Defend Truth


If we scrunch up our eyes and look at the global economy differently, a startling picture emerges


Dr Michael Power recently retired from Ninety One where he was the Global Strategist for most of the past two decades. He remains a Consultant to Ninety One. Prior to Ninety One, he had worked in London, South Africa and Kenya for Anglo-American, Rothschild, HSBC Equator and Barings. He has a PhD from UCT, a master’s from the Fletcher School at Tufts and a bachelor’s from Oxford. His primary focus today is doing research into the emerging field of geo-economics focussing in particular on the global implications of the return of the economic centre of gravity to a China-centred Asia.

The usual way we look at the global economy uses market exchange rates, and the US clearly emerges as the world’s largest economy. But there is a more three-dimensional way of viewing today’s world and from this perspective, China is now the world’s largest economy, having overtaken the US around 2016.

I was once shown an annoying book called Magic Eye by a six-year-old. In it were a collection of kaleidoscopic images which otherwise meant absolutely nothing to me. They reminded me of those Ishihara tests for colour blindness or perhaps one of Georges Seurat’s pointillism paintings.

But that all-seeing six-year-old could see Shrek, Darth Vader and Thomas the Tank Engine. Eventually, via a cross-eyed squint, I too saw the images. And yes, what emerged were indeed three-dimensional images of the aforementioned characters. It was a startling revelation!

My sense is that the global economy today is somewhat analogous to one of those Magic Eye pictures. The usual way we look at the world today tells us the US is its largest economy. I call this perspective “viewing the data through the ‘Atmosphere of Capital’ (AoC)”.

This method uses market exchange rates, and as a result the US clearly emerges as the world’s largest economy. But, like looking at one of those Magic Eye images, there is a more three-dimensional way of viewing today’s world and measuring its economic statistics: I call this via the “Atmosphere of Trade” (AoT). And here the currency that is used is purchasing power parity (PPP). From this perspective, China is now the world’s largest economy, having overtaken the US around 2016.

I realise that many South African readers breathe only the AoC: often their job mandates them to do so, and their everyday lives and economic well-being seemingly depend upon it. And I am not in any way disputing the fact that this AoC approach still rules global finance.

But not seeing the world from that other perspective – via the AoT – may blind one to the New World arising and thereby leave one unprepared for when it does.

(As an aside, of all the emerging markets I have visited, only Argentina, Lebanon and Zimbabwe are more dollar-fixated than South Africa. But we still have some way to go; Johannesburg house rentals are not yet US dollar-denominated as they are in Buenos Aires, Beirut and Harare. Of course, this country list does not include those who have gone the whole hog and dollarised completely, notably Ecuador, El Salvador and Panama.)

So large is the US budget deficit that, in 2023 and again with only 4.2% of the world’s population, the US accounted for more than 42% of all budget deficits worldwide.

There are many consequences of these two perspectives. Those breathing the AoC usually cite – appropriately – the market value of America Inc first. During January 2024, the US weight in the MSCI All Country World Index for equities rose to more than 70%, leaving the rest of the world at under 30%.

For proponents of this AoC perspective, this is a “game, set and championship” point all in one: to them, PPP is but fantasy money. And, accepting the two-dimensional perception of the AoC, their argument is indisputable. Reinforcing evidence would be that the US has the world’s largest military budgets and many of its richest men (even if Elon Musk is no longer the richest of them all!).

But there is an aspect to all these measures that we take for granted: they are all denominated in the US dollar and so the value it represents against other currencies.

Understanding the mechanics of how the US dollar is valued reveals the Achilles heel of America.

Last year, the US – with 4.2% of the world’s population – ran more than 50% of its current account deficits. That shortfall was financed through broadly matching inflows on its capital account. Result? The US dollar held its international value. But without the privilege of possessing “the world’s reserve currency”, the value of the US dollar would likely have fallen.

And where did those foreign capital inflows go? Looking at the long-term trends captured in the Treasury International Capital System (TICS) data, overwhelmingly into the US fixed income market, with far less into the US’s celebrated equity market. In the latter, and on a net secular trend basis with occasional positive fluctuations (such as November 2023), the degree of foreign investor enthusiasm has actually been declining since 2014.

No matter; ballooning US budget deficits over the past 15 years have provided ample Treasury paper for foreign investors to park their surplus cash. It seems that, for this “checking account facility”, foreigners far prefer the US public sector over its private sector.

Just how large these US budget deficits have become and the quantum of aggregate national debt they leave behind needs highlighting. Forgive the forthcoming number deluge but grasping the scale is critical.

The annual deficit to the end of fiscal year 2023 (September 2023) was 6.3% of GDP; the first quarter of fiscal 2024 (to December 2023) saw a shortfall of $510-billion, suggesting the deficit might rise to 7.5% of GDP in the current fiscal year, 2024. Not since World War 2 – and never in peacetime and doubly so not when near “full employment” has prevailed – has such US government profligacy been recorded.

