Lee Hsien Loong: Yuan Revaluation Is Win-Win for China-U.S.
Comment of the Day

January 11 2011

Commentary by David Fuller

Lee Hsien Loong: Yuan Revaluation Is Win-Win for China-U.S.

This is a topical article published by Bloomberg. What makes it especially interesting is that the author is the prime minister of Singapore. Here is a section on superpower status:
Pre-Eminent Superpower

The world is witnessing a gradual shift in the relative balance of influence and economic power. The U.S. will remain the pre-eminent superpower for decades. But Asian countries see and sense China's growing influence and are adjusting their stances to benefit from that nation's growth and to consolidate their relationships with China. Yet almost all of them wish the U.S. to stay engaged in Asia. They want to be friends with both the U.S. and China, and not be forced to choose sides.
The Chinese are aware of foreign perceptions that with growing strength it has become more assertive. China's leaders have emphasized that the country is committed to peaceful development and has no aggressive intentions. China's domestic challenges are numerous and daunting. Its government must uplift hundreds of millions who remain in poverty, create social safety nets for its people, moderate major disparities in wealth and development, and maintain social and political stability so that progress can continue.

And another on skills:

Investment in Skills

The only reliable strategy for improving the lives of citizens is for countries to upgrade the skills of their people and the capabilities of their economies. This means educating the population to enhance their earning power, investing in technology and infrastructure to raise overall productivity, developing new industries to replace declining ones, and constantly adapting to stay relevant in a changing world.

Beyond promoting growth, governments must build political support for free markets and economic integration. Growth has to benefit the many, not just a few. The state needs to tilt the playing field in favor of the less successful, and those having difficulties keeping up. But it must do so in a sustainable way, without undermining the human drive to do well and get ahead. This is what Singapore is striving to do, to improve its people's lives and advance as a nation.

David Fuller's view The USA will certainly remain a superpower but will it be "the pre-eminent superpower for decades"? Not if the USA's and China's growth trajectories over the last twenty years are maintained at anything close to current levels. They are due to China's rapid emergence from a previously underdeveloped stage and to some problems of governance in the USA.

Another big factor is population. Even if we were to assume comparable GDP growth rates over the next twenty years, a country of 1.3 trillion people is going to have a bigger impact, not least on resources, than the previously pre-eminent superpower which has a population of approximately 310 million.

If China does not project its influence more strongly, it will be the first superpower in human history not to do so. We have already seen this with strategic resources, as Fullermoney has long predicted. So far, the competition has been mostly peaceful. Hopefully it stays that way but the competition will intensify as GDP growth expands and the global population, forecast to reach 7 billion this year, continues to rise. It will be interesting.

How should investors position their portfolios in this environment?

I would continue to back GDP growth, which means favouring equities over bonds. In particular, I would remain overweight growth markets and western equities leveraged to the Asian-led global economy. I would remain overweight in resources.

Historically, resources have been highly cyclical, but far less so in this environment, particularly if you agree with a Standard Chartered report forecasting a GDP Super-Cycle (see my comment following Email of the day (2) on 4th January, for a link to the report).

Inevitably any growth super-cycle - a best-case scenario but not unrealistic - would still be punctuated by periodic recessions. These will be triggered by soaring commodity prices, more often than not, which cause central banks to tighten monetary policy. When the major economies are all raising interest rates, subscribers may wish to reduce exposure to Fullermoney themes, which now include short long-dated government bonds

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