The Future of China

THE FUTURE OF CHINA AND NORTH ASIA
MAINLAND CHINA, HONG KONG, TAIWAN, JAPAN, SOUTH AND NORTH KOREA.
FROM HERE TO 2030

SUMMARY: Revision 2005

The global population of the North East Asia (China, Taiwan, Japan and the two Koreas ) attains 1,524 million in 2004. It would stabilize and reach about 1,542 million in 2030. The global GNI accounts for $7,565 Billion in 2004. We can expect about $28,000 Billion in 2030. Clearly, the future of China and North East Asia is bright. The region will be the main economic center in the world.

China has quadrupled its GDP since 1980. Thanks to foreign investments and a fast transfer of technology, this country has realized in twenty years that Japan and South korea have realized in 45 years. The Chinese GDP ($2,133 Billion in including Taiwan and Hong Kong) could attain $18,000 Billion in 2030.

We must answer to three questions:

1-Is the Chinese growth expected to going on? Clearly, we answer Yes. Thanks to its population, China represents a huge market and the economy can still enjoy a very high growth rate in the next future. Despite political and social uncertainties, we are confident because of the quality of the Chinese youth. 400 Million are aged between 20 and 39 (Only 110 million in Western Europe ) and constitute the main labor force. These people are well educated, enthusiastic about business entrepreneurship, eager to work as much as they can. They focus on ethics and values. They show a real openness to the world. The Chinese youth is better prepared than the European youth to the coming world. In our opinion, it is the most important asset of China.

2-What are the consequences for the world community? Today, a wave of panic is spreading through the world: Chinese textiles exports to the main western countries jumped by 80 to 90% in the first quarter of 2005. As a result, people campaign for protectionism or a change in currency. In fact, China only represents 5.6% of the world trade in 2003 and the Chinese positive trade balance remains quite constant (On average of 31 $Billion over 7 years ). China only gets a large surplus with the US (175 Billion). In this context, Protectionism or a change in currency could bring more problems than solutions. The best guess is the democratization of China and the increase of its labor costs.

On the other hand, there is an hidden challenge: What should we produce in the future? Presently, China is a blessing for the consumers. However, if current trends were going on, we could export wine, antiques and tourism and import all the machinery and technology from China. Clearly the free trade theory ought to be revisited!

3-Does a risk of conflict exist? In our opinion the answer is no, with a reservation about North Korea. The US-China relations should remain peaceful. The Taiwan-China conflict could find a pacific issue ( Despite the irresponsible French demand to lift the arm embargo on China ). The immediate threat comes from North Korea

Warning: Go to Standards of quality about the sources of tables and stats: Economic stats-World Bank: www.worldbank.org/data. Population stats: UN: www.un.org/esa/.

1-CHINA 2-JAPAN 3-KOREA 4-WAR OR PEACE

1-CHINA

As usual, this survey is not a worm book paper. Regarding China, we visited Hong Kong, Guangzhou, Nanjing, Shanghai, Guilin, Beijing and Lhasa in Tibet. We met businessmen and students. Moreover, we have kept in touch with them through the Internet. We have currently more visitors from China than from France or Germany. Regarding Japan, we sojourned in Tokyo and Kyoto. Look at the next map (CIA source).

11-Introduction

With an area of 9.6 million square kilometers, China is the third largest country in the world ( Next to Canada and Russia). It is the most populated (1.3 Billion). It is one of the oldest civilizations ( A written history of 4,000 years. Inventions of compass, paper-making, gunpowder and printing). For centuries China stood as a leading civilization, outpacing the rest of the world in the arts and sciences. In the 19th and early 20th centuries, the country was stormed by civil wars, famines, military defeats, and foreign occupation. After World War II, the Communists established a totalitarian power that cost the lives of tens of million people. After 1978, the communists focused on market. As a result, living standards have improved and the room for personal freedom expanded. However, China is still a dictatorship.

According to the UN lower projection (Revision 2004-See world population prospects) the global population (Including Hong Kong and Taiwan) would grow slowly and then stabilize ( 1,346 million in 2030). Thanks to birth control, China has succeeded in reducing its fertility rate. Whatever the projections, China will be less populated than India in the future.

China is a very homogeneous ethnic country ( Han represent 92% of the total population). People mainly worship Taoism and Buddhism. The day to day religion (Confucius) looks like a collection of ethical advices.

12-The present economic growth

The World Bank stats distinguish mainland China and Hong Kong. Regarding Taiwan, the only available stats can be found on www.gio.gov.tw (Government office of the Republic of China).

121-Mainland China

In 1978, the communist replaced the collectivization, authorized private enterprises, and increased foreign trade and investments. As a result, China benefited of high growth rates over 25 years and quadrupled its GDP since 1980.

The GNI attains 1,677 $Billion in 2004 (Gni per capita: $1,290). Measured on purchasing power parity (PPP) basis, China stands as the second-largest economy in the world after the US in 2004. However, in current dollars, China remains far behind the USA (12,150 Billion) and behind Japan, Germany, the United Kingdom and France (About the purchasing power parity go to our standards for quality)

The main figures of the Chinese economy are given by the next drawing (Yearly GDP growth rate in %, Gross capital formation in % of GDP, the exports and imports of good and services in % of the GDP, the % of high technology exports in manufactured exports and the amount of foreign investments received each years in $ Billion.