In the 16 years since 2008’s global financial crisis, US debt has quadrupled from $8-trillion to more than $34-trillion. The outcome is that intragovernmental debt holdings are $7.1-trillion (21% of total) and debt held by the public (DHBP) $27-trillion (79%). Of the DHBP, foreigners own $7.6-trillion (22% of total or 28% of DHBP).

So large is the US budget deficit that, in 2023 and again with only 4.2% of the world’s population, the US accounted for more than 42% of all budget deficits worldwide. Another metric measured in a global context is that the US owns 34% of all the world’s sovereign debt in issue.

In 2023’s hottest area – AI – China leads in four out of six of its subsectors. In the two where the US still leads… its advantage over China is marginal.

With DHBP currently 98% of GDP, the Congressional Budget Office’s (CBO) most recent forecast sees it rising to 110% by 2030. The CBO also forecasts nominal GDP in 2030 to be $35.5-trillion, implying a 2030 $39-trillion total debt burden, an increase of $1-trillion per annum every year from today’s $34-trillion. These CBO forecasts (made only in June 2023) already flatter to deceive: last year’s deficit was $1.7-trillion while this year’s is heading towards $2-trillion.

The January 2024 update from the US Committee for a Responsible Federal Budget (CRFB) has DHBP rising to 125% of GDP by 2030 (its median forecast). With a GDP of $35.5-trillion, this implies total debt at $44.4-trillion, up from today’s $34.1-trillion. This means $10-trillion over six years equating to about $1.7-trillion per annum. Again, this is likely too optimistic as it only matches 2023’s outcome and assumes no growth from this base!  

Only their pessimistic scenario – DHBP at 130% by 2030 or a total of $146-trillion – would equate to a deficit increase of $2-trillion per annum. But this assumes no increase from 2024’s projected base: looking back six years, to 2018 and so pre-Covid, the US’s budget deficit was $779-billion and so only half of what it is today.

Two trillion here, two trillion there and soon you are talking real numbers!

I was much struck by a conversation in January 2024 between Jamie Dimon, CEO of JPMorgan, and Paul Ryan, former Republican Speaker of the US House of Representatives; it occurred at the Bipartisan Policy Center.

If this runaway federal deficit was not reined in, Dimon predicted a US bond market rout: “When it starts, markets around the world – by the way, because foreigners own $7-trillion of US government debt (latest estimate $7.6-trillion) – there will be a rebellion, and that is the worst possible way to do it. It is a cliff, we see the cliff. It’s about 10 years out.”

Ryan agreed: “This is the most predictable crisis we’ve ever faced.” (I am less optimistic about this time frame. In particular, Donald Trump’s re-election would likely fast-forward it. CRFB estimates the former president added $8.4-trillion to the deficit (25% of the $34-trillion total) including the trailing effect of his much-vaunted middle-class tax cuts.)

Were this “most predictable crisis” to materialise, the fragile equilibrium that underpins global finance would be shattered. Congress shows no signs of addressing the ballooning budget deficit issue, with Democrats hell-bent on raising Federal spending and Republicans similarly hell-bent on not raising and preferably even cutting taxes.

January 2024’s “Tax Relief for American Families and Workers Act” – agreed by both sides of the House in a 357-to-70 vote – will cause the budget deficit to rise a further $78-billion: the Democrats got childcare credit for their electoral base; the Republicans got corporate tax breaks for theirs.

Were Dimon’s bond market rebellion to happen, the risk would be that not only would foreigners back off (via their funding of the US’s current account deficit) providing new funding for the ongoing US budget deficit, but these foreigners may also even start selling US assets as well. And that – if it happened – would likely undermine the value of the US dollar.

There is another cliff on the horizon that few in the US dare mention: in 2033/2034, actuaries predict the US’s social security fund runs out. In 2022, the fund paid out benefits totaling $1.24-trillion. After 2034, beneficiaries will receive only 77% of what they are entitled. Will Congress then move to top up the difference? In 2022, that would have added an extra $300-billion per annum to spending and so to the deficit.

Were this bond market rebellion to occur, expect the difference between the value of the US dollar measured by market rates to start converging down towards the value of the US dollar as measured by purchasing power parity. And this would shrink the difference in the relative size of the US economy to that of the Chinese economy. The dragon hiding in one of those Magic Eye pictures would then start to come into sharp focus.

But the implications of a US bond market rebellion go far beyond the ramifications for the US dollar’s value. US Treasuries are the linchpin of global finance. They derive this status from the yield on the 10-year US Treasury Bond being regarded as the world’s risk-free rate, the opportunity cost of capital. Echoing Archimedes’s lever principle, that yield is the fulcrum about which the world of global finance moves. (Bloomberg recently highlighted the work of Charles Gave of Gavekal which shows that, since 2018, the Chinese Government Bond has been a far better risk-free asset than its US counterpart: a 30% higher return with much lower volatility.)

