Can China As Super Power be Trusted?

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China is poised to become number one

China is supposed to take over as the number two economy in the world in a few weeks from now after Japan offiicialy declares its 2009 GDP numbers. The GDP of China is currently $9 trillion and is still growing at 10% per year. US is the only country above China currently with a GDP of $ 13 trillion. China has a huge advantage over US as it has the world’s largest population and the biggest bank in the world in terms of market capitalization. The world economy is as much dependent on China as it is on US. But if you think about it more, even US economy is dependent on China. Not only China provides for cheap imported items, it also is the third biggest market for US exports after Canada and Mexico. In 2009 GM sold as many cars in China as it sold in US. Its chinese unit was the only profitable unit it had. Similar stories hold true for other US industries also.

China has its own set of problems

Recently Chinese government announced the second increase in reserve requirements this year. The move is to reduce the inflation that is continuously booming in the Chinese economy. This rattled the world markets and the Dow Jones fell by 100 points. The same DJIA was not even affected when Fed Chairman Bernanke announced plans for similar moves in US. Plesae remember that US is still the number one country in the world and is expected to grow at 3% this year. So what was different about the Chinese that the wall street reacted in the way it did. The difference was Chinese are much more opaque in their decision making. While we all know about the Fed plan, we have no clue on what steps would Chinese government take next. The Fed rollback is already baked into the market and therefore there are no sudden swings. On the other hand investors and hedge fund managers have no idea when the chinese would increase rates or how much the economy is growing really because of strict govt control over any and every information source. Most investors were expecting the Chinese to take this step in Q2.

Real Estate Bubble in China is Eminent

Due to this sudden step people are worried about an asset as well real estate bubble happening in China. The demand for residential property grew by 82% last year in China. If the residential mortgage industry blows up in China it would have same impact on the world economy that US mortgage industry blow up had. The Chinese government step is in right direction. However if China wants to be part of world economy and WTO, it has to start making its economy much more transparent to the investors abroad. This will not only help reduce the sudden shock the stock exchanges around the world faced on Feb 12th but also help provide a sustainable growth to Chinese economy. The biggest worry in an opaque economy is that the end of the economy is sudden and it may not have any forewarning. The Collapse of USSR in late 80′s was the biggest example of this in 20th century. We hope as Chinese start interacting with world leaders more  and that they will understand the importance of bring more transparency in their decision making.