DRAWING 1

Years---------------------- 1999-- 2000-- 2001-- 2002-- 2003-- 2004

GDP growth rate -------------7%----8%----8%-----8%---9%---10%
Gross capital formation------37%-- 36%-- 38%----40%--44%--45%
Exports--------------------- 22%-- 26%---25%----29%-- 34%--40%
High technology------------ 17%-- 19%---21%----23%---27% --?
Imports--------------------- 19%-- 23%---23%----26%-- 32%---39%
Foreign investments---------39----38-----44------49-----53 ----?

The gross capital formation (Investments) is very high (45% in 2004). As a comparison, gross capital formation peaks about 30% in Korea, 25% in Japan and 20% in the US. Compared to the growth rate (10%), it indicates a capital output ratio of about 20%. Such a profitable ratio can only be reached by an economy based on commerce, services, high technology, light industries rather than on heavy industry and agriculture: Value added by agriculture has fallen from 27% to 15% between 1990 and 2004.

Since China accession to the World Trade Organization in 2001, exports and imports are rapidly increasing. China ranks in 2004 as the third largest trading country in the world after the US and Germany (See below). The % of high technology exports in manufactured exports has outpaced those of Japan in 2003. It remains below the % of South Korea (On an average of 32% over the five last years).

The transfer of technology is due to the impact of foreign investments. Since reform began in the late 1970's China has been more open to foreign direct investments than Japan. China harbors four hundred billion US dollars of foreign investments coming from the U.S., Japan, Taiwan and Europe. These investments upgrade the Chinese industry and boost its productivity.

Finally, China has become the world's low-cost manufacturer. It not only produces labor-intensive goods ( Footwear, textiles and toys). It is increasingly a big producer of capital-intensive goods such as cars, machinery, power energy, telecommunications equipments and electronics. It will soon become a big producer of knowledge goods such as computers, softwares and so on.

122-Hong kong

Hong kong has known a very fast growth during the British colonization as a gateway to China. Hong Kong became the Special Administrative Region (SAR) of China on 1 July 1997. In this agreement, China has promised that, under its "one country, two systems" formula, the socialist economic system will not be imposed on Hong Kong for the next 50 years.

The GNI attains 183 $Billion (GNI per capita : 26,810). The next drawing shows the Yearly GDP growth rate in % and the Gross capital formation in % of GDP.

DRAWING 2

Years--------------------- --- 2000--- 2001--- 2002--- 2003---2004

GDP growth rate---------------10%-----0%-----2%-----3%-----8%
Gross capital formation--------28%----26%----23%----23%----22%

Following the handover, Hong Kong suffered a 60 % fall in residential and commercial property prices.This fact and the financial Asian crisis explain the sluggish growth in 2001 and 2002. The economy rebounded in 2004 with a 8% growth rate. However, Hong Kong faces an increased competition from Shanghai and other mainland cities

123-Taiwan

Taiwan (36000 square kilometers, population 22 million) was an undeveloped countries in the sixties. It is today a bright economy with high technology exports. The GNI attains 273 $Billion in 2003 (GNI per capita $12,400). Taiwanese exports represent 130 Billion (quite half the GDP) and imports 112 Billion. As a result, the trade surplus is substantial, and foreign reserves are the world's third largest.

Bad bank loans had caused a depression in 2001 and 2003 but a strong rebound occurred in 2004 (5% growth rate).

124-Conclusion

Thanks to foreign investments and fast transfer of technology, China has realized in twenty years that Japan and South Korea have realized in 45 years. The only bad note (As in other Asian countries) is related to the State banking sector which has many bad loans (About $700 billion!). Under WTO obligations, Foreign banks will be able to enter into China in the form of joint ventures and could improve the sector.

From a business point of view, China is going to allow foreign service-providers in many high technology sectors. It could be an opportunity for small business. Consequently, our country rating guide gives the following ranks:
Hong Kong: ****- and China: ***+

Anyway, recall that a good implementation could take a lot of time and money. What is more there are many uncertainties and risks that we must carefully examine.

13-Projections 2030: Threats and opportunities

Considering the projections 2030, we suppose that just like Hong Kong, Taiwan will be integrated in China under the "one country, two systems" formula. Consequently, we may sum up the GDP: Mainland China (1,677)+ Hong Kong (183) +Taiwan (273)= 2,133 $Billion in 2004.

We have set up two projections: A high projection with a growth rate of 9% and a medium one with a growth rate of 9% from here to 2020, 8% from 2020 to to 2030. The next drawing shows the results ( Population in Million, GDP in Billion, GNI per capita in $).