Meanwhile, in modern China, a very different country profile is emerging.  What many foreign observers of China’s economy miss – especially those with doomsday prognoses – is that China is decisively changing gear. Under Deng Xiaoping, the mantra was “Growth or Bust”… and in the end, growth AND (property) bust was delivered.

China decisively leads in all areas where AI is applied to industry and manufacturing processes.

Under Xi Jinping, the mantra is “National Security”. And this does not mean only the traditional Western definition which focuses on the military aspects. In fact, China’s principal foci centre on delivering technological, energy and (relatedly) environmental security.

Combined, these forces will deliver economic security, military security and yes even – albeit lower than the 2000-2019 go-go years – economic growth. In fact – see below – they are already the single-largest driver of GDP growth.

For those prepared to do that Magic Eye squint, a startling picture of China comes into focus. And it is not simply because China has become a manufacturing powerhouse, producing annually three times more than the US and indeed more than the next eight countries combined.

Read more in Daily Maverick: ‘From the edge of the sky to the ends of the earth’ – China’s ever-expanding reach

China has become a technology powerhouse too. Twice yearly, the Australian Strategic Policy Institute releases its Critical Technology Tracker update. It now monitors research in 64 technologies: China leads in 53; the US in 11.

The US still leads in high-end computing and chip design (though not the intriguing field of photonics), biotechnology and space technology. In five out of those 11 sectors where the US is number one, its advantage over China is marginal.

And in all these 11 sectors, China is always placed second. Correspondingly, if the US is not first, neither is it always second: India beats the US in five categories; South Korea in one. In every sector focusing on automated manufacturing and industrial processes, China leads.

In 2023’s hottest area – AI – China leads in four out of six of its subsectors. In the two where the US still leads – advanced integrated circuit design and fabrication and natural language processing – its advantage over China is marginal.

This status in the AI race is also echoed in the findings of Stanford University’s 2023 Artificial Intelligence Index: peer-reviewed journal publications from China (with 40% of the world’s papers) far outnumber the US’s (10%). Likewise, Stanford notes that nine out of 10 of the top universities ranked by peer-reviewed journal publications are Chinese: only the Massachusetts Institute of Technology makes the Top 10 ranking… at number 10.

While the US is weighed down with the detritus of its past… China is investing heavily in a new future.

If there is a bias in AI knowhow, the US still excels in many consumer-facing apps like ChatGPT, ClickUp and Whitesonic. But this consumer app lead does not extend to AI-assisted online shopping where even Amazon’s US operations are now feeling the heat from Shein and Temu and to online gaming where NetEase and Tencent are challengers to the Activision-enriched Microsoft.

Otherwise, China decisively leads in all areas where AI is applied to industry and manufacturing processes: it is telling that of the 553 industrial robot installations in the world in 2022, 290 (52%) were in China versus 263 (48%) elsewhere.

Finally, China is at the forefront of the green energy revolution, one which will have profound consequences for the country and its environment and, by extension, our planet at large. China now has more than half of the world’s capacity in solar power and a quarter of it in wind power. This position derives from having just under 70% of the world’s manufacturing capacity of new energy products, including solar panels and wind turbines. China also produces more than 70% of the world’s lithium ion batteries.

Read more in Daily Maverick: China tightens rules on polluters before carbon market expansion

This gargantuan volume of production has driven down Chinese unit costs to 50% or less of foreign competitors. (Naturally, the EU is complaining bitterly about “dumping”.) Lower costs mean lower prices which further boosts demand which only reinforces this virtuous cost-cutting and so price-lowering circle.

The latest example of this is in electric vehicles. In 2022, 60% of EVs sold worldwide were sold in China. (Almost every EV was made in China and with very few imported components.) This cost advantage helped China’s 2023 EV exports increase 57% to 1.7 million units. And this surge has allowed China to surpass Japan and become the world’s largest car exporter, “traditional” and EV combined.

Xi’s priority in achieving energy independence is already contributing to China’s growth. In 2023, clean energy sectors accounted for 2.2% of China’s 5.2% GDP growth.

With China more than doubling solar capacity in 2023, and with its wind power capacity increasing by 66%, the Centre for Research on Energy and Clean Air now believes China could reach peak emissions not in 2030 but 2027… and this is despite ongoing and considerable investment in coal-fired power stations. China – the world’s largest polluter – is doing far more than any other country to bring about environmental security both for itself and, by extension, the world at large.

Read more in Daily Maverick: In the rapidly shifting world of geoeconomics, the Rest is getting tired of the West

In conclusion, while the US is weighed down with the detritus of its past (a $34-trillion debt mountain which is now rising by $2-trillion every year), China is investing heavily in a new future. China’s focus is on enhancing its technological capabilities and securing a home-sourced green energy supply: sunshine and wind are not classified as imports!

