China – now the world’s most important trading nation

Recent data have shown that in 2012, China overtook the USA to become the world’s most important trading nation. On the basis of aggregating total imports and total exports, China’s total international trade amounted to $3.87 trillion, and that of the US was $3.82 trillion. Given that the Chinese economy is only one third the size of the US economy, China has become the most significant trading nation on the planet in terms of both absolute trade and its importance to their economy.

The turn of the twentieth century was when this title last changed hands, when it moved from the UK to the US, and in the following decades the more populous and faster-growing economy (then the US) meant that it became a more and more powerful force in the world economy, culminating in its currency becoming the world’s primary reserve currency.  This status accords a huge advantage to the holder, in that there is an underlying demand from all other nations to hold the reserve currency in order to maintain the ability to trade.  This has been clearly visible for the US, as the dollar makes up the largest proportion of foreign exchange reserves, and most trade in commodities is conducted in dollars.

The dollar is not going to lose its reserve currency status overnight – the yuan is not yet freely convertible and today barely features in the international financial markets. However China’s stated ambition is that it will become the world’s primary reserve currency and take on that role from the dollar.  Since 2005, however, China has slowly but steadily been internationalising its financial markets by (i) allowing more foreign exchange trading, (ii) the issuance of yuan-denominated bonds and (iii) giving more access to foreigners wanting to invest in China’s stock markets.

Just as London maintained its presence as an important centre for financial markets as the US economy and New York overtook it in the twentieth century, though losing market share, so in the this century will Asia and China become the key centre for financial markets.  Success in the investment world in the next few decades will require substantial exposure to Asian markets and an increasing understanding of the impact of Asian economic policies and decisions on our own economy and markets.  We maintain a heavy commitment to Asian equities in portfolios.

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