DRAWING 3

Years--------------------- 2004--------2030-9%/8%----- 2030-9%

Population----------------- 1,315-------- 1,346------------ 1,346
GDP------------------------ 2,133------- 18,300-----------20,000
Per capita------------------ 1,620------- 13,600-----------14,800

We choose the medium variant (18,300 $Billion in 2030). Thanks to its population, China represents a huge market and the economy can enjoy a very high growth rate in the next future. Whatever the hypothesis, China will remain behind the US (About 26,000 Billion with a 3% growth rate). However, we are aware that many risks exist. To evaluate them, we have to use the business matrix: Threats and opportunities.

131-Threats

1-Political Uncertainties:

Of course, China is not a democratic country. In the past, the communist rule caused eighty millions dead (civil wars, famine, cultural revolution and so on). The communists backed the red Khmer genocide in Cambodia. They never apologized these crimes. The Communist party sets governmental policy and hold all the offices. Until today, many labor camps are reported. About human rights in China, go to freedomhouse.org

The main worry is the Lack of transparency. China history shows that many revolutions are not spontaneous and are in fact organized by some members of the power circle: For example, during the period 1860- 1900, China was yet open to foreign investments. This policy was encouraged by the government but the Empress did not agree with that and she encouraged the Boxer revolt (The 100 days of Beijing). In this early wave of globalization, the westerners lost all the money invested in Shanghai or Canton. More recently, Mao Zedong was opposed to the alliance with the Soviet Union. Instead of openly disagree, he favored the cultural revolution with the Red Guards. Recent anti US or anti Japanese demonstrations may obey to the same hidden agenda. This lack of transparency represents a major uncertainty: Riots and revolutions may surge without any prior warnings.

2-Social uncertainties

What is more, the Chinese society is not stable. Let’s us compare with India. Beside its democracy, India is a very stable country that relies on a structured society with traditional classes: Nobody could reasonably expect a revolution or a landslide political movement in this country. Compared to India, what is the real Chinese society: You have the communist nomenclature, some capitalist tycoons, the new rich and a large unstructured population. Wars and revolutions ( Notably the the cultural revolution) have destroyed all the relish of the traditional society. The entire society is floating (See below).

Moreover, there are growing concerns about the consequences of massive inequalities. Firstly, 400 million live in the towns on the coastal area: The modern China. What about the 900 million living in small villages and countryside. Indeed, there is a rush of poor peasants coming to the towns and engaging themselves as laborers. A "floating population" of some 80 million to 130 million people, have left their rural homes in search of work in cities. Secondly, just like in all countries in transition, there are inequalities between the workers of state enterprises and the employees of foreign companies. Millions of workers have been laid off from state-owned enterprises particularly in the Rust Belt provinces (heavy industry). Thirdly, inequalities are increasing between rich and poor's. China has gone from being one of the most equal income distribution in the developing world to one of the worst. Globally, the inequalities may be larger than in India. However, we must take in account that poor people have increased their living over the period thanks for the high growth rate. They do not suffer any more of starvation and famine.

This situation already leads to unrest and civil troubles. Workers and farmers very often demonstrate in street protests. Some people think that China could implode and disintegrate like the former Soviet Union. We do not think so. The Soviet Union was a patchwork of ethnic and nationalities. On the contrary, China is an homogenous country. Along its history, China has known many revolutions, civil wars and chaos but by the end it has preserved its unity.

132-Opportunities

1-Some progress toward democracy.

China has begun the process toward democracy at the local level. The recent decision to admit "capitalists" to membership in the Chinese Communist Party is also an indication. Nevertheless, the process has not moved very far. Chinese leaders suggest that a moderate move is a guarantee of stability. Many western leaders seem to agree with that and favor a "gradual change". Indeed, this argument has been used with the decision to hold the Olympics in Beijing in 2008.

Moreover, China is not any more a totalitarian power. The economic reforms have freed millions of Chinese from party control. In day-to-day, people and notably women seem freer than in Saudi Arabia or Iran. The regime restricts press freedom but you can find the US press. It is said that the government regulates access to interest, but we observe that freeworldacademy is currently visited in China. It is also said that Beijing restricts religious freedom but any traveler can observe that buddhist Protestant and Catholic worship freely. After China took control of Hong Kong, many people feared a communist pressure. Despite these concerns, everyone acknowledge that Hong Kong residents enjoy the same basic rights as they had before.

2-A vibrant Youth

Finally, there is a fact that favors an optimistic diagnosis. Any traveler is stunned by the quality of the Chinese youth: Young people born after 1980 and who have not known the communist period form today a very large cohort ( About 560 million people are before 25). 400 Million are aged between 20 and 39 and constitute the main labor force (Western Europe: 110 million aged between 20 and 39). These young people are well educated, enthusiastic about business entrepreneurship, very eager to work as much as they can. They are clean, polite, smiling, civilized, optimistic. They focus on ethics and values. Although patriot, they show a real openness to the world. They are eager to travel. Most of them speak global english. They really represent the future of China. There is no possible comparison between the Chinese and the German or French youth. The Chinese youth is better prepared to the coming world. In our opinion, it is the most important asset of China.

133-Conclusion

In summary, there are some political risks but the current trend is not so bad. However, in the present social situation, an economic slow down could have dramatic outcomes. It means that the regime is condemned to maintain a very high growth to managing inequalities. China is addicted to hyper growth.

14-What are the consequences for the world

There is today a panic in the western world about chinese exports. The world's textile trading arrangements ended on January 2005 and with the disappearance of quotas, Chinese textiles exports to the main western countries jumped by 80 to 90% . in the first quarter of 2005. As a result, there is a campaign for protectionism. Some officials called on China to appreciate its currency. We have to examine the problems and the issues.

141-The chinese share in world trade.

What is the real importance of China as a global trader in the world competition? To calculate the trade rank you have just to sum up the imports and exports of goods and services. The next drawing shows the world trade evolution in $billion and the main countries share in % (EU means the Euro zone)

DRAWING 4

Years-------------1999--------- 2000----- 2001---- 2002----- 2003

World trade----- 13,918---------15,801--- 15,215--- 15,280---16,596

EU----------------4,340 (31%)--- 4,828---- 4,628----- 4,354---4,479 (27%)
USA --------------2,250 (16%)--- 2,524---- 2,380----- 2,452---2,642 (15.9%)
Japan-------------794 (5.7%)----- 894------ 908------ 899------959 (5.7%)
Other countries--6,132 (44%)---- 7,035---- 6,754------6,895---7,582 (45.6%)

China-------------402 (2.9%)---- 520------ 545------ 680------ 934 (5.6%)

As you can see, China (imports +exports) only represents 5.6% of the world trade. Since 1999, its share has doubled but remains far behind the euro zone (27%). Over the period, the shares of US and Japan are quite constant. Only China and "Other countries" have expanded at the detriment of the Euro zone which lost four points.

The world trade has increased by 19%, "Other countries" by 23% and china by 132%. However, when we take in account the volume we can see that the world has an incremental increase of 2,678 Billion: 1,452 from “Other countries” and only 532 Billion from China. It means that China only took 20% of the world increase. We are far from the apocalyptic descriptions. Nevertheless, with a global trade of 1,154 Billions China has outpaced Japan in 2004 and became the third world trader after US and Germany. In 2005, China is expected to attain 1,300 Billion. It is really an exponential growth.

However, the positive Chinese trade balance with the world remains quite constant (On average: 31 Billion over 7 years) because the increase of imports follows the exports. Just consider the next drawing (In $Billion)

DRAWING 5

Years-------- 1999--- 2000--- 2001--- 2002--- 2003--- 2004--- 2005

Exports------- 216---- 276---- 284---- 359----- 481---- 593---- 682
Imports------- 186---- 244---- 261---- 321----- 453---- 561---- 651

Balance-------- 30----- 32----- 23------38-------28------32----- 31

The trade positive balance is not very high. Let’s us compare with the main Countries: In 2003, Japan had a positive balance of 87 billion and the Euro zone of 139 billion. On the other hand, the US had a negative trade balance of -440 Billion

142-The Chinese trade balances: US-China relations

In fact, the main problem is related to the US-China trade.

The next drawing describes the Chinese trade balances in 2004 with its main partners (In $Billion-The negative trade balances are shown in red).

DRAWING 6

---------------------USA----Japan----- Korea----Taiwan--- Singapore

China exports to ----210----- 73--------- 27--------13----------12
China imports from-- 35------94--------- 62-------- 64--------- 14
China balance-------175----- 21--------- 35--------51---------- 2

--- ---------------- Malaysia----Germany----- Other----------- Total

China exports to ----- 8---------- 23------------ 227------------ 593
China imports from-- 18---------- 30------------ 244------------ 561
China balance------- 10----------- 7------------- 17------------- 32

This table shows that China has a negative trade balance with quite the entire world (143 billions) compensated by a high surplus with the US (175 billion). In 2005, China will continue to run a big trade deficit with Asian trading partners like Japan, Taiwan, South Korea, and oil countries. On the other hand, China is expected to have a surplus with European countries such as Germany. However, these figures show that the main problem is connected to the US-China trade relations. The next drawing shows the Chinese trade with the US (In $Billion).

DRAWING 7

Years---------------- 1995---------2000---------2004

Exports to US----------48.5-------- 107.6-------- 210
Imports from US------- 11.8-------- 16------------35

Balance---------------- 36---------- 91--------- 175

Chinese Exports to the USA double every five years. The deficit with China accounts for 39% of the US deficit in 2004. You can understand why the US are complaining!

143-uncertainties and Solutions

1-Uncertainties:

Some people would like to adjust tariffs on the ground that China does not honor its obligations. In fact, China has fulfilled all its commitments since its accession to WTO in 2001. Right now, its tariffs are lower than those of Mexico or Brazil. By late this year, all no-tariff (For example, quotas for agricultural products) will be abolished. Facing protectionist measures, China will have to reduce its exports to the US and then either to increase its exports to the rest of the world, either to restrict its own imports with a risk of global recession in Asia. Obviously, such an adjustment could bring a tide of protectionism and a world depression just like in the 1930. Moreover, we have to recall that much of Chinese exports are produced by western companies implemented in China.

