Can China and India Save the World?

Thu, 21 Oct 2010 19:59:00 GMT

A pillar in all bullish arguments for the global economy is that China and India will carry the weight of industrialized nations due to their insatiable demand for a better way of life. While they will certainly try, the risk of both nations hitting a wall is increasing as that insatiable demand consumes increasingly more resources.

Ignoring the rest of the world, The US, China and India are expected to increase their daily consumption of oil by almost 10 million barrels per day by 2025. Economic advancement over the last 150 years has been highly correlated with the consumption of oil and other fossil fuels. Without this increase in consumption of oil at low prices, the world will experience no growth. With such large populations, and leverage to energy consumption it is unclear if China and India can live up to their high hopes of leading the world out of the current global economic slump.

Global crude oil production peaked in 2005 and has plateaued at 74 million barrels per day. Global consumption took a small dip in the wake of the 2008 financial crises, however now that economies are recovering consumption levels are back on the rise. The result will be an inevitable rise in oil prices.

A $100 increase in the price of oil would cost an additional $3 trillion in direct consumption expenses globally - effectively reducing global GDP by 5.1 percent. While some of this wealth may be transferred to oil exporting nations, this is not a zero sum game. If oil shale or deep water drilling is used to replace current low cost supplies than oil producers will be spending nearly $100 in additional productions costs and realizing none of the financial gains to offset the losses from consuming nations.

Most developing nations that are driving global economic growth are highly dependent on energy consumption. Although The US, EU, and Japan consume large amounts of energy, these nations have less leverage to the price of oil in relation to their GDP. If the price of oil were to rise by $100, China would suffer from a direct 6 percent hit to their economy, and India would suffer from an 8 percent hit to their economy.

Another important consideration for countries is their foreign dependency on oil. While Russia has a high level of leverage in oil consumption, it is also a net exporter. As a result, Russian oil supplies are relatively secure. The two most vulnerable nations in the world to an oil shock are Japan and South Korea as they import more than 97 and 98 percent of their oil respectively. Both nations are also highly urbanized with very little arable land. These nations would not survive a halt in global oil trade. The EU, China and India are also highly dependent on oil imports.

Argentina and Brazil are in a unique position of being self sufficient in oil production and consumption. They also have vast amounts of arable land. As a result, they would be least affected by an oil shock.

Capacity of arable land is a strong indicator of potential for economic prosperity if energy prices spike because the arable land supports farming and food production.

Conclusion:

Japan is probably the most economically vulnerable nation in the world. Now that the US, and Europe, are also financially insolvent energy consumers, the world is turning to nations such as India and China to drive global growth. However, their large population and leverage to the price of energy create a situation of great risk. If peak oil is realized within the next five years, then growth prospects in India and China will be reduced drastically. The result will be negative global GDP growth and a reduced standard of living for virtually all nations.

South and Central American nations including Brazil and Argentina may have the best chances of coming out ahead as they are energy independent, have lower populations than Asia, and the most unused arable land.

China Plays Currency Chess

Wed, 30 Jun 2010 23:31:00 GMT

Mainstream media has interpreted the recent announcement by China that it will allow their currency to float more against the dollar to be a positive signal for the global economy and beneficial for the US. This stream of political spin, that came from the White House and Congress, will prove to be as false as talk of a long term recovery last year.

Politicians are claiming that the move, which will lead to a higher Yuan, was made to appease American officials. They also claim that China wouldn't allow their currency to float higher if their leaders were concerned over a double dip recession. For this reason, the announcement was perceived to be a sign that China is bullish on the markets and economy.

Let there be no mistake; China will revalue their currency on their terms when the timing is most beneficial for China. A more likely scenario is that Chinese officials are anticipating the next phase of the recession and realize it is an opportune time to decouple their currency from the dollar. Despite common misinformation, a strong currency supports a strong economy. The dollars relative strength during the last century is a testament to this. The Chinese realize this and do not want to dragged down with the western economies as they drown in debt and currency debacles. China wasn't calling a bottom in the stock market, they were calling a top in the dollar.

Would it have made sense to revalue the Yuan against the dollar a couple of years ago when the dollar index was threatening to break below 70 and everyone was short the dollar? The near financial collapse launched the dollar higher to its current level near 90, and the Chinese Yuan went along the ride by default. Had the Chinese decoupled earlier their currency would have been trashed just as the Australian and Canadian dollars were.

The coming weakness in the global economy has already begun and will in the near term continue to increase demand for the dollar and treasuries. This will be an opportune, and possibly the last great time to exit the dollar. By decoupling when the dollar is near its peak, the Chinese currency will be launched at a moment of strength and might even give them the chance to sell some dollar based assets before the next round of quantitative easing begins.

TradePlacer.com Blog - china tag

Can China and India Save the World?

China Plays Currency Chess