When Giants Fall

Playing Catch Up

While we were out fighting ill-conceived wars and expanding our empire to our financial detriment, other nations have been preparing for the real challenges that lie ahead.

They've been venturing out and making deals with other nations to ensure they have what they need to survive in a resource-constrained world.

Naturally, that means they have targeted those regions where resources like oil and gas, water, arable land, strategic minerals, and food are relatively plentiful, most notably Latin America.

Unfortunately, as with so many other things our leadership has failed to grasp or has wrongly taken for granted, our relationship with what has long been referred to as America's "backyard" has been neglected and allowed to deteriorate.

Now that we've cottoned on to the need to secure reliable long-term supplies of various essentials, we find that others have jumped in ahead of us.

In "China Grabs Latin America, Well Ahead of Obama's Outreach," the Christian Science Monitor reports on how the world's leading superpower is scrambling to catch up.

In the past year, China has secured some $65 billion in regional deals. President Obama's current visit to Latin America is seen as a counteracting move.

President Obama's current visit to Latin America is widely seen as a move to counteract the rising influence of China, which is in the midst of an unprecedented energy grab in the oil- and mineral-rich region.

From oil to refineries, China is capturing and integrating Latin America as much as it can, securing at least $65 billion in deals throughout the region since 2010. The deals are expected to eventually translate into at least a million barrels of crude oil and refined products per day and growing markets on both sides of the continent.

The grab is not only unprecedented but also a significant game-changer in China’s rise as a world power, especially because the US plans to increasingly meet its own energy demand with Latin American oil, setting the stage for a future competition between both countries.

“Latin America is very important for China. I think that it’s as important as Africa,” which in 2009 supplied roughly 30 percent of China’s oil imports, says Keun-Wook Paik, an expert in the Chinese overseas energy expansion at the London-based think tank Chatham House. Latin America supplied about 2.5 percent of China's oil imports in 2009.

Think you know South America? Take our geography quiz.

Brazil’s cool reception to Mr. Obama this past weekend contrasts with China’s quiet but effective cash diplomacy in the region, home to the world’s second-biggest reserves after the Middle East. The Chinese yuan is contesting US hegemony by funding stadiums and dams and investing billions in strategic sectors.

Short-Changed

One theme I discuss in When Giants Fall is the geographical mismatch between supply and demand for many essentials, including energy, food and water.

Simply put, the biggest consumers aren't necessarily the biggest producers.

Knowing this, it's not hard to see why Africa, the "source of at least one-third of the world’s commodities," has attracted the interest of nations like China, where domestic consumption of various resources is outstripping what can be produced locally.

Unfortunately, that doesn't necessarily mean the people living there are reaping great rewards, as The Christian Science Monitor reports in "Hunger and Food Security: Is Africa Selling the Farm?"

Foreign investors see Africa as a breadbasket. Done well, investment could help with African hunger but create food security for the rest of the world.

In March 2009, civilian protesters led by a baby-faced former disc jockey swarmed through the streets of this hilly capital city. They were calling for the ouster of then-President Marc Ravalomanana for what they saw as literally giving away the farm, selling out his impoverished nation.

The anger was about food. Mr. Ravalomanana reportedly had leased 3.2 million acres – nearly half the island nation's arable land – to a South Korean conglomerate, Daewoo, for 99 years. In theory, it should have been a win-win deal: Daewoo would pay Madagascar $6 billion to grow corn and oil palm, helping South Korea meet both its food-security and bio-fuels needs, while providing Madagascar with revenues and desperately needed jobs.

But the protests, ultimately backed by the military, showed that the Madagascan people – 70 percent of whom live in rural areas and nearly 50 percent of whom suffer chronic malnutrition – saw the deal as a "land grab" and a threat to their country's survival. Ravalomanana fled the country within days, and a military-backed junta led by the young DJ, Andry Rajoelina, took control. The Daewoo deal was promptly scuttled.

"There was no process," says Hajo Andrianainarivelo, Madagascar's new minister for land management. "The head government official of the region just received an order from the president of the country to help the Korean people to find the most fertile land. That was it. You can't do that in Madagascar."

Perhaps not. But the attraction of Africa's last great resource – its fertile land – is drawing dozens of foreign corporations and even national governments to the African mainland, developing the same kind of agricultural plots contemplated by Daewoo in Madagascar.

