Chinese inventors created the first paper and printing presses, gunpowder and the compass. Each invention found its way to Europe along the trade routes that paved the way for many of the Western world's historic evolutions. As the rest of the world now prepares to follow China's lead in lifting lockdown measures with the slowing of COVID-19 infections, differences in national responses to the pandemic as well as different economic and geopolitical visions are being tested. Last week we addressed some of the longer-term economic trends that we expect to play out globally. In this article we look more closely at the possible consequences. Today's slowing global economies increasingly rely on growth in Asia. Gross Domestic Product growth is forecast to shrink -6.1% this year in developed markets, according to the International Monetary Fund, and by -1% in emerging economies. Overall, the global economy will average a 3% contraction, the IMF said last week. China's economy may be struggling to get back on track, but has the advantage of starting from a higher growth rate than the US and Europe. The IMF expects China to contract 3% this year, and expand by 9.2% in 2021, bringing it close to its long-term average. The country's purchasing manager's index (PMI) already pointed to an expansion for March, from a record low in February. Simultaneously, the Chinese economy is changing character as it continues its transition from a manufacturing, export-led economy to a domestic, demand-driven importer. Growing demographics As Asia's economies expand, demographics are likely to become the main catalyst for changing consumer trends that may dictate a shifting balance of demand and development. Consumer spending in the Asia Pacific region will outstrip North America and Europe by 2025 and reach $35 trillion by 2030, according to the Brookings Institution. From cloud computing to health care, automation in manufacturing and logistics or artificial intelligence, Asia's intense urbanisation and consumer demands are likely to drive innovation. China's scale will also mean that it leads those changes as it works to keep pace with its domestic infrastructure needs and supply those of the region. To take one example of the scale of urbanization, China now has 39 cities with populations of more than 3 million people, counting city centers. In the US, there are only two city centers of that size, New York and Los Angeles, and in Western Europe just three; London, Berlin and Madrid (and excludes the Paris region, the EU's largest urban area, since the city itself totals 2.2 million). China's flourishing middle class, a population with an annual income higher than $10,000 per year, is forecast to reach 850 million people and make up two-thirds of the country's population within ten years, according to World Bank data. That is bigger than the total population of Europe and North America combined. At the turn of this century, China's middle class numbered less than one million people, or no more than 0.1% of the population. A new Silk Road China's political class recognizes the need to cut overcapacity, lower inequality and strengthen social safety nets as well as pursue its long-term economic development. Such thinking has informed the ‘One Belt, One Road' initiative that will connect around half of the globe's population and reinforce the infrastructure behind one-fifth of the world's GDP. This will inevitably impact the balance of global economic and political power. The One Belt, One Road project is often described as a new Silk Road. For at least one-and-a-half millennia, trade, technologies and plagues travelled the Silk Routes from China through central Asia, the Middle East and Europe. From ancient times through to the modern era, spices and textiles as well as invasions of Greeks, Huns, Arabs and Mongols flowed along its overland and maritime routes. A focus on China of course misses the enormous disparities between Asia's economies. Poorer economies across the region from Kazakhstan, to Bangladesh, India or Thailand are struggling to impose lockdowns because their populations cannot afford to be unemployed. Some governments are resorting to food handouts. A United Nations survey released this month estimated that the Asia Pacific region may see Gross Domestic Product decline by 0.8%, or $172 billion in exports alone, in the wake of COVID-19. In addition, investors are fleeing emerging markets, withdrawing about $90 billion in recent weeks, further undermining the region's economies as many Least Developed Countries already face a debt crisis. Logistics and geopolitics Ironically, the experience of US/China trade tensions through 2018/19 may have helped to prepare Asia's commerce for the trials of the pandemic. It forced exporters to identify new supply routes and alternative sources, testing the resilience of supply chains and acting as a catalyst for many trends. Exporters have learned to bypass existing routes and channel shipments through third countries and source alternative suppliers. China's exports to other ASEAN members increased as much as one-sixth last year, as its shipments to the US slowed by an estimated 12.5%. In 2017, the Chinese Communist Party's congress invited other economies to copy the country's economic policies. China's ‘One Belt One Road' multi-lateral trade and investment initiative illustrates this ambition. When China joined the World Trade Organisation in 2001, the assumption was that the country would begin to follow the West's growth models. Clearly, that has not happened. Instead, this century may well see forces pulling in the opposite direction. The post-World War II period is often labeled the American century; a period of global US power aspiring to universal values. In November, US voters will decide whether to back a presidency that has spent the last four years putting ‘America First' and undermining multilateral solutions. China is using its response to the pandemic to project ‘soft power.' But the obstacles to any shift in the power balance are numerous, starting with a political system that clearly bungled its initial response to the crisis by first trying to contain news of the outbreak, rather than the virus itself. Still, as China tests its economy's ability to bounce back, and its vision to project commercial power through a modern Silk Road network, it is tempting to wonder whether the axis of economic and geopolitical power is shifting for the twenty-first century towards China. — The writer is chief investment officer, Lombard Odier Private Bank
