The Emergence of China

This week, Germany released economic data that confirmed what many thought was inevitable, but which no one knew exactly when it would happen. China is now the world's largest exporter, surpassing Germany with $1.2 trillion for 2009. Although it was lower than the $1.4 trillion exported in 2008, Germany's export decline was dramatic enough to catapult China into the top spot.

It's no wonder China is throwing their weight around and elbowing their way onto the scene once reserved for the world's powerhouses. Their recent spats with the U.S. are not uncommon, but China’s economic emergence seems to have given them more confidence in their dealings with the U.S. and others.

Part of the reason for the growth in exports is the intentional manipulation of the Chinese renminbi in order to make Chinese goods cheaper abroad. But doing so for a prolonged period of time has implications for inflation, foreign reserves, and not to mention political pressures from their trading partners. Their largest trading partner, the U.S., has been calling for a free-floating currency for quite awhile. And although China has allowed their currency to appreciate somewhat, the consensus, outside of China, is that it is extremely undervalued.

China will continue to grow and their exports will continue to expand. But surprisingly, their domestic consumption has increased and muted the decline in worldwide demand. While the world was in a recession, China kept growing. And although currency appreciation will make their goods more expensive eventually, global demand will reach a point where it is strong enough to drive continued growth in their exports.

What is the point of all this? The Hang Seng Index was one of the best performing indexes over the last 5 years, and if one can withstand the volatility, it may very well be one of the best performing indexes over the next 3 to 5 years, particularly in U.S. dollar terms.