went over 50????

BB
November 13, 2012 at 20:55

JChan,
Two dollars per day for the whole family is not enough for any family's daily living. The gap b/w the rich & the poor in China is sadly so extreme  & ironically,  the biggest obstacle for China's political & economic reforms is the very CCP & its influential vested interest groups!

John Chan
November 12, 2012 at 20:20

@BB,
You are wrong; the nation with one billion + living in poverty is India that rather spends billions on lining the pockets of the rich western nations’ death machine manufacturers instead of feeding its poor.
 
You are wrong again; economic & political reforms are an ongoing process. Drastic reform is destructive and radicalism, all nations in the world will do their best to avoid such destruction. You must be a terrorist by invoking radicalism.
 
Hitting a jackpot has a better chance than the Republicans and the Democrats in the US to stop their political bickering and to put American’s wellbeing first.

BB
November 12, 2012 at 14:34

Just think about your commie China, Chan. Its leaders are kicking the can down the road to save themselves & the vested interest groups at the expense of one billion+ of Chinese people currently living in abject poverty. Without serious economic & political reforms, nothing can save China! But somehow, you're right.  Republicans & Democrats in the US  need put aside their ideology & working together to solve the Nation's economic problems , especially the coming fiscal cliff.

Jaques666
November 12, 2012 at 13:43

Well that was a long rant! How does QE drive companies abroad btw? 

John Chan
November 10, 2012 at 15:40

@Anon,
It is called kicking the can down the road; burying the head in the sand; policy of ostrich; drug addict mentality; …
 
That definitely is a sign in decline, not a forward looking, responsible and courageous leadership should have; the world needs a forward looking, responsible and courageous leadership to move humanity forward, not an incompetent tyranny to drag the world into regression.

Theo Prinse
November 10, 2012 at 15:26

 
As to the crony capitalist economic relation between the US and China in terms of resp. outsourcing of production and jobs, an inevitable drop in production in the arms factories and consequently a rise in unemployment, a weakening of US military strength etc. for the Us and low rating policy of the Yuan, child exploitation, ecological damage, ghost cities, looming Chinese housing bubble etc for China  .. it is inevitable too to collapse. 
 
Bernanke’s inflationary Quantitative Easing must ultimately raise consumer prices while causing US companies to flee abroad can someday no longer be compensated by even cheaper Chinese products because like Russia, Brasil etc the Chinese Yuan will be faced with US currency wars. 
 
Philosophically there are two camps. Idealists and (Philo) materialists. The idealists accepts facts as truth only from believe or faith and deny scientific proof and forge materialism to vulgar consumerism. Materialists accepts knowledge only to be empirical evidence and deny believe systems.
 
Capitalism too has two faces. Crony Trade Unionist syndicalist capitalism and innovative entrepreneurial venture capitalism. Innovation however is the onlu source of wealth and causes temporarily unemployment each time a new product and or new production method is introduced. Former innovative capitalists who have become crony capitalists like in the Victorian Age the steam engine and railway capitalists promote a quantitative growth (John Boehner) economic model were it should be qualitative innovation instead. 
 
Innovation had its highest peaks during World Wars. The 2nd gave the world the Jet Age and the Moon. Society is always a balance between stagnating crony and innovative venture capitalism. The end of the Space and Arms race with the fall of the Berlin Wall caused a huge fall in innovation and quantitative production worldwide. The early 20th century American credit life style finally crashed in derivative products, predatory lending plastic credit etc. in 2008. 
 
Worldwide there is about 45 trillion public and 17 trillion private debt Both debts represents groups that have been looting the financial system from two sides. The world needs to liquidate about half (25 trillion a.s.a.p). But the US has to become Islam oil independent and design a new military geo-politics as well. The fundamentalist wave in the Islamic world cannot be stopped by anyone. Obama, Brennan, Jarrett etc. succeeded here with their evil re-distributive idealism causing civil war and bloodshed in the Arab world and Treason in the Benghazigate affair. 

