A New New World Order

12/13/2007 12:00 am EST

Focus: GLOBAL

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says there’s a fundamental realignment of global economic power, but economic weakness in the US can still hurt everyone else.

This year will probably be remembered as a turning point in the global economic balance of power. With the decline of the US dollar and continuing housing/credit market woes, much of the rest of the world grew faster than the US in 2007. For the first time since the outbreak of World War I nearly 100 years ago, all of the European stock markets combined surpassed the US in total market capitalization.

For much of the second half of the 20th century, the US accounted for more than 40%—sometimes approaching 50%—of the world's total economic production. In other words, the US economy was almost as big as the rest of the world combined. In the past five years, however, a 38% decline in the US dollar and the superior growth of newly-emerging economies is changing the global distribution of economic power.

Eastern and central Europe, led by Russia, is growing much faster than Western Europe. Run by Vladimir Putin and several dozen multi-billionaire oligarchs, the Russian economy is riding high on a global energy and commodities boom. Thanks to higher global commodity prices, Russia's GDP has already hit the $1 trillion mark.

In Asia, China may have just surpassed Germany to become the third-largest economic power in the world after the US and Japan—but the official news probably won't be released for a few months. In terms of stock market capitalization, China (the Mainland and Hong Kong) has already surpassed Japan to become number-two in the world. China's GDP growth this year is more than 11%, reaching $3.27 trillion.

At its current rate of growth, China will overtake Japan by 2011. Even if there is a recession in the US next year, China's GDP growth in 2008 is likely to remain above 8%. Two commodity powerhouses, Brazil and Canada, also have $1 trillion economies for the first time ever. And India's GDP is looking to hit $1 trillion by 2010.

China and its neighbors will probably evolve into a new Asian economic bloc. It's likely that this fast-growing region will become the new global epicenter of wealth creation in the 21st century. There will be many investment opportunities throughout the region that are shielded from the economic problems of the US

I must say that although I believe that we're invested in the right companies at the right time, I'm still cautious for the long term. Unless the US financial sector improves in the next six months, it will be tough for the US market to regain upward momentum. If US stocks weaken, it will weigh on stock markets throughout the rest of the world. Right now I want long-term investors to continue holding 25% of their portfolios in cash while more aggressive investors can be fully invested until the end of the year.

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