In these economies, real GDP growth was forecast by the International Monetary Fund to reach 6% in 2010, up from 2.1% in 2009 (IMF, Jan. 2010). In comparison, advanced economies shrank by 3.2% in 2009 and are only expected to expand sluggishly in 2010.

As the IMF noted in Sustaining the Recovery (October 2009), “emerging economies have withstood the financial turmoil much better than expected based on past experiences.” When the IMF talks “emerging economies,” in this context it is mainly referring to a resurgent Asia. Of these economies, only China, Indonesia and India escaped recession, due to large stimulus packages and, in the case of India, less dependence on exports. 

Many Asian economies, particularly export-oriented ones, took a beating during the downturn. However, recent developments point to a strengthening of domestic demand and exports in these markets. From an investment perspective the critical question is whether this rebound will be self-sustaining ahead of a stronger growth pickup in the rest of the world. 

while THE SITUATION remains volatile, gains are being seen in many markets, providing hope that global recovery, although feeble overall, will continue. Yet, regardless of when and how a recovery fully appears, one trend is clear: the world’s economic center of gravity is shifting rapidly from West to East.  

Asia’s share of global output has steadily risen from 17% in the 1970s to 34% today (adjusted for purchasing power). According to estimates by the Asian Development Bank, Asia’s global economic output in 2050 will increase to 50%. 

It is obvious that the developed world is rapidly being overtaken by Asia, and of all countries in the region, China is the most important. With a population four times that of the US and a real GDP of 8.7% in 2009, China is set to dwarf its neighbors and play an increasingly central role in the development of global financial markets and international relations. 

In January, China became the world’s largest export nation, exporting $957 billion of goods in the first 10 months of 2009 compared with $917 billion for longtime top exporter Germany. It is also expected that the country will pass Japan this year to become the world’s second-largest economy.  

Jim O’Neill, head of global economic research at Goldman Sachs, wrote in November in the UK’s Evening Standard newspaper that his company has revised its forecast on China’s economic growth. Having previously predicted that China will overtake the US to become the world’s biggest economy in 2041, he believes it will occur 14 years earlier in 2027. 

THE GREAT RECESSION is not responsible for these shifts in fortunes, but it has accelerated long-term trends, including the rise of Asia (see Will Asia Return to its Past?). In his book When China Rules the World, Martin Jacques argues that the West will find these developments increasingly difficult.  

For well over two centuries the West has held overwhelming global pre-eminence, first in the form of Europe and, more recently, in the form of the US. With the emergence of China, India and other developing countries, the world will become multipolar.  

We shouldn’t be blinded by the “economic wow factor” of China’s growth, Jacques cautions. Like any rising and potentially hegemonic power, China will invariably use its economic strength for wider political, cultural and military ends. “The West will progressively discover, to its acute discomfort, that the world is no longer Western,” he says. 

Professor Sun Zhe, director of Tsinghua University’s Center for US-China Relations, acknowledges that China is growing increasingly confident in its own abilities. Thirty years ago, he says, when China opened up the door for diplomatic relations with the US, China viewed the US as a tutor. Now China wants to be an equal partner.  

“For many people in China, the Western model of development and even the Western model of democracy have lost their institutional attractiveness. Over the last 10 years the Chinese people have seen the war in Iraq, seen the global financial crisis and are blaming the US. Resulting from this is a growing sense that China can create its own path.”   

This path-seeking will be particularly agonizing for the US, predicts Martin Jacques. He says the US will enter a “period of economic, political and military trauma.” But US demise has been predicted before. For example, in 1980, Ezra F. Vogel wrote Japan As No. 1, outlining how Japanese superiority in industrial competitiveness would see them surpass America. Japan has languished in the economic doldrums since the 1990s. 

China also faces significant challenges on its path to become one of the two major powers and, perhaps ultimately, the major power in the world. It can no longer rely on debt-fueled US consumers to drive its breakneck expansion, so needs to switch from an economy based on exports to one based more on domestic consumption.  

This can be achieved, but the road is likely to be rough. Threatening structural bubbles, poor governance, yuan valuation issues (see Yuan Enough is Enough) and the “four uns” (unbalanced, unstable, uncoordinated and unsustainable) as Premier Wen Jianbao has described them could prove to be impediments and make China more vulnerable to economic shocks. 

James S. Chanos, a contrarian who heads the $6 billion Kynikos Associates hedge fund, says China’s hyperstimulated economy is heading for a crash. Chanos, famed for having foreseen the demise of Enron, stated late last year on CNBC that the booming Chinese real estate sector, buoyed by speculative capital, looks like “Dubai times 1,000 – or worse.” 

Overstated? Christina Chung, a senior portfolio manager and China expert at RCM, believes so. “I don’t think China can be compared to Dubai, as the fundamentals remain strong,” she says. “We believe the Chinese economy can sustain relatively high economic growth for some time. Domestic demand is supported by high savings, rising household income and increasing urbanization. While we may see signs of an asset inflation bubble in selective cities, China is a big economy and economic growth will spread into lower-tier cities where economic development has significantly lagged behind,” (see If … Then).  

Yet, with the government’s legitimacy resting on economic expansion, any shock could quickly spiral into full-blown crisis. With the world economy increasingly dependent on China, any shock could have the potential to make 2010 as rough a year as 2009. 

ASIA IS NOT CHINA in the same way that the Americas are not simply the US. However, the economic and military size of the US has meant that it has long dominated its region. A similar situation is arising in Asia, where the sheer gravitational mass of growing China means many countries will end up in orbit around its economy – for better or worse.  

Mark Matthews, a strategist with Macquarie Securities, notes that trade between China and the 10-member Association of Southeast Asian Nations (ASEAN) has increased from $60 billion per year in 2003 to roughly $200 billion today. “Asia grows and closes ranks at a time when the US has basically not signed an FTA (Free Trade Agreement) in almost three years,” he comments (see What Happened to the Asian Tigers?).  

He cautions that the threat for many countries is that the sheer size of China and India may cause them to “fall off the radar.” Singapore – with one of the freest economies, efficient goods and labor markets as well as a sophisticated financial market – has been successful in this respect, but he worries about the Philippines, Malaysia and Thailand. 

Yet, all of these potential issues should not obscure the fact that Asia’s power is growing and that we are standing on the brink of a different kind of world; a world where Asia and, in particular, China increasingly dominate. Speaking after the uncompromising position adopted by China at the UN Climate Change Conference in Copenhagen, one Western diplomat is reported to have commented, “It’s a new game. Don’t even bother addressing any global issue unless you first have China on-side.”  

It is a realization that the developed world will increasingly have to make as it gradually works through a disruptive and potentially tumultuous era of a changing world order.