This suggests that sometime in the mid-2030s, some of us will no longer need to use a Magic Eye squint to realise that China is the world’s largest economy: it will be plain for all to see, even using market exchange rates.

And that the world’s largest economy might no longer be the US must worry Jamie Dimon even more than his impending bond market rebellion… though I sense he highlighted the latter because he realises it may help cause the former! DM


Comments - Please in order to comment.

  • Stuart Hulley-Miller says:

    Really great article Michael. Unsettling, to say the least. To bring perspective I would have liked to hear more from you about India. Hope to hear more from you.

    • Jane Crankshaw says:

      Hear hear! What is more unsettling is that a large part of US debt is owned by China…if they call it in, one can only wonder at the consequence!

      • Rod H MacLeod says:

        If you owe the bank $100k and you can’t pay, you have a problem. If you owe the bank $100 trillion and you can’t pay, the bank has a problem.

      • MICHAEL POWER says:

        Jane, they still do own c$780bn of US Government assets but this is down to two thirds of 2018’s $1200bn peak. More tellingly, in 2012, China owned 11% of the US’s outstanding debt; that is down to 3% today. And what has China done with the sales proceeds? Bought gold – which IS counted in China’s foreign exchange reserves – as well as oil, minerals and grains for their strategic reserve – which does not qualify for inclusion into those FX reserves according to the IMF. (I tend to agree with the IMF’s logic.)

    • MICHAEL POWER says:

      Rest assured, Stuart, a piece on the Dancing Elephant is coming!

  • Catherine Royce says:

    You make a compelling argument; your conclusion seems inevitable. Even if in China, social upheaval or a Taiwanese war, sweep away the communist party, the fundamentals you describe will persist.

    • MICHAEL POWER says:

      I really don’t want to venture into the ‘what if there was a war?’ predictions, Catherine! But yes the forward momentum is powerful!

  • Johan Buys says:

    Well, at 3.7 RMB per Dollar (PPP rate) instead of 7.1 (market rate) at least the US debt is only half its size ;). Bummer is Apple is then only worth 10 trillion RMB instead of 20 trillion. US stocks are worth 70% of global equity because they make 70% of global profits, not because the dollar is overvalued. Have a look where for example Apple earns its revenue : it is global not domestic.

    The more real issue is that at 3.7 most Chinese exports are entirely uncompetitive, meaning China will lose exports even faster than they are already losing those to competitors like Vietnam. China wants 7.1 and manipulates the market to remain at 7.1

    I’m not sure why there is in the past year a media craze to bemoan “western hegemony” and predictions for how the BRICS+ nations are going to fix this imbalance into bipolar balance.

    Imho the imbalance the likes of China, India, Russia, South Africa, Saudi, Iran and Brazil SHOULD try and fix is the imbalance in personal, religious, political and financial freedom under systems of the rule of law. Those exist in the evil west (plus Japan, South Korea, Singapore etc) and do not exist in BRICS+

    • Jane Crankshaw says:

      I agree…. The caste system in India….BEE policies in SA, Russian economic nationalism….freedom of speech in China. These all need to be dealt with to recalibrate possible successful communities and some form of real Democracy! IMHO! P

      • MICHAEL POWER says:

        Johan, As things stand you are very right…at least for most of China’s exports. Which is why they are going hell-for-leather into the higher value added space. Cars es EVs. Wind turbines. Solar panels. Electric batteries. Watch out for all-but-the-top end microchips chips (And see the FT’s headline today!!!”China on cusp of next-generation chip production despite US curbs”.) Within 5 years, expect huge competition between COMAC and Airbus…I fear Boeing is going, going…you know what comes next!)

        That China’s green products cost less than 50% of the West’s equivalents would help cushion the blow from a sharp rise in the RMB…

        • Johan Buys says:

          Michael, China may well produce a lot of chips but at moment they buy US plant to manufacture 7 nanometer chips. The west did 7 nanometer seven years ago, which is three decades in high tech measures.

          One thing that puzzles me is that you seem to discard the system of government in China. There are virtually no freedoms, there is no rule of law and the government does central planning. The comrades decide who can open which business where.

          What that translates to is massive and hugely understated unproductive investment in empty cities, disused airports and railways, non performing state loans to the chosen recipients.

          • MICHAEL POWER says:

            No longer US machines, Johan. That was a while ago. Where allowed, China buys from ASML of the Netherlands . (The US lost the cutting edge here 7 years ago and is struggling to regain a position here: the stories coming out of the US in this regard are not encouraging.) SMIC and Huawei are re-engineering those ASML UV lithography machines and are now honing in on 5nm chips: see FT yesterday.

            Yes China is a different model though not as different as you may think. The US Government accounts for more GDP – +36% – than the Chinese one does – +33%. And note the Biden’s Washington Consensus II approach is MUCH more state-cented: see Blinken’s speech on ‘central planning’ in the US from here on. (They are massively subsidizing the US chip plant programme but thus far with little success,). If re-elected, Trump will likely be even more interventionist: see his comments on US Steel.

