Despite the increasing worries about a possible asset bubble bursting in China, the immediate prospects in this largest Asian economy continue to be bright. The domestic market is increasingly replacing exports as the engine of growth. Any danger of an asset bubble may still be five to ten years down the road.

It is possible that before 2010 is over, the U.S. and China will be the two largest economies in the world. In 2008, the U.S. had GDP of $14.4 trillion, Japan had $4.9 trillion while China posted $4.3 trillion. With the U.S. and Japan succumbing to the Great Recession of the last two years while China hardly experienced a blip, it is a certainty that China will surpass Japan in GDP in the course of this year. With the U.S. facing the possibility of a double-dip recession in the next year or so and Japan probably seeing a repetition of its lost decade in the 1990s, China will clearly outshine the G-2 of the last century. Given the widespread expectation that U.S. demand will stay subdued for a while, especially as regards consumer spending, the U.S. can hardly be expected to be part of the dynamic duo. A more likely partner of China in stimulating the world economy is its giant neighbor, India. In an IMF report that appeared last February 4, 2010, India's economy was cited as one of the first in the world to recover after the global crisis. To quote from the IMF report, "Prompt fiscal and monetary easing, combined with the fiscal stimulus already in the pipeline and the return of risk appetite in financial markets, have brought growth close to pre-crisis levels. Leading indicators suggest the output gap will continue to close. Capital inflows are back on the rise, and financial markets have regained most of the lost ground."

India is the only major economy in the world that has joined China in recovering lost ground suffered during the Great Recession within a year. China was back to its pre-crisis growth of 9 to 10 percent as early as the fourth quarter of 2009. Similarly, GDP growth in India is projected to rise from 6.75 percent in 2009 to 8 percent in 2010, which was its pre-crisis average growth rate. Its economy may temporarily face the challenge of the ongoing drought, but IMF estimates that nonagricultural GDP growth is expected to gather momentum. Private consumption will be boosted by brighter employment prospects and less uncertainty. Investment is expected to benefit from robust corporate profits, rising business confidence, and favorable financing conditions. As advanced economies like the U.S. and Japan grow below trend, India is expected to expand at 7 to 8 percent in the medium term.

The two giant economies in Asia can play a major role in rebalancing the global economy. As the largest economy in the world, the U.S. suffers from unsustainable fiscal and current accounts deficits, other large markets in the world must replace the American consumers as the global economic engine. As Master Card chief economist Yuwa Hedrick-Wong wrote in Consumption Trends in the US and China (1Q2010), "the global imbalance of over-consumption in the U.S. and under-consumption in much of Asia, in particular China, from which so many macro economic ills are seen to have emanated, is also deemed a major contributing factor to the global financial crisis. The imbalance undoubtedly exists. In early 2008, private household consumption in the U.S. accounted for about 72 percent of GDP, and, in sharp contrast, it was 37 percent in China. The shock of the global financial crisis pushed American households to start saving more and consuming less. Household savings rose from negative in 2008 to around 5 percent by mid-2009 in the U.S. The Chinese government, on the other hand, responded to the global crisis by actively promoting higher household consumption through a combination of subsidies on auto and consumer durable purchases, and significant increases in spending on public health, education, and retirement pensions."

Dr. Hedrick-Wong corrects the misimpression that the high savings rate of China (about 50 percent of GDP) is primarily due to Chinese households. He says that the real culprit for China's high savings is the corporate sector. On average, the corporate sector accounted for up to 60 percent of China's aggregate savings in recent years. Although the 20 percent of disposable income Chinese households save is above-average for developing economies, there are solid reasons for postponing consumption. They save for precautionary reasons such as making provision for future health care and education needs for their children. The one-child policy increases the motivation to save: parents prefer better quality, but expensive, private health care should their only child get sick. And they are prepared to pay for private tuition and even a private school education to ensure that their single child is successful in the future. This above-average propensity to save is also explained by the very slow growth in wages.

The Chinese Government has realized the potential of increased consumption compensating for sluggish exports. A fiscal stimulus package has jump-started the increase in spending on social welfare, especially in health, education and pensions. All these address the main reasons Chinese households have been reluctant to spend in the past. There will surely be more social welfare spending by the Government in the future as well as a comprehensive tax reform that will require large state-owned enterprises to pay dividends to their shareholders, the government, and royalties paid for resource extraction. The additional revenue accruing to the government will be used to fund the higher social welfare spending. It is also expected that income tax will be lowered for the households.

China obviously cannot drag the rest of the world into a recovery all by its own. As a Time Magazine cover story (August 10, 2009) aptly remarked, "China can help. But it remains a relatively poor country, with an annual per capita income of $6,000, compared with $39,000 in the U.S. and $33,400 in the E.U. To be solidly middle class in China's big cities is to have an income of about $12,000. Brisk though auto sales may be, most Chinese still can't afford a Volkswagen or a Buick, let alone a BMW...Last year, says Peking University's Pettis, China's consumption was about the equivalent of France's. No one is calling on France to save the world." True, no one is calling on France to save the world. If we put the consumer market powers of China and India, however, they can act as catalysts to get the emerging markets to equip their middle classes with sufficient purchasing power to at least reduce the dampening effects of the medium-term stagnation of the U.S., Japan and some of the members of the European Union suffering from very high fiscal and current accounts deficits (such as Portugal, Italy, Greece and Spain). The two populous Asian countries can be a G-2 for the BRIC and the Next 11 countries made popular by Jim O'Neill of Goldman Sachs. Especially together with the ASEAN that has a total population of more than 600 million consumers, this new version of G-2 can rebalance the global economy within the next decade. For comments, my email address is bvillegas@uap.edu.ph.