Theo Prinse
November 10, 2012 at 13:04

 
No Mitt Romney, Paul Ryan and the conservatives and the republicans did just fine. Maybe a little to decent, to polite. But the reason of reelecting Obama is caused by the monopoly mass media of ABC MSNBC CNN CBS has over the undecided voter, the necessity for polling agencies to comply with the party political preference in order to have its then party political preference broadcasted for millions of mostly undecided voters and the fact that ABC, MSNBC, CNN and CBS were all pro Obama and anti Mitt Romney. 
There were other factors ..but they were marginal to the above. 
2ndly it is protocol that Mitt Romney received CIA briefings in the last weeks during the debates and concluded that if the information he got regarding the Benghazigate scandal where Obama has committed at least two counts of Treason to the US Congress were to be made publick ..Romney concluded he either has to acquiescence by keeping this secret or would have gotten the blame for supposedly causing a second US civil war given the gravity of all the constitutional powers involved …
 
November 7, 2012
 
It's the coup d'état stupid!
In just the Benghazigate affair alone there are already 2 counts of treason committed by Obama to the U.S. Congress.
Furthermore, the CIA director David Petraeus, the top of the Pentagon General Martin E. Dempsey and his DoD secret services and satellites and the Secretary of Defense Leon Panetta are all involved ..
Watergate was limited merely to a silly eavesdropping on the orders of Nixon at the party office Democrats by a few individuals in and outside the WH. 
Watergate then is similar to the Obama birth certificate forgery scandal today ..
But the Obama's birth certificate forgery is only one (1) aspect of a series of fakes concerning his medical, social and educational documents.
The Romney-Ryan team however during the debates did operate very well given there has been a secret coup committed by the clique surrounding Obama.
For people outside the US, the elections in the U.S. are a Winners takes All system which is hugely sensitive to fraud, voter manipulation, gerrymandering etc. but also very polarizing and subjective in terms of political issues and argumentation. 
According to the Dutch analyst of US politics Charles Groenhuizen Obama beat McCain by 8.7% in 2007 and now beat Romney with only 0.9%
In that respect Obama in fact lost the elections given the gridlock that has been declared already
Furthermore, the US Senate, although a majority of Democrats of 51 is NOT filibuster proof …
In Western democracy – like the US – the Mainstream media achieved a decisive monopoly in the electoral outcome. 
Secondly polling agencies influence to an unacceptable degree the electorate as well.
Thirdly polling forecasts are of no use if they are not covered by the MSM (Fox, MSNBC, CNN, ABC, CBS) and broadcasted to the millions of voters. 
In America, MSNBC, CNN, ABC and CBS favor the Democratic Party and oppose the Republicans  … and so the Polling institutes is extremely sensitive to the political affiliation of this MSM …
In short: the polling institutes in combination with the pro Obama MSM can and have largely manipulated the choice of millions upon millions of voters.
Although Mitt Romney – according to American Thinker – ran a decent campaign it was all together a too mild, too defensive campaign.
Mitt Romney was also briefed weeks before the election by the CIA … and Mitt Romney knew precisely how Benghazi gate really implicated the very Government he was championing .. It is ironic too that were David Petraeus must have been consulted a year ago on the making of ARGO, this movie now must have influenced the mind set of Petraeus and Obama when they watched their ambassador Chris Stevens, intelligence officer Sean Smith, frm Navy Seals Tyrone Woods and Glen Doherty and David Ubben get killed or wounded 
This fact may explain why Romney did not play out Benghazigate, illegal Libya war, birth certificate forgery, leaking intelligence regarding Abbotabbad raid, allowing a Hollywood film makers in a secret intelligence vault, Presidential security agents engaging prostitution while during an Obama visit etc etc hard enough by Romney …
Romney gambled wrongly on: 'its the economy, stupid!'
The conclusion is that the American electorate, the citizens, the people have little or nothing to say in the political electoral process …
In reality we already see unfolding the Hillary Clinton dynastic line continuation.
The electoral choices in America are (long) made by a small clique of financial speculators / billionaires, Polling institutes, large Media Outlets and political spin doctors of the resp. political parties.
 

Jaques666
November 10, 2012 at 04:57

Possibly, but those managing billions of dollars need to be a bit more certain than “conventional wisdom”. Look at what happened to the markets after the election result (despite there being no 2000 style uncertainty!). It kinda demonstrates that they are still worried about it.

Anon
November 8, 2012 at 19:41

The conventional wisdom is that the Fiscal Cliff isn't going to happen, even if congress can't reach a compromise on where to cut the budget.
At that point congress will simply legislate themselves around the cliff taking away most if not all of the short term economic hurt…

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