            There are “freedoms’ in China: when were you last there to see for yourself? But they may not match your requirements for “freedoms”. But yes, China’s Government is interventionist in places where Western Governments mostly are not. And yes these are mostly on the “supply side”. Where Western Governments are (chronically?) interventionist is on the demand side: France Government spending to GDP 58%; Italy 56%. Broadly and ideally, China should probably be less interventionist on the supply side, much of the West less interventionist on the demand side (though the Scandinavian model is intriguing.)

          • MICHAEL POWER says:

            Capitalism has very often evolved in “fits and starts”: the overbuilding of railroad capacity in the US 1880-1900 is the classic example here. I am sure much of the capacity in China will be taken up in time: 250m rural dwellers still want to move to the urban areas (property); air travel is recovering post-COVID led by domestic over foreign; railways are generally well utilized (especially freight). There is a lot of ‘dead wood’ NPLs on provincial government books, yes. (BTW steel yourself for the fall-out of the $1 trillion+ losses in US commercial real estate: see New York Community Bancorp and Aozora Bank)
            But this PALES in comparison to the c$213 trillion of unfunded liabilities in the US (mostly unfunded pension obligations and Medicare/Medicaid). This has no equivalent in China because they have not (yet?) gone down the path of an all-encompassing social security underpin to their society.
            And this goes one statistic goes to the centrality of the argument I am making: as much as one might admire democracy and its accoutrements (and it is hard not to!), is it affordable in its current manifestation?

      • MICHAEL POWER says:

        Jane. I try to focus on the economics but you are right, messy politics are widespread. Quote Donald Trump “I will be a dictator on Day 1”! Ugh…

  • Interested Observer says:

    And yet, here we are

  • William Kelly says:

    I am no fan of 91 but this article had me enthralled. Thank you!

    • MICHAEL POWER says:

      I am semi-retired from them so they are what they are. But one thing they don’t practice is stale thinking!

      • Ismail Lagardien says:

        I actually am never impressed by their ideas. It is the same old predictable stuff. Then again, I am a heterodox person; hence I speak of political economy (not economics) and don’t believe that economics and politics are non-overlapping magisteria, nor (in particular) that economics is a science “like physics”. Then again. These ideas do not sit comfortably with the comments section.

        • MICHAEL POWER says:

          I am very sympathetic to your views, Ismail. After all the first academic chair – for Alfred Marshall at Cambridge – was for Political Economy. And yes, in recent years, the language of the market has decoupled from its political twin…though in the past five years, in the West at least, politics is now swamping economics again. Government debt is the ultimate evidence of this. Globally, the West has starting preaching ‘geopolitics’ to all; the Rest are – broadly – more inclined to speak ‘geoeconomics’.

          • Ismail Lagardien says:

            Thanks Michael. Whenever I discuss policy-making with orthodox economists, I turn to Alfred Marshall who said every generation should address the problems if its time with the insights and methods of their time. To me that is precisely a rejection of the cookie-cutter approach to policy-making that we contested from 1997 onward, when I was among the Neo-classicists. After about 2001, when I started the PhD, I had moved from even that “radical” view.

  • Michele Rivarola says:

    I am not so sure that a new dawn is on the horizon at least not my horizon for a few simple reasons which Dr Power seems to be overlooking:
    – China, Japan and Germany own the majority of US debt (which is peculiar in the case of Japan as Japan is the most indebted country in the world) they have little appetite for seeing the debt vanish off their balance sheets over night or devalue more so as it provides them with a way of remaining competitive in the export market
    – historically China, unlike Russia has had little appetite for expansionism and rather has spent the last 3000 years or so protecting its borders from others. It has been invaded and conquered many times so it is hard to believe that besides wishing to continue being a trading power they have any other expansionist intentions. Be that as it may HK has been a learning lesson on what not to do and by the time it was released by the UK it was a hollowed out HK at least financially. The same can be expected to Taiwan so it could be little more than a pyrrhic victory if they ever get there
    – if you own US treasury bonds which you bought at a high yield, to remain export competitive, the last thing you want is for interest rates to drop below the bond yield as your bonds will not be worth much at that point in time
    – the Evergrande bubble will end up taking a fair chunk of China’s forex holdings that is if they want to remain in the good investment club and not join the speculative investment club or the failed investment club
    – watch put for India as they are the rising power and their strength is built on solid foundations
    – lastly the US dollar has been predicted to fall many times and so far nothing much has changed either than they keep on racking up debt which someone keeps on buying
    Like or not the US controls the skies and those who control the skies control the flow of information which in this day and age is worth more than any hard asset. So if you think that the US will implode dream on and hope for the best because if they implode they will take all and sundry with them, Mr Dimon included who has been rescued from his malfeasance before by the very same government he is so quick in chastising.