Another solution is to let the Yuan to appreciate (It is funny to recall that few years ago during the financial Asian crisis, economists prayed china to not devaluate!). The idea is to make Chinese products more expensive, to curb exports and to increase the imports. Unfortunately, this bright idea could be wrong: Firstly, the cost of labor is so low that a moderate rise would not be sufficient. Only a surge in China's currency on the order of 25% could make a difference. Secondly, a drop in exports would hammer the weakest producers and the banking sector. A social crisis could follow. Thirdly, thanks to its positive trade balance, China buys extensively the US treasury bonds. It means that China contributes to the Dollar stability. With a negative trade balance, China will not buy anymore. Then, the dollar will depreciate compared to the Euro and it is quite difficult to expect the consequences.

Moreover, made in China products have prevented a revival of inflation in the U.S. and in Europe. Despite the huge US deficits, the cheap Chinese products have contributed to stabilize the global level of prices. On the other hand, China oil demand has make increase the price of oil and other raw materials.

In short, a strong drop in Chinese exports may have unexpected consequences. In such matters, gradual changes are the only mean to avoid a world disaster.

2-Solutions

Clearly, one side of the problem is related to the US public and trade deficits. The solution should be to limit US expenses. On the other hand, US deficits sustain the world economy. Moreover, the US military spending's (500 $billion) represent the ultimate life insurance of the free world.

In fact, the democratization of China represents the long term solution. Since labor is a merchandise like other goods and services, the bargaining power of the workers is an element of a free economy. Due to the lack of democracy, this bargaining power does not exist in China. As a result, the salaries remain artificially low: The monthly cost of the shop floor worker ($100) is about 5% of the same labor cost in US and Western Europe. In a democratic country, people would demonstrate to rise their salaries. Then, the internal market would grow and both exports and imports could be reduced. In China, this free trade adjustment cannot work any more.

Protectionism or a manipulation of the currency could bring more problems than solutions. The best guess is the democratization of china and the rise of its labor costs.

144-The hidden challenge

Beside the trade balance problem, there is another question. Considering the Chinese and Asian economic evolution, what should we produce in the future? The free trade theory can bring an answer but few people are aware of its long term implications and consequences.

1-Free trade theory revisited

To explain the challenge, we have to say a word about the Ricardo's comparative advantage. Sorry, we have to go to the specifics because the next explanation is once again a world web exclusivity.

According to Ricardo, exchange is beneficial when the costs of goods in country A differ from the relative costs of the same goods in country B. Look at the next drawing: One machine in Europe costs 20 man days of labor and only 6 in China. Likely, one barrel of wine costs 10 man days of labor in Europe and only 2 in China. At first glance, all the costs are lower in China than in Europe and any exchange should be impossible.

DRAWING 8

-----------------------Europe------------ China
--------------------Labor required by units in mandays

One machine---------- 20------------------- 6
One barrel of wine-----10--------------------2

Ratio-------------------- 2------------------- 3

Now, examine how the Ricardo argument is working: If China exports wine to Europe and sells at European prices, China can get a machine for two barrels of wine (20/10=2). In China a machine would cost 3 barrels of wine (6/2=3): China has a comparative advantage in wine. China gets a machine with 6 days at home. In selling 2 barrels of wine (cost 4 days) it gets the same machine in Europe.The cost of the machine becomes 4 days rather than 6.

On the other hand, if Europe exports machines to China at Chinese prices, Europe gets 3 barrels of wine for a machine rather than 2 barrels at home. Europe has a comparative advantage in machine. Europe gets a barrel of wine with 10 days at home. In selling a machine (cost 20 days) it gets 3 barrels. The cost of the barrel becomes 20/3= 6,3 days rather than 10.

The argument relies on the ratio between the costs of machine and wine in each country. If the ratio were the same there would be no benefit from an exchange. The classical theory postulates that the ratio are never the same and that exchange is always possible and brings a benefit. According to this scheme, the theory posits (Notably the Hecksher-Ohlin model-Go to internationalecon.com) that a richer country which have more capital, should export capital intensive goods and import raw materials and labor intensive goods from a developing country. Each time the developing country modernizes and climbs one rank, the developed country has to move up with a more added value products. For example, Europe sells textiles in exchange of raw materials. Then, it sells machinery in exchange of textiles. Then, it sells technology in exchange of machinery and finally it sells planes and financial services in exchange of high technology.

In fact regarding China, this model does not work as expected above. Although China is clearly a developing country (with a low income per capita) Chinese exports are not mainly composed with labor intensive goods (Such as pork, poultry, textiles). Firstly, electrical machinery and power generation equipments represent 240 $billion that is to say about 40% of the Chinese global exports in 2004. Secondly as we have seen above, the % of high technology in manufactured exports is higher in China (27%) than in Germany (16%) or France (19%). Thirdly, in recent years, Chinese manufacturers have rapidly moved up into semiconductors, telecom equipments, and other sophisticated digital devices. By the end, what should we produce?

2-What should we produce?

The Chinese trend does not contradict the theory. The Ricardo Comparative advantage was invented when Europe was the most advanced civilization. Backward countries such as in Africa or in the Middle East were expected to grow steps by steps. Implicitly, western economists thought that these countries would constantly stand behind Europe. It means that we have never expected a reversal move: Look at the next scheme:

DRAWING 9

-----------------------Europe------------ China
-------------------Labor required by units in mandays

One machine------------ 20---------------- 6
One barrel of wine-------- 5---------------- 2

Ratio----------------------4---------------- 3

We have only modified the ratio in Europe. According to this new scheme, the reasoning shows that Europe would be better to specialize in wine and China in machine. It means that the theory could move like that: Firstly, we import from China high technology and we export gross machinery (Such as Germany today). Later, we will export wines, antiques and tourism in exchange of basic apparels and so on. By the end, Europe could be an industrial desert. Of course, the theory posits that our negative trade balance would be compensated by the inflow of dividends and other revenues from investments abroad ( The story implies that we are all becoming capitalist and only earning dividends for a living!).

The comparative advantage is not at stake. It works perfectly. In fact, it relies on a difference in relative knowledge that is the cause of the difference in labor cost. We have seen that the new generation in Asia is better motivated and educated than in Europe ( Better education includes all the components: Not only school knowledge but also character, logical thought and willingness). As a result, the comparative advantage predicts the future of Europe compared to Asia. In Europe: The Jose Bove world. In Asia: The high tech world.

Does it matter? If 1.3 billion Chinese madly addicted to work produce all the basic needs for peanuts, it could be like a God blessing! The problem is the balance of power. As china experienced in 1900, you do not resist to predators with Ming potteries, fine philosophers, and antiques. Likely, we will not resist with dividend vouchers, museums, and the exports of Derrida and Bourdieu masterpieces!

1-CHINA 2-JAPAN 3-KOREA 4-WAR OR PEACE

2-JAPAN

21-Introduction

Japan (378,000 square kilometers, and 127 million inhabitants) remains a specific country just like the United Kingdom in Europe. During the late 19th Japan began to modernize and industrialize. In the early 20th centuries, Japan experienced an imperialist and military policy. After its defeat in World War II, Japan recovered and became the second economic power.

According to the low UN projections (revision 2004), the present population (127 million) is expected to decline to 115 million in 2030. Ethnic japanese represent 99%. People worship Shinto and Buddhism ( 84%).

Despite or because of their former imperialist history, the Japanese ( Like the British) are very attached to their national values. Few people speak global english (even in first class hotels in Tokyo). At the difference of China, the Japanese society is still influenced by hierarchical values. Japanese are friendly but not too much open. With tourism, they have a growing interest for exoticism: French wines and cheeses-Europe as a global museum!

22-Present economic situation

Despite the lack of raw materials and fuels, Japan is the second world economy after the US. For three decades, the economic growth had been spectacular: A 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. In the 1960s, futurologists forecasted that Japan's GDP would overtake USA in 2000. This is not at all the case. Presently the GNI attains 4749 $Billion (GNI per capita: 37,180)

Consider the next drawing ( Yearly GDP growth rate in %, Gross capital formation in % of GDP, exports and imports of goods and services in % of the GDP and the exports and imports in $ Billion ).

DRAWING 10

Years--------------------- 2000----2001----2002----2003----2004

GDP growth rate -----------3%------0%------0%------3%-----3%
Gross capital formation----26%----26%-----24%-----24%----24%

Exports--------------------11%-----10%-----11%-----12%-----?
Imports-------------------- 9%-----10%-----10%-----10%-----?
Exports------------------- 492------454------471------523-----?
Imports--------- --------- 402------454------428------436-----?
Balance---------- ----------90-------0--------43-------87----- ?

These data need some comments:

1-Despite the zero growth period, the per capita income is one of the highest in the world. The unemployment ranks about 4 or 5%. An interesting fact to note is the gross capital formation which is constantly above 24% over the period. It is higher than in the US or Europe (About 20%). Since the growth rate is zero, it means that most of these investments are deprived of economic return. Firstly, one share corresponds to public subsidies to preventing a banking collapse. Secondly, another share is dedicated to social investments such as anti pollution, retired house for aged, and so on.

2-Japan experienced a major slowdown starting in the 1990s with the stock and real estate market crisis. Japanese banks had too much bad loans and stopped to lend. It caused a depression. The government spent one trillion to save the economy, generating a huge public debt (150 % of economic output, ) with poor results. Since 1990 japan has a very low growth. The economy rebounded in 2004 with a 3% growth rate and analysts think that japan is out of the deflation period.

3-People believe that Japan is a large exporter. It is true in absolute term but relatively to its GDP, the Japan trade only represents about 10%. Comparatively, Germany, France and the United kingdom have higher percentages than Japan (about 25 to 36%). On the other hand, Japan exports more high technology than Germany (% of manufactured goods 16% in Germany, 24% in Japan).

23-Prospects for 2030

We cannot expect a high growth rate. We have three hypothesis: The first with a zero growth rate over 26 Years; The second with 1% and the third with 1.5%. Look at the results:

DRAWING 11

Years--------------- 2004---- 2030-0%----2030-1%----2030-1.5%

Population----------- 126------ 115---------- 115------------ 115
GDP---------------- 4,749----- 4,749---------6,151----------- 6,993
Income per capita- 37,180----41,295-------- 53,500--------- 60,800

We favor the 1,5% hypothesis.

