“How soon will the Chinese natural resource demand decrease? The Chinese population is significantly larger than every individual country’s population in the world (except India).” Is China the New North? Assessing the Impact of Chinese Trade with Latin America, Brookings Institution
“In terms of long-term structural trends, demand is now driven by an urbanization process that is far more structural than consensus generally believes. On our analysis, China is only 20 to 25 per cent along the path towards being a mature materials market and it may take at least six to nine years before demand intensity peaks.” Andrew Keen, Thorsten Zimmermann and Lourina Pretorius, analysts at HSBC
BCG Consulting says China is expected to become the world's second largest consumer market by 2015 and by 2020 China’s consumer consumption nation-wide will amount to 22 percent of total global consumption, behind only the U.S. at 35 percent. The expected transition from an investment led economy to a more consumer focused model will bring about continued growth.
The McKinsey Global Institute projects that India's middle class will grow to 583 million people in the next two decades. At the same time, the country will advance from the world's 12th largest consumer market to the fifth largest.
Africans, on a per capita basis, are richer than Indians and a full dozen African states have higher gross national income per capita than China.
Today Africa has 14% of the world’s population and by 2050 one in every four people on the planet will be African - by 2027 Africa will have more people than does China or India.
The New Silk Road
Over the last few years the economic cycles of developed economies have become disconnected from the cycles of the developing world. A crisis in the US or Europe does not hurt development in Africa, India or China as much as many believe. That’s because there’s been a shift in global trade taking place with developing countries increasingly interacting with each other instead of their old trading partners, the developed nations.
“A network of new “South-South” trading routes connecting Asia, the Middle East, Africa and Latin America are set to revolutionize the global economy. Trade and capital flows between emerging areas of the world could increase tenfold in the next forty years. In the same way that trade between the developed nations exploded in the 1950s and 1960s, we expect the 21st Century to see turbocharged trade growth between the emerging nations." HSBC Global Research
“In all trade corridors in which China participates, strong growth is anticipated. So strong in fact that it is no exaggeration to highlight this as the emergence of a new world trade order; by 2030, China will effectively be fulfilling the central trade role occupied by the US and the EU today. Having said that, the importance of India should not be underestimated – particularly for trading partners in MENA, the Association of Southeast Asian Nations (ASEAN) and Africa.” The Super-Cycle Report, Standard Chartered Research 2010
Today the:
- BRIC countries; Brazil, Russia, India and China
- CHIME group of countries; China, India, Middle East
- MENA group; Middle East and North Africa
- GCC, the Gulf Co-operation Council; Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman
- ASEAN, The Association of Southeast Asian Nations is a geo-political and economic organization of ten countries located in Southeast Asia - Indonesia, Malaysia, the Philippines, Singapore and Thailand, Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam.
Are defining world trade.
Indonesia will soon be added to the CHIME group.
India
After reaching $60 billion in 2010, bilateral trade with China is expected to reach $70 billion in 2011 and up to $100 billion by 2015.
“The report also confirms the shift in India’s trade patterns that we have been witnessing. Trade with the West Asia corridor, China and a few Latin American countries is expected to be higher than India’s traditional large trading partners the US and Europe.” Bhriguraj Singh, HSBC India, talking about the HSBC trade forecast survey
A just concluded trade deal between India and Pakistan has been called historic. India has also been trying to engage its other neighbors in the region, Afghanistan, Nepal, Bangladesh, Myanmar and Sri Lanka on a commercial basis.
Currently intra-region trade, at $5 billion, accounts for just five percent of the goods trade total. A World Bank report, published last year, estimated intra-region trade could grow to $20 billion.
A Free Trade Agreement (FTA), signed in August 2009 with 11 ASEAN member countries became operational in 2010 and will lift import tariffs on more than 80 percent of traded products between 2013 and 2016,.
"FTA has opened up more opportunities for Indian industries in terms of greater market access for their products in the ASEAN region." Federation of Indian Chambers of Commerce and Industry (FICCI) survey
Africa
Africa's top trading partners, in terms of bilateral trade volume, are China, India, Brazil, South Korea and Turkey.
Africa's trade with emerging countries has doubled to 40% of its total trade volume. In 2009, China overtook the United States as Africa's top trading partner.
Manufactured goods represent a growing portion of the products emerging countries import from Africa.
ASEAN
ASEAN is the third-largest trading partner of China and China-ASEAN imports and exports totaled USD 171.09 billion in the first half of 2011, up 25.5% from the end of the first half of 2010.
With a GDP of $1.7 trillion and 591 million people, ASEAN has concluded free trade agreements (FTA) with China, India, Korea, Australia and New Zealand. The ASEAN group has also completed a Trade and Investment Framework Arrangement with the US and is negotiating other trade and investment agreements.
The ASEAN-China FTA represents an estimated 1.9 billion consumers.
Arab League
China's trade with Arab countries is growing by 30 percent annually - over the past five years trade between China and Arab states has increased from US$65 billion to $145 billion.
"The United Arab Emirates (UAE) will emerge as India’s largest trading partner with trade volumes estimated at $103.6 billion overtaking China, which was largest trading partner in 2010." HSBC trade forecast survey
Iran
When the current Iranian calendar year ends annual trade between Iran and China will be worth $45 billion. The Iran-China trade was worth $30 billion in the last Iranian year. China is Iran’s biggest oil buyer.
India and Iran have agreed to set up a payment mechanism to facilitate bilateral trade and resolve the payment crisis for oil imports as well as exports. Iran is India’s second largest oil supplier supplying 12 per cent of India’s needs.
Turkey
HSBC’s Trade Connections report says
“Turkey is one of the world’s fastest growing economies and trade is forecast to grow 109 percent by 2025.”
Turkish-Russian trade will increase by 123 percent and Turkish-Chinese trade by 125 percent in the same period, taking the volume of exchanged goods to USD 541.3 billion by 2025, up from its 2010 level of USD 266.1 billion.”
Trade with India will rise 7.09 percent.
Korea
China is South Korea’s biggest trading partner and bilateral trade between the two countries has increased at an average annual rate of 22 percent. In the first half of 2011, China accounted for 22 percent of South Korea’s total foreign trade, compared with a record low nine percent for the US.
South Korea saw a combined trade surplus of $18.8 billion last year with Chile, Singapore, the European Free Trade Association (EFTA), India and the Association of Southeast Asian Nations (ASEAN).
Russia
Trade between Russia and China could reach $70 billion in 2011 and $200 billion by 2020 according Russian Prime Minister Vladimir Putin.
Russia is close to sealing an energy supply agreement with China worth one trillion dollars for up to 68 billion cubic meters of gas every year.
China and Russia recently opened an oil pipeline from Daqing in northeast China to Skovorodino in eastern Russia. The line is 1,000 kilometers (621 miles) long and yearly capacity is 15 million tonnes.
The volume of Russian-Indian trade, in 2010, increased by 14.4% compared with 2009 and amounted to $8.5 billion.
In 2010, India was 18th among foreign trade partners of Russia, while Russia was listed 29th among foreign trade partners of India.
Latin America
China's trade with Latin America is growing twice as fast as U.S. trade with the region.
In 2007, Latin America's trade with China topped 100 billion U.S. dollars for the first time, just three years later trade was worth 183 billion dollars.
India's bilateral trade with Latin America was $23 billion in 2010, a ten-fold increase from 2000. Indian-Latin American trade involves not only commodities but manufactured goods as well.
Indonesia
According to the Indonesian Ambassador to India, Ani M Ghalib, bilateral trade between India and Indonesia will reach $25 billion by 2015, trade between the two countries today amounts to $12.7 billion.
By the end of the current fiscal year Indonesia will be the second largest trading partner of India in the ASEAN region.
Indonesia’s Industry Minister Mohamad Hidayat said Indonesia and China aim to double two-way trade to $80 billion by 2015.
Disconnect
There has been a revolution in world trade - a new pattern of trade is flowing, connecting Asia, the Middle East, Africa and Latin America. Trade between China and South Asia is growing, China's trade with Africa is expected to double by 2015, Africa's top trading partners, in terms of bilateral trade volume, are China and India, over 50 per cent of India's trade is now with other Asian countries while only 32 per cent is with the United States and Europe. China's trade with Arab countries is growing by 30 percent annually and India’s is expected to grow even quicker. China's trade with Latin America is growing twice as fast as U.S. trade with the region and India’s trade within the region has increased 10 fold in a decade.
The First Industrial Revolution started with technological innovation driving the slow industrialization of the United Kingdom in the 18th century which merged into the Second Industrial Revolution around 1850. The start of the second industrial revolution was marked by a transition of technological leadership from Britain to the United States and Germany.
What is happening today is not being driven by technological innovation or technological leadership, what’s driving emerging economies today are urbanization, population growth and consumerism. The US is still, by far, the leader in technological innovation - emerging economies are simply playing catch-up with the west. They want a better life for their families; schools, running water, electricity, better sanitation, transportation and shelter. They want increased consumerism, the flat screen TV’s and other electronic devices that go along with a modern society and their increasing disposable income - all of this is driving a commodities super-cycle.
Infrastructure spending and increased discretionary spending by consumers are the key factors driving this rising demand - as more and more people in emerging markets move from rural areas to the cities, consumption will increase putting massive upward pressure on commodities - per capita consumption of commodities in developing countries is still only a fraction of the level it is in developed countries.
"By 2030, income per head in China - using market exchange rates, which include our view of a stronger CNY - could have risen from USD 4,166 in 2010 to USD 21,420. China, currently a big but poor economy, would become a middle-income economy - but on a vastly larger scale...Income changes elsewhere are no less impressive. India, for instance, is projected to go from USD 1,164 in 2010 to USD 7,380 by 2030, Latin America from USD 7,114 to USD 14,608, and Sub-Saharan Africa from USD 1,075 to USD 2,780." Gerald Lyons, chief economist Standard Chartered
In 2000, developing countries were home to 56% of the global middle class, by 2030 that figure is expected to reach 93%.
The current commodities super-cycle will see China, India and the ASEAN group emerge as economic powerhouses - much like Great Britain and the United States did but without emerging economies obtaining technological leadership.
The world economy will grow from $62 trillion in 2010 to a projected $308 trillion by 2030, with emerging economies accounting for 68 percent of that growth, according to Standard Chartered.
Growing trade between emerging markets helps explain why they now account for about 30 percent of global final consumption, about the same as the U.S. and up from 10 percent in 1990.
Ascending Yuan
Emerging markets are increasingly starting to denominate trade contracts in currencies other than dollars.
"Western central banks use quantitative easing and government backup plans to deal with fundamental problems in their economies. But it is not sustainable. Those developed countries used to interfere with the development of developing countries. I believe it is about time for China and ASEAN to unite to protect their own interests. The Chinese yuan is the best choice for an intermediate currency in trade. I hope China could facilitate a trade mechanism by providing yuan convertibility and develop its settlement mechanism which is easy and simple to implement." Yum Sui Sang, CEO of Union Commercial Bank of Cambodia.
Because of its international aspirations and the fast growth of business conducted in the Yuan, in March of this year, the Industrial and Commercial Bank of China (ICBC) set up its first overseas Yuan processing center in Singapore. In June 28, ICBC set up a China-ASEAN Yuan clearance and settlement center in Nanning while at the same time launching a pilot program for the exchange between the Yuan and Vietnamese dong.
The world’s first offshore Yuan denominated spot gold contract recently started trading in Hong Kong.
“Occasionally we read in various columns of mainstream journalists that the Chinese have shot themselves in the foot when they (in violence of Friedmanite precepts) failed to revalue their currency upwards. The world will retaliate by imposing punitive tariffs, creating horrible unemployment in China and causing civil unrest. These journalists should be careful to make wishes, because they may just get what they’ve wished for. One of these days China may open its Mint to gold and silver, setting the example to Asia and the Muslim world and, possibly, to South America. Other countries may follow suit.” Antal E. Fekete
It was
“a push by Chinese authorities for a more international role for its currency and as an alternate reserve currency to the embattled dollar and euro.” GoldCore Analysts
The Chinese Yuan or Renminbi (RMB) currently cannot be used as a reserve currency for two reasons:
- The Chinese government maintains capital controls on the conversion of its currency
- China’s currency is not attractive to central banks for holding, they need to develop a strong open bond market
While China's currency will be increasingly used to settle trade between emerging nations China is not YET ready to turn the Yuan/Renminbi into a Global reserve currency on par with the Euro and Dollar…but the first steps are being taken.
Baosteel, the state-owned Chinese steelmaker, is going to issue Rmb6.5bn ($1bn) worth of renminbi denominated bonds. This is a landmark move as Baosteel will be the first Chinese company, other than a bank, to sell renminbi bonds directly to international investors.
“The regulatory approval shows that China is supporting the growth of the offshore bond market in Hong Kong, they want the market to increase and to be more liquid.” Dariusz Kowalczyk, Hong Kong-based strategist at Crédit Agricole
Conclusion
A commodities super-cycle is based on the assumptions that 1. population growth will lead to industrialization, urbanization and infrastructure build-out and 2. higher living standards leads to increased consumerism and higher protein diets. This supports long-term demand and higher prices for industrial and agricultural commodities.
The developing countries of China, India, Russia, the Arab League, ASEAN including Indonesia, Latin America and many countries in Africa represent a huge percentage of the world’s population and its natural resources.
The global shift in trade, the Chinese Yuan becoming the developing world’s, currency of choice for trade and Chinese baby steps to make their currency at least a regional reserve currency, with future, much higher aspirations, should be on everyone’s radar screen. Is it on yours?
If not, maybe it should be.