Africa is drawing dozens of corporate giants like Daewoo and even governments of such nations as Saudi Arabia, the United Arab Emirates, Brazil, Japan, and even India (which is food self-sufficient) to grow the food and biofuel crops they need back home. The coup in Madagascar and food riots in Mozambique last August – which followed news of a similar food and biofuels deal with the European Union and Brazil – are a warning sign of the volatility of the global balance of wealth and poverty that foreign investors and African leaders face.

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End Is Nigh for EU

At what point is an economic union no longer viable? When one out of 27 members gets into serious financial trouble? Or two? Maybe three? How about if six of them -- over 20 percent -- are at risk? Seems like that would make it almost impossible for the arrangement to survive. If you buy that -- and I do -- then the perspectives featured in the following Business Insider report, "Citi: Ireland, Greece And Portugal Are Insolvent, Spain Will Be Soon, Italy And Belgium Are Threatened," suggest the end is nigh as far as the European Union is concerned.

His Sovereign Debt Crisis Update names six countries in or on the brink of insolvency (via FT Alphaville).

Greece: "Greece is de facto insolvent, in our view, all the more so after the recent debt and deficit revisions. As long as Greece remains sufficiently compliant with the conditionality of its EU/IMF program, sovereign debt restructuring is likely to be postponed at least until mid-2013, when its EU/IMF programme expires. At that point, it likely will be transferred to the EFSF or its successor. Whether its debt will be restructured at that stage, including haircuts, will depend on factors beyond the sustainability of its debt."

Ireland: "Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.

Portugal: "After an Irish agreement with the EU/IMF, the market’s attention is likely to turn to Portugal’s sovereign, which at current levels of interest rates and growth rates, is less dramatically, but quietly, insolvent, in our view. We consider it likely that it will need to access the EFSF soon."

Spain: "For now, the markets have put Spain in Italy’s sovereign risk class when, in our view, it should be closer to Portugal and Ireland once its banking sector problems are recognised. We argued before that the EFSF should be much larger (€2trn). Should Spain need assistance, it will stretch the resources of the EFSF, perhaps beyond its current limits. There may be some room to expand the size of the EFSF. But, in our view, once Spain needs assistance, the support of the ECB will be critical (by purchasing Spanish sovereign debt through its Securities Markets Program — SMP — and funding Spanish banks using Spanish sovereign debt or sovereign-guaranteed financial instruments as collateral or by making loans to or purchasing the debt of the EFSF, legally a limited liability company that could even be made an eligible counterparty of the Eurosystem for this purpose). In the longer term, there may be a need for large-scale restructuring of the debt of the Spanish banking sector and possibly the sovereign."

Italy and Belgium: "At longer horizons, high debt levels and political instability in Italy and Belgium may yet give rise to fundamentally warranted sovereign debt crises, while self-justifying crises are possible even in the near term, despite roughly balanced structural primary budgets."

Thinking About What Might Go Wrong

Unlike the headless chickens running loose on Wall Street, some business and finance executives are thinking about what might possibly go wrong and engaging in some contingency planning.

In "Global Survey Shows Risk, Opportunity in Supply Chain," BizTimes.com details the results of a poll that reveals manufacturing executives are focusing on how their firms could be affected if a critical aspect of their business is disrupted in some way.

While the manufacturing sector has seen a significant rebound from the global recession, many within the sector are reluctant to make large investments because of risks, said Jeff Dobbs, global and U.S. head of diversified industrials with KPMG.

While there is no clear risk-mitigating strategy that all manufacturers have adopted, many are now looking at their suppliers differently, Dobbs said.

“One of the big things that came out of the survey was that we’ve got to operate differently with our suppliers, we’ve got to be a lot more collaborative,” he said. “We can’t beat the daylight out of them anymore. We’ve got to count on them for various aspects of the manufacturing cycle from product innovation to supply chain agility.”

Instead of just worrying about cost, quality reliability within the supply chain, many manufacturers have started thinking about global risks like weather, labor relations and international conflict.

“It’s Icelandic volcanoes, longshoremen striking, patent infringement, regulatory risks, tax risks and free trade policies,” Dobbs said. “There are a lot more risks to a supply chain than we’ve historically focused on. And while there weren’t any real ‘Ah-has’ in terms of what people are focused on, they’re saying that risk is on the top of the radar screen."

Makes sense, given the growing list of potential threats, including the increasing social unrest and cross-border conflict, that a deglobalizing, post-American era world is being confronted with (which I've highlighted here and in my last book).

I wonder how long it will take for all that "smart money" on Wall Street to catch on?