24-Japanese lessons

The Japanese economy provides with some useful lessons:

1-The rapid growth of Japan is not only a free trade story. Exponential growth in the past had been based on Government-industry cooperation with a careful planning of expansion directed by great groups and families. The agricultural sector has been subsidized and protected. By the end, this Japanese model with its ties between state officers and public groups is the main cause of the banking collapse (Like in other Asian countries).

2-However the slow down cannot be only attributed to the banking and real estate crash. In fact, it may be assumed that Japan had experienced the passage of a growing economy to a mature economy. An economy cannot grow until the sky and Japanese have already get the maximum income per capita: Any new growth in material performance should have a decreasing utility. However the passage of a growing to a mature economy is a difficult operation like a landing: Banks and companies which expected an indefinite growth are suddenly exposed to a reversal effect. For example, all the banks have bad loans. It does not matter too much as long as you expect a growth of your portfolio. On the contrary, once the portfolio is declining, the % of bad loans relatively increases and can become unbearable. It means that an expected landing must be carefully monitored ( It could be a good lesson for China. In the future, it will experience the same landing with the same possibility of a bank crash!)

3-Japan is the perfect example of a mature economy: Japanese have a growing part of their revenues coming from massive investments in less developed countries such as South Eastern Asia and China. Let’s us suppose that China closes its markets and nationalizes the foreign investments: Japan will encounter dreadful problems. It means that China stability is a vital issue for Japan. We could say that it’s a vital issue too for the entire globalization.

4-We may observe some facts that could constitute a good learning for the European elite. Firstly, with a zero growth you can get a few unemployment. Secondly, Even with a zero growth and thanks to a declining population, you can increase your individual income. What are the causes of this situation? Firstly, there is not any immigration in Japan ( The 1.77 million "foreign residents" are not automatically Japanese citizens at birth. Instead, those seeking citizenship must formally apply and submit to extensive background checks ). Globalization in Japan only means economic globalization and certainly not multiculturalism like in Europe. Japan does not need immigration and does not incline to favor it in the future. Secondly, Japan has anticipated the decline of its working population with huge investments in robotics: The country possess 410,000 robots of the world's 720,000 working. Finally, Japanese will gain many advantages that cannot be measured by the GDP such as high security standards, less pollution, more open space, less crowd and so on.

In the past, Japan was overestimated. Fade have moved toward China and as a result Japan is today underestimated. Just consider that it is the second largest economy in the world and one of the highest per capita income. Whatever the hypothesis of growth rate, the per capita income ranking will remain relatively and absolutely very high in 2030. Japan remains a major economic power, both in Asia and globally. In accordance, our Small investor ranking is: ****-

1-CHINA 2-JAPAN 3-KOREA 4-WAR OR PEACE

3-KOREA

Following World War II, Korea (220,000 square kilometers-71 million inhabitants) was split, with the northern half coming under Soviet domination. During the Korean War (1950-53) North Korea tried to conquer the southern portion. The war killed two million people and ended with a cease fire rather than a peace treaty. Since then, the two Koreas have been on a continuous war footing.

31-South Korea

Since the early 1960s, South Korea has achieved a record of growth. Four decades ago, its GDP per capita was comparable with levels in the poorer countries of Africa and Asia. Today the GNI attains 673 $Billion. Its GNI per capita ( $13,980) equals to the lesser economies of the European Union.

Consider the next drawing: Yearly GDP growth rate in %, Gross capital formation in % of GDP, Exports and imports of good and services in % of the GDP, the % of high technology exports in manufactured exports, exports and imports in $Billion, and the amount of foreign investments received each years in $Billion

DRAWING 12

Years----------------2000---- 2001---- 2002---- 2003----2004

GDP growth rate------8%------4%-------7%-------3%-----5%
Gross capital---------31%-----29%-----29%------29%----29%

Exports--------------41%------38%-----35%------38%------?
Imports -------------38%------36%-----34%------36%------?
High technology-----32%------35%-----30%------31%----32%

Exports--------------188------190------188-------219-------?
Imports--------------174------180------182-------207-------?
Balance----------------14-------10--------5--------12------ ?

Foreign investments---9--------3--------2--------- 3-------8

The economy was based on a system of close government/business ties, including directed credits, import restrictions, sponsorship of specific industries ( Just like in Japan). The Asian financial crisis of 1997-99 stopped the success story. Growth plunged to a negative 6.6% in 1998, then strongly recovered in 1999 and in 2000.

South Korea economy plays a major role in connection with Japan and China. The main fact to note is the % of high technology in manufactured exports. It is the highest in Asian countries.

32-North korea

North Korea is a rogue state and a stalinist country suffering of a global economic and humanitarian disaster. It is quite a mental asylum (Go to www.korea-dpr.com . With the end of cold war, North Korea lost soviet union subsidies. Famine and starvation have killed about 2 million people between 1995 and 1997 (Go to www.freedomhouse.org )

Regarding this country, we have no data except for Population (22 million). GDP could be about 10 Billion US dollars. Its larger share is dedicated to the military built up ( $5 Billion) .