    • MICHAEL POWER says:

      Collectively Japan, China and Germany own 5.9% of the total US debt and 7,4% of the debt held by public (The Fed has most of the ther $7bn).

      My own prediction is that – in 5 years – China will outproduce Taiwan’s TSMC – both in volume and quality – meaning no invasion is necessary. Thereafter Taiwan will draw ever closer to China.

      China makes 1.7% more on US Treasuries than it pays on its own 10 year. Nice cushion!

      No doubt the fall out from Evergrande will be significant. And yes, it may see some FX reserves being used up (but to recapitalise banks exposed to Evergrande. But I expect time will ‘work out’ (double meaning!) much of the asset impairments.

      Agree on India. But it is a long way off from being a second China. China’s GDP is 5.5 x the size of India…though now smaller in population.

      Ernest Hemingway’s pithy reply on how bankruptcy happens: “Gradually…and then suddenly”. I think this sequence was what Jamie Dimon was alluding to.

      • Johan Buys says:

        Michael, China has for sure progressed fast from T shirts, Trump baseball caps and Walmart toys to electronics, but you’re probably optimistic on their high end semiconductor capabilities. IBM prototyped 2 nanometer in 2021 and Apple has been shipping 3 nanometer chips (dutch fab gear, TSMC production BUT deploying Apple’s SOC design) for a while already. The chip design element is 99% of the IP compared to manufacture.

        Expect Samsung to also play a big role here and expect Apple, Intel, IBM, NVidia and TSMC itself to move new plants (chip and other components) out of China, onshore to the US because of increasing trade/sanction/banning/nationalisation risks in China. There is practically zero advantage locating a new advanced semiconductor plant in China from a cost perspective, which means political risk tips the scales. TSMC is right now building its new plant in Arizona, partly because the US can also play the game of local and central government incentives. Electricity costs are a coin-toss, labor is a tiny component.

        Big Business today is global in the sense that both revenue and costs and sources are widely distributed (volkswagen is not german when you plot where they source, assemble and sell). China must still take its first steps toward their companies globalizing other than sales. BYD will likely be forced to.

        Interesting times

        • MICHAEL POWER says:

          Spot on with your logic, Johan. BYD is building car plants in Mexico, Hungary and Indonesia.

          On the chip front, yes the West is still ahead but the gap is closing: Huawei and SMIC doing 5nm. But more interesting is probably the progress China is making in photonics which may reinvent the process by which chips are fabricated. Furthermore, China is on its way to dominating all chip production of 14nm and more. (See Chris Miller – Author of Chip Wars – in the FT. ) This may not be hugely profitable for China but it will undermine cash flow at many non-Chinese production. The Arizona plant TSMC is building will not produce cutting edge chips: the one TSMC is building in Japan will.

          ARM is an interesting ‘middle ground’ company: it has a subsidiary in China that generates 25% of ARM’s revenues. Lots of tech accessible to the Chinese there. If Trump gets elected, I suspect he will go after ARM…

          Meanwhile, Huawei has in 2024 displaced Apple’s iPhone from the top spot in China with the Mate 60 series. This contains the self-developed 5nm Kirin 9000S chip plus its own HarmonyOS operating system. Going forward, I suspect Apple’s growth will come much more from services than the iPhone…

  • D'Esprit Dan says:

    Great article, and slightly above my pay grade (maybe a lot, actually!). I would, however, like the authors’ view on the pending (already with us) impact of the decline in population in China together with the shift to a much older population. It’s fine to look at tech and manufacturing and exports, but with an ageing population coupled with a troubled, at best, domestic property market, China has a less sunny disposition than this piece gives credit for.

    The massive tax breaks given to companies to set up in different cities are causing severe financial strain at a local level, which will have a knock on at national level. There is also a suspicion (unproven, granted) that China’s GDP numbers are cooked by the Party to reflect a stronger economy than the reality.

    Finally, totalitarian countries generally become belligerent in the face of domestic headwinds – and you can track Chinese belligerence in Asia quite closely to the emergence of the property woes and the knock-on effects this is having on industrial capacity.

    • MICHAEL POWER says:

      Dee, you seemed to get it fine if your questions are anything to go by!

      Demographics are a very important subject. My own view id that the critical demographic metric is first “how many people live in the countryside and want to move to the city?” China’s current urbanization rate is 66%: 924bn. If the US and Japan are any guides, China needs to absorb another c200m from rural areas before the GROSS POPULATION STATISTIC starts to really bite. I see this as happening in ten years – ie. after a decade of +20m p.a. from rural areas.

      One unknown is whether autonation can substitute for people. I think it may be possible… BUT – a big but – what jobs will the urban population then do?

      Yes tax breaks have happened. But look at what the EU did for Airbus (so far successfully) and the US did for its car and steel industries (mostly unsuccessful.)

      I look at electricity generated figures: difficult to cook and broadly in line with the official macro data.

      Agreed on your final point. But it is not just happening in the Rest…belligerence growing fast in the West too!

