China’s rise to power isn’t a done deal.
Is there anything China can't do? The World Bank has just upgraded its 2009 economic growth forecast for China to 8.4%, which is scarcely believable at a time when the UK's economy is still shrinking by 0.4%.
A century or so ago, Britain could boast cantons and concessions all over China, and called itself the workshop of the world. What a turnaround. There is no question which country is the workshop of the world these days, and if you don't think China has cantons and concessions in the UK, you obviously haven't stepped inside a British shopping centre lately.
Now that's what I call public debt!
It is a modern commonplace to say the credit crunch has cemented the long-term shift in wealth from West to East. In fact, I've said it myself, on several occasions, but I'm not convinced that it's a done deal.
Everybody agrees that China is set to become the most powerful country in the world, but everybody said that about Japan as well, and look what happened to them. Japan is in danger of suffocating under a mountain of public debt, which stands at 283% of GDP. That makes the UK look relatively healthy at 44%, although that is expected to double to 88% by 2011.
China may look all-conquering at the moment, but that doesn't mean its expansion phase will continue forever. It is one thing storming the citadels during the rapid growth phase of a developing economy, with a cheap workforce running into hundreds of millions. It's another thing coping with the consequences of becoming a First World economy.
From baby boom to baby strike
Japan couldn't do it. It's conservative and consensual government failed to administer the radical medicine its banking system was crying out for, or shift from its export-driven economic model. The country's male-dominated structures have fuelled a population crisis, where women have gone on 'baby strike' over the cost and difficulties of raising children alone.
Japan is running out of young blood to fund an ageing population, let alone service its towering public debt, and it isn't keen on immigration. The West also faces some of these problems, but at least has been trying to tackle them.
No wonder all the best-performing investment funds are in the sector labelled Asia ex-Japan.
Poor governance
China (and the rest of the emerging world) will also face unexpected social and economic challenges, most of which have been obscured by their headline grabbing growth rates, and the envy and self-pity of Western commentators.
Fund manager F&C has been urging companies in Asia to improve their corporate governance and risk management standards. It says they also need to build a more sustainable growth model, to manage their impact on the environment, employees and local communities.
Local companies need to develop strong, independent and accountable boards, and produce innovative products to attract increasingly wealthy local consumers, says F&C. They still have a long way to go to catch up with us.
But that's nothing compared to what the country's politicians have to do, to shift from one party communist rule to something approaching a modern democracy (if they even try), or to address political unrest in outlying regions such as Tibet and Xinjiang.
We've given them a helping hand
The West may watch China with awe, but it is also giving it a free ride, by failing to tackle its undervaluation of the yuan, down more than 20% against the euro since the spring. This permits China and the West to maintain the ruinous global trading imbalance, but that trillion dollar distortion simply can't last forever, and the China-US tyre row might only be the first in a series of trade wars.
The West can't keep spending China's money forever, but will China prove any more successful at stirring domestic demand than Japan? If it doesn't, China may suddenly find its mercantilist model is a one-trick pony.
Not to mention the concern that Beijing's massive fiscal stimulus policy could also be pumping up all manner of property and equity bubbles.
Old heavyweight still packs a punch
I'm still investing in China, Asia-ex Japan and the BRIC story, and I haven't completely changed my view that emerging markets are the future.
But you can't write off the West just yet, particularly the US, despite its troubles. Western democracies, although flawed, have shown they can tackle the problems of managing an advanced post-industrial economy, and I don't see why they can't do it again.
The US is still the largest economy in the world, and the second most competitive (after little Switzerland), according to the latest annual report from the World Economic Forum. Japan is the eighth most competitive while China still languishes at 29. And India (49), Brazil (56) and Russia (63) all have a long way to go to compete with the West.
The US consumer represents a massive 20% of the global economy, according to Merrill Lynch. China still needs the West.
The major US banks are getting their balance sheets back in order, something the Japanese have singularly failed to do, and the economy grew by 3.5% during the third quarter.
Yes, I know that is largely due to the country's fiscal stimulus programme, but you could say the same about China's growth.
The US can also boast household names such as Google, Wal-Mart, Exxon, Johnson & Johnson and Cisco, all of whom have major operations in Asia. So they will benefit from the Asia growth story as well.
The West is still best
So to answer my initial question, is there anything China can't do? Plenty. It can't do democracy for starters, or consumption. And it can't do without its own £359 billion fiscal stimulus programme and of course you and me, the Western consumer.
I'm still heavily committed to emerging markets, but I'm not writing off the West just yet. We're still the ones to beat.