33-Projections to 2030

Regarding 2030, we expect that North Korea will disappear just like the Eastern Germany and that the two koreas will be reunified. It means a population of 70 million in 2003/ 04 (South korea: 48- North korea: 22). This population is expected to grow to 71 in 2030 (45 in South Korea and 26 in North Korea). Our basic GDP hypothesis accounts for 683 $billion ( South korea: 673-North Korea:10) and we have chosen a 6% growth rate until 2030. Consider the results:

DRAWING 13

Years--------------------- 2004---------- 2030-6%

Population----------------- 70--------------- 71
GDP----------------------- 683-------------- 3,107
Income per capita------- 9,750------------ 43,760

Since we have never visited Korea, we cannot provide you with small investor advices.

1-CHINA 2-JAPAN 3-KOREA 4-WAR OR PEACE

4-WAR OR PEACE

Many cartoonist forecast a new cold war opposing China to US. Once again we need a realistic outlook. Firstly, China is not an imperialist country, secondly the Taiwan-China conflict could find a pacific issue. Thirdly, North Korea is the only threat

41-Is China an imperialist country?

411-Border disputes

An imperialist country tends to expand through military conquests to gain market and raw material access. For example, Japan was an imperialist country just like the United Kingdom in the 19th. An imperialist country can also expand through its ideology mixed with military ( Such as the former Soviet Union). Clearly, history does not prove that China is an imperialist country. A so large big continent is too much occupied to preserve its own unity rather than to expand outside. What is more, China cannot expand any more its ideology like in the sixteen: Who could be attracted by a rough capitalism mixed with a dictatorship?

However, China and India have constant disputes regarding their common borders. China is also involved in disputes with Malaysia, Philippines, Taiwan, Vietnam. China has also dispute territories with Japan, North korea and finally Russia and Tajikistan! This situation has led China to adopt an imperialist behavior regarding Tibet. China invaded Tibet and the chinese troops killed 90,000 Tibetans in 1959. The Dalai Lama was forced to flee in India with 80,000 supporters. Visiting Tibet you may observe that the country is quite colonized. The improvement of relations between India and China could ease the situation in the future.( About human rights in Tibet go to www.freedomhouse.org ).

412-The Taiwan case

The dominant political issue continues to be the relationship between Taiwan and China. Recently, China has increased its military spending and warned Taiwan not to pursue independence. Many commentators see China's military modernization as a growing threat to Taiwan. In fact, defense expenditures are lesser than that of many developed nations. Consider the next drawing in $Billion:

DRAWING 14

-------------------World---- USA---- China---- Japan---- UK---- France

Military spending-- 950----- 420------ 51-------- 41------41------ 34

China's armed forces are simply incapable at the present time of invading Taiwan. An invasion would require an operation on the scale of the Allied D-Day landing in Normandy. China has not the necessary amphibious capability or air power to mount such an attack (Go to: www.fas.org and www.asiasociety.org). On the other hand, the European demand (Mainly backed up by France) to lift the arm embargo on China is a dangerous and irresponsible idea.

In short, China is quite completely isolated and surrounded by an unfriendly neighborhood. We believe that China is unlikely to become militarily aggressive, though the status of Taiwan involves the potential for conflict.

42-The north Korean dilemma

The real worry would come from North Korea. It represents a threat for South Korea, and Japan. North Korea is spending as much as 40 percent of its gross domestic product on its military, including its nuclear-weapons program. North Korea's long-range missile development and research into nuclear, chemical, and biological weapons are of major concern to the international community.

US intelligence agents are convinced North Korea is now able to build missiles that can deliver a nuclear weapon. A two-stage Taepo Dong could strike parts of the US west coast and a three-stage version could probably reach all of North America ( However, North Korea has not yet tested its 2 or 3 stage version)

43-Global power balance in North East Asia

Our real confidence relies on the fact that each of the nations composing North East Asia is quite isolated. Despite its huge potential impact on the world economy, this region has none political unity. This situation results primarily of the popular opinions that we have gathered in visiting most of these countries. Look at the following mapping that shows the perception that each population has about its immediate neighbors:

DRAWING 15

---------------------Unfriendly---------- -Neutral----------- Friendly

China----------- Japan, Russia, India------- Europe-------------- US
-------------------United kingdom

Japan------ ----China,South east asia------ Europe-------------- US

South East Asia---- --Japan------------- China,Europe----------- US

Russia---------------China,Japan------------ US----------------Europe

India---------------- China,Japan-------- South east asia -----United Kingdom, ------------------------------------------------ Europe,US---------- Russia

With such a patchwork, you can hardly expect alliances or political unity. Paradoxically, the US is the only nation which could play an arbitrary role in the region.

In our opinion and with some reservations about North Korea, the region should be shielded of any major conflict until 2030.

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1-CHINA 2-JAPAN 3-KOREA 4-WAR OR PEACE

Best links-Click below

www.cia.gov: Go to the "Worldfactbook"

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