  • Really Honestly says:

    Compelling reading begining to end. We will see in a few years how accurate these valuable insights are. If Western governments, left leaning policies prevail the West has no hope, but maybe the penny will drop in time for electorates to save the day, if they are not already too comfy consuming government handouts to care!

  • Jon Quirk says:

    Thank you, Michael for a most enlightening article; the most extraordinary thing for me – and I confess that I have been fortunate, having worked around the globe in senior roles – is that it contains no surprises or unknowns; however, put together it is a very enlightening view of an increasingly multi-polar World, the more so in that India, is catching up fast and will, on current trends, join the top table within a decade, and there are signs that Europe is awakening from it’s somnulence, and thus a stable four-side stool may emerge.

    We have lived too long in a uni-polar, American World, and this experience has not been good for anyone – including, America.

    • MICHAEL POWER says:

      For me, Jon, the real effect of India is not so much that it will catch up with China – that will take a couple of decades + – but rather the displacement effect India will have on the hold of the North Atlantic countries on their place in the global economy and the result that India’s reinforcement of China will have in truly cementing Asia as the centre of economic gravity globally.

  • Johann Olivier says:

    All interesting conversation, but I’m going to simplify it. As long as folks would rather own a home in Boston, or Bonn, than Beijing, or Miami, or Milan, than Mumbai, all the complex financial equations fail. One can titter & complain about ‘left-leaning’, ‘weak’ Western Democracies all one wants, but living in them – being a part of them – seems to be the desire of most of humanity. Including most of the correspondents here. Thus, as has been mentioned in these comments, Mark Twain, liberally paraphrased, puts it best: As long as this is true, news of the demise of the US & liberal democracies is greatly exaggerated.

    • MICHAEL POWER says:

      I don’t disagree with your essential point, Johan. But that is not my essential point. Deep down, my worry is that – some more, some less (the Scandinavians, Netherlands and Switzerland are in the ‘less’ category) – Western Democracy is becoming an expensive “necessity”. Given demographic trends, the outlook for most of the West is that the welfare state – in all its guises – will grow is cost much faster than the revenues needed to sustain it (and this is now happening very obviously in the Arsenal of Democracy, the US.) This combination is simply not sustainable. One of the greatest historians of the 20th Century, Arnold Toynbee, noted: “Civilizations die from suicide, not by murder.” There will come a point where embodying a great idea beloved of the people will (sadly) not be enough if it cannot be afforded. Democracy URGENTLY needs to repair itself and central to that repair – especially in the US – will be a combination of “higher taxes and lower social spending”. I am sceptical as to whether this is possible.

      • JDW 2023 says:

        This article was very interesting even if a lot of it did go above my head when it came to the numbers. Your comment here generalising and summarising the article’s point really did sink into me and now I get where you are going. What I am not really comprehending is why the collective think tanks of the world are not addressing this. Does politics and the money that goes with it really trump (pun intended) rational, longterm thinking?

        • MICHAEL POWER says:

          Very good question, JDW. Sorry about all the numbers (!) but such is the entrenched narrative going in the other direction, numbers are the best weapon against this bias. In my space, one of the fastest growing areas of research is geo-economics despite all the talk of geo-politics. I try to steer clear of the politics where I can (though I do let my biases show and no, they are not unflinchingly pro-Chinese. Not in the slightest!)

          But the blindness in the West towards their flawed economic fundamentals at times beggars belief.

  • Scott Gordon says:

    All is good in China ?
    Think not .
    Evergrande owes $300 billion , the rest of the major developers are also bankrupt !
    25 %of GDP gone !
    Infrastructure is being cut by 50% .
    Luckily there is no no inflation allowed in China as far as the traded Yuan goes.
    As for the chip industry , there are so many fails.
    The PV industry is over supplied , the EV market is massively trimmed down .
    There are 1000 s of junk vehicles parked on fields .
    Little is mentioned about Chinese debt internal / external .
    Moody’s just down graded several banks in China .
    Just how will 200 m be integrated into the economy ?
    The same way as they lifted 400 m out of poverty by lowering the poverty level .
    Youth unemployment figures have stopped , no mention of those affected by the halt in housing construction ! The aging population is also an issue !
    As for shares like Ten cent , seen a big drop as its gaming market is strictly controlled .
    Anyone for Alibaba shares?
    Tech has been leaving for years. More lately !
    How about FDI into China , that has taken an hit too .
    I do not share your optimism about the Chinese economy .

    • MICHAEL POWER says:

      China is experiencing growing pains no doubt. Just as the US did in 1873’s Panic which lasted 6 years. Of the US’s 364 railroads, 89 went bankrupt and 18,000 businesses failed . (Incidentally, gold’s discovery in South Africa played its part in this crisis.) I rate the Panic of 1893 as worse, worse than the Great Depression of the 1930s: 575 banks failed or temporarily suspended operations.

      But, unlike the US back then, China has no net external debt, $3.2 trillion of FX reserves and runs a current account surplus.

      What is happening in green tech is that the powerhouse of China’s manufacturing capability in launching itself on high cost competitors in the West. There is overcapacity, yes…but in the high cost West. See Siemens Gamessa. The Chinese EV industry is not being trimmed down unlike the US and EU. Chinese output 2020 1.1m; 2021 2.9m; 2022 5.47m; 2022 8.0m. Last month, BYD – now the world’s largest producer – announced +62% sales in 2023.

      Yes, lots of fails in chips but that is how a new industry evolves: see US auto sector 1910-1930.

      China’s lower inflation is there for many reasons. A big one is they did not splurge to the same degree on social spending during COVID. US budget deficit to GDP 2020 15%; China 8.6%. 2021 US 12.4%; China 6.1%.

      Yes demographics is an issue but note last year US life expectancy fell below that of China.

  • dexter m says:

    Great article. the question i have is your analysis is also available to most US and western politicians and the trends were there for at least the last 10 years. Has US politics become so toxic that a grand bargain between democrats and republicans not possible ?

    • MICHAEL POWER says:

      Dexter, No better question! The broad denialism in Western – and especially US – political circles – beggars belief (some on the Republican right have raised the debt issue…whilst simultaneously proposing TAX CUTS!). I sense most are lulled into a false sense of security that the day of reckoning will not be tomorrow so all is well: classic ‘boiling frog syndrome’.

      Liz Truss tried (very cack-handedly) to raise the alarm and the political elite said ‘no’. Briefly, the UK gilt market woke up to what she was trying to say…until the fire engine that is the Bank of England swamped the potential conflagration. (There was HUGE moral hazard in the Old Lady of Threadneedle Street’s behaviour but immediate needs prevailed! Let’s not talk about the longer term implications… Boiling Frog!)

      In the US, note that in the past week, both Jay Powell at the Fed and another banker, Brian Moynihan, CEO of Bank of America, have added their voices to the alarm call of Jamie Dimon. Their message reminds me of Apollo 13: Washington, we have a problem….

  • dexter m says:

    how does central banks purchase of gold figure in your analysis.

    • MICHAEL POWER says:

      In theory, when the CBs buy gold for FX reserves, they need to report it to the IMF. My concern is that for China, the numbers do not easily add up. China is the largest gold producer AND the largest gold importer. The difference between the sum of these two supply sources and the increase in recorded domestic consumption and China’s FX reserves is MASSIVE. Yes, the domestic market is significant but I cannot help but think that there is a Chinese agency – somewhat equivalent to our Rand Refinery – that buys the mined gold and does not onsell it all into the domestic market (This stockpile is not held by the CB so not counted in FX reserves). Last year the amount mined was 375 t. Net imports were 1,447 t. Jewellery Consumption was 1089 t (overtaking India to be Number 1). The Central Bank bought 225 t. The numbers are opaque and so difficult to reconcile. Glad to hear from anyone with more insights.

  • A Rosebank Ratepayer says:

    Really enjoyed this article and the maturity and incisiveness of the comments including Dr Power’s responses, (unlike the trite nonsense of the chaterati following most other articles, including the odd Ponzi scheme advert which DM seems unable to control – DM please take note)
    My question to Dr Power is, given your insights, what should the strategy be of a private investor seeking to secure their pension over the next 30 years?
    Would it be something similar to Ray Dalio’s All Season’s portfolio? After visiting India a couple of years ago I am particularly interested in their prospects, especially as it appears they have the highest savings rate in the world. China appears too complex and inaccessible.

    • MICHAEL POWER says:

      Thank you for your comments, Simon. I aim to be civil and constructive. I also hear my history master’s oh-so-simple secret as to how to pass exams: ANSWER THE QUESTION!

      I am glad you still have 30 years. That increases the weight you can afford to take in your portfolio to take strategic risk at the expense of being forced to stick with short term tactical security. Yes Dalio is definitely onto something and his book is full of useful insights even if it is not so digestible when reading it. 🙁

      There are a number of levels you have to address: think of a simple spread sheet. Along the top is geography mostly because you cannot escape the straightjacket of currency; down the side is asset types including in equities sectors. Geographically the Big Easy is Asia. Within that yes India – but watch valuations. And don’t short sell China even if it is ‘complex and inaccessible’. Don’t underestimate Singaporean financial institutions (nor the Singapore Dollar for cash.) There will be a few individual winners by home revenues. My own holy grail today is to find Asian brands than can go Pan-Asian, usurping Western brands as they do. Some with be China-based, others Indian-based. Occasionally there are interesting niches (like Koren Cosmetics) to watch. And a few non-Asian heavyweights: Nestle comes to mind. LVMH too though watch for the coming rise of home-grown Asian luxury brands.

      And, whilst I am not a bug, don’t ignore gold.

      Not an easy question to answer. Hope this helps!

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