More Challenging With Each Passing Day

In When Giants Fall, I argued that the end of the long-running global boom and the blow-back from decades of policies that benefited the "haves" at the expense of the "have-nots" would leave U.S. businesses, especially larger multinationals, with an operating environment that grows more challenging with each passing day:

The kinds of concerns that were seen even before globalization took hold will...come into play. After years of ever-growing profits, easing regulations, and a yawning gap between the incomes of workers and those at the top, political and social pressures will force the pendulum back the other way. The result will be increasing taxes on businesses and their overseers, restrictive legislation and political interference, tougher rules on governance and executive compensation, and pressure for payoffs and handouts. Businesses may be offered incentives to expand domestic hiring; those that try to stick with their offshoring ways will almost certainly be penalized. Firms will also face intense grassroots pressure to boost local hiring and rescue communities from the yoke of hard times.

With that in mind, I expect we will see a lot more efforts like this (a great many of which will ultimately be successful):

"Obama: End Tax Breaks to Stop Overseas Hiring" (Associated Press)

End tax breaks that reward some U.S. companies with overseas subsidiaries and encourage those businesses to create jobs in other countries, President Barack Obama is telling Congress.

Yet it's an idea that has raised concerns even among some lawmakers in the president's own party.

At issue is a bill, now stalled in the Senate, that would do away with some tax credits and deferrals for U.S. companies for operations abroad.

"There is no reason why our tax code should actively reward them for creating jobs overseas," Obama said in his weekly radio and Internet address Saturday. "Instead, we should be using our tax dollars to reward companies that create jobs and businesses within our borders."

Though Obama singled out Republican opposition, the bill also failed to get support from some Democrats, including the chairman of the Senate Finance Committee, Sen. Max Baucus, D-Mont. He has expressed concern that the change would put the U.S. at a competitive disadvantage.

The ending of the tax provisions has run into opposition from business groups, including the National Association of Manufacturers.

Obama said that while companies that conduct business internationally do make an important contribution to the U.S. economy, it doesn't make sense to grant them tax breaks when companies at home are struggling to rebound from the economic crisis. 

Yet Another Non-Surprise

No surprise here:

"53% in US Say Free Trade Hurts Nation: NBC/WSJ Poll" (CNBC)

In addition to the fallout for congressional Democrats, the economic and political turbulence of 2010 has also damaged public support for free trade.

A new NBC News/Wall Street Journal poll shows that 69 percent of Americans believe free trade agreements with other countries have cost jobs in the United States, while just 18 percent believe they have created jobs. A 53 percent majority—up from 46 percent three years ago and 30 percent in 1999—believes that trade agreements have hurt the nation overall.

Moreover, that rising skepticism extends across the political spectrum—a sign that continued trade expansion may be no easier for Republican leaders to promote if they regain control of Congress than it has been for Democrats.

While 65 percent of union members say free trade has hurt the U.S., so do 61 percent of Tea Party sympathizers. Democratic pollster Peter Hart and his Republican counterpart Bill McInturff, who conduct the NBC/WSJ poll, say the greatest shift against free trade has come among relatively affluent Americans, or those earning more than $75,000 a year.

That sentiment represents an obstacle for leaders of American business—who favor trade expansion—and for President Obama. His administration has made export expansion a key element of his economic strategy and is pushing, albeit belatedly, to complete a new trade deal with South Korea later this year.

With economic conditions deteriorating, populism gaining steam, and election season upon us, polls like this will almost certainly embolden Congress to press forward with efforts to enact legislation that some might describe as Smoot-Hawley 2.0.

Headed for Tit-for-Tat

Although there are many reasons to believe that the current downturn won't be a replay of what took place nearly eighty years ago, some aspects are sure to be repeated. This includes ongoing efforts by countries around the world to erect barriers that "protect" domestic markets from foreign competition, unfair or otherwise. At a time when economic woes have already impacted cross-border commerce, it's likely that protectionist efforts by some will spawn tit-for-tat moves by others. So, it's worth keeping tabs on developments like those detailed in the following Reuters report, "China Surplus Shows US Must Push on Yuan-Schumer":

Senator Charles Schumer, an outspoken critic of China's trade policy, on Tuesday seized on an unexpected surge in the East Asian country's trade surplus to renew his call for U.S. legislation to deal with Beijing's currency practices.

"These numbers show just how little motive China has to end its currency manipulation unless it is pushed to do so," Schumer said in a statement after new data showed China's trade surplus widened in July to an 18-month high of $28.7 billion.

Schumer is one of the U.S. Congress' loudest critics of China's currency practices, which he blames for scores of lost U.S. manufacturing jobs.

