December 15, 2016    7 minute read

Easternisation: The Shift Of Power From West To East

An Almighty Asian Force    December 15, 2016    7 minute read

Easternisation: The Shift Of Power From West To East

 

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Most power is still found in the Western world. Over the last few centuries, Western countries proved themselves to be top-notch in terms of economic development, technology, education, and political power. However, this might soon to come to an end, especially economic-wise. Over the past decades, Asia has become a booming continent. Gideon Rachman (the Chief Foreign Affairs Commentator at The Financial Times) wrote an entire book, named Easternisation (2016), about the major transition of power from West to East.

What Is Going On?

Asia, and particularly China, is on the rise but does not have the intention to harm the outside world. The currently established power (the US) is challenged by China. According to Rachman, this is referred to as ‘the Thucydides trap’, predicting that the US will start a trade war because they are afraid of China. The US should have found a way to co-exist with China. However, they have been busy in the Middle East.

Historically, Western countries have always determined developments and decision-making on the other continents. Just look at the colonial times, when Europe almost ruled the majority of the world’s surface. This way of ruling slightly changed as the US gained more power, especially after the Second World War. However, this is all coming to an end. The main reason for this is economic development, which is clearly visible in Asia, especially over the last decades. Asia’s wealth has been rapidly increasing in the last few years, and China has made great improvements in this area as well. This change in wealth led to pressure on Japan and the US. It seems that the established power (the US) is focusing on the wrong area.

Economically speaking, the interference of the US in the Middle East possibly resulted in some crucial consequences. This meddling behaviour led to war, terrorism, and the rise of the immigrant stream to Europe. Consequently, this immigrant stream negatively impacted the entire European economy. Additionally, the economic crisis, Greece, Brexit, a potential Frexit, and the situation in Ukraine are considered to be other factors that had a huge impact on the overall economy in Europe. This clearly shows the highly unstable situation in the Western world, and a country like China can make use of this. Europe and the US are relatively lacking in terms of political and economic power. It is expected that China will make a huge impact because the country counts over a billion of people.

China In More Detail

The Chinese economy has been growing already at a high rate since the 1980s. A historical moment occurred when China became the largest economy in 2014 in terms of purchasing power. This was already the first sign of power shifting. Moreover, three out of the four world’s largest economies are now in Asia. More specifically, this is also true at a city level. According to research conducted by Oxford Economics, Asian cities will be among the top performers in the world in terms of GDP contributions by 2030.

The_Cities_Contributing_Most_To_Global_GDP_By_2030_GDP_In_2030_(In_£bn)_TMMChart.png

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It is expected that this economic development will continue at a fast pace in the near and long term future. The main reason for this growth is the division of the world’s population. In about ten years, it is expected that the majority of people will live in Asia. Furthermore, this majority of people will be more wealthy and can have an even more positive impact on the global economy.

Many people have pointed out that the growth rate in China is plummeting, but it is still quite steady at approximately 7%. Asia, and particularly China, will defeat North America and Europe in terms of overall power relative to GDP and population. The process of Easternisation is clearly on its way.

The Chinese NASDAQ

Recent accessibility changes are also clearly seen in the way foreign investors can invest in China and its surroundings. Last week, a stock link was created between Hong Kong and Shenzhen, providing easier access to the Chinese stock market. It is expected that this access channel will bring in $29bn in inflows. At this moment, more international investors, who only count for 2% of the overall market capitalisation of $3.4trn, will enter this enormously large untapped market. This will change the proportional numbers related to national and foreign investors because no clear regulatory constraints are put in place. In the end, this stock link is not a capital flight approach, and cash can only be taken in the currency that was invested in the beginning. In the end, this new opportunity is an attractive one for investors and another sign that China is really on its way in terms of economic power.

$3.4trn is the total Chinese market capitalisation

However, there was also some downside news, recently. Some exchange controls were put in place that had an impact on foreign corporations. Dividend payments abroad could not be made. At this moment, China wants to control the capital outflows.

China wants to grow its foreign investment reserve, and this is one of the consequences since the reserve has been drying up in the recent period. This is clearly linked to the renminbi currency that went down by 6% against the dollar since the start of this year. At the moment, dividends of foreign companies are stuck in the Democratic People’s Republic until further notice. How far is China going and what will the reaction be of Europe and the US?

The US is already reacting. The dollar just hit its strongest level in about 13 years since President-Elect Donald J. Trump is on board. This even strengthens the capital outflow described earlier and puts enormous pressure on the Chinese economy. Moreover, investors are even offloading assets that were valued in renminbi, mainly because the currency looked promising, but hit its’ eight-year low versus the dollar, recently. Is implementing exchange controls China’s answer to the outcome of the US election? And is China on its way to internationalising the country’s currency? It is quite obvious that the high growth potential country is having some issues on the rising path. How dependent is China on its foreign partners?

Japan, The ‘Western Ally’ Of The US

Japan is doing a good job in its attempt to receive protection from its Western friend, the US. Recent announcements show that $50bn will be invested in US tech start-up firms by the Japanese telecom and internet giant SoftBank. Consequently, it is expected that this will create 50,000 more jobs in the US.

From the short video that was shortly introduced after the news came out, it was clear that Trump made a good first impression in Japan. After all, the move of this Japanese company can be logically connected to the fact that many Asian countries are afraid of the rising power of China and want to make sure security is put in place.

Conclusion

In conclusion, it will be the question of which direction the future period will go. China is a rising economic power that has already had a huge impact on the global economy. Moreover, it is expected that this development will continue in the future, so the Western world has to make sure the right response is given. However, China is not there yet, and there will be factors that can slow down the process. One of those factors is put in place by China itself. The restriction of dividend payments repatriations and other capital shifting clearly shows China included some restrictions related to the attraction of foreign investments, which it needs to grow further as an overall economy.

However, the new Hong Kong-Shenzhen stock link partially offsets this restriction. In the end, China remains dependent on the outside world and has to analyse it to make the best use of its relations with other crucial countries. Nevertheless, corruption is still a factor that has an impact as well on the rising power. On the contrary, the Western world has to make sure it keeps the worldwide balance between East and West regarding economic power. Major changes are visible at the moment, and the shift is on its way, so it would be a good decision to start learning Chinese.

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