He also leads a bipartisan group pressing for legislation that would require the Commerce Department to apply countervailing duties against countries with undervalued currencies.

The lawmakers contend China's currency is undervalued by 25 percent to 40 percent against the U.S. dollar, giving Chinese exporters an unfair price advantage.

Those complaints could intensify in coming months, with U.S. unemployment remaining near 10 percent and one-third of the Senate and all the House of Representatives up for re-election in November. That includes Schumer.

China loosened its currency, known as the yuan, from a near two-year peg to the dollar on June 19. Since then, the yuan has strengthened just 0.8 percent against the dollar.

"China's expanding trade surplus tells us two things. First, China is back to its same old mercantilist tricks. Second, China's currency announcement was a sham," Scott Paul, executive director of the Alliance for American Manufacturing, said in a statement.

The House Ways and Means Committee has set a hearing on China's currency practice for Sept. 15 and is expected to hear testimony from Representative Tim Ryan, who is pushing legislation similar to Schumer's bill.

"We look forward to working with the House and Senate to pass China currency legislation that will put Americans back to work," Paul said.

Upping the Temperature

While much of the focus in this country is on how one of our largest trading partners is taking unfair advantage of America through its artificially weak currency and a variety of trade barriers, we are certinly not the only ones who are feeling shortchanged. Other regions and nations have also been raising Cain over the persistently lopsided commercial relationship that exists with the world's third largest economy. In "EU Clashes with China Over Trade 'Barriers’ to Rival Firms," The Telegraph reveals that Europe is turning up the heat in its dispute with the Asian nation over unfair trade practices.

China and Europe are entering into a destructive trade war as EU officials vow to “get tough” over China’s bureaucratic barriers against foreign investment and trade.

The EU, China’s largest single trading partner, is rapidly running out of patience with China’s continued refusal to create a level playing field for EU firms.

Leading European businessmen claim Beijing has violated its trade treaty commitments to increase protections for its domestic firms.

The European Chamber of Commerce in China found that almost 40 per cent of members believed the business climate in the country would worsen in two years.

Jacques de Boisseson, the Chamber’s president, said EU businesses in China would “vote with their feet” if Beijing continued to frustrate their operations. He said: “I’m worried about rising protectionism — on both sides — because we see this as a vicious circle. If you start playing that game it is very difficult to control.

“We are trying to say to the Chinese government and the EU authorities, 'Don’t give reasons for protectionist sentiment to rise. The more unfairly you are perceived to be behaving, the more reasons you will give for the other side to retaliate.”

Asia's Big Comeback

A videographic from the Economist, Asia's Growing Economic Power, details how Asia is regaining the economic dominance it enjoyed a millennium ago:

Reaching a Similar Conclusion

At the beginning of the year, Bespoke Investment Group was kind enough to organize a "roundtable" where several bloggers, including yours truly, offered their guesses opinions on how various asset classes would perform in 2010.

As it happens, one of my predictions was that the U.S. dollar would rally, which surprised some of those who were aware of my decidedly negative long-term views on the currency. Among the reasons for my short-term bullishness: overly bearish market sentiment (leading to a notable though relatively short-lived contrarian reversal), continued deleveraging (which would boost near-term demand for dollar liquidity), and euro-related woes (which would lead some currency traders to favor the greenback as a safer alternative).

Regarding the last reason, in particular, while I can't claim to have mapped out the script for the sovereign debt crisis now playing out in Europe, I did believe that economic pressures spawned by the financial meltdown (and the accompanying downturn) would have a fractious effect on European monetary union -- and, by extension, its currency (in fact, I discussed this issue in my 2009 book, When Giants Fall).

As it happens, a growing number of individuals have come to a similar conclusion, including the head of one of the world's biggest hedge funds, as MarketWatch reports in "Moore Capital Warns of Euro-Zone 'Breakdown'":

Moore Capital, a leading global macro hedge-fund firm run by Louis Moore Bacon, warned of a "potential breakdown" of the European Monetary Union and criticized plans to bail out Greece, according to a recent investor letter obtained by MarketWatch on Wednesday.

"Perhaps the most interesting area for the foreseeable future is in the potential breakdown of the European Monetary Union," Bacon wrote in the letter, dated April 16.

"Instead of punishing the Greeks for their free-rider and fraudulent gaming of the Maastricht rules -- either by ejecting Greece from the Union to propel them to reform and come back at a competitive exchange rate or by forcing them to restructure their debt within the confines of monetary union, either of which would have eventually strengthened and solidified the euro -- the European leaders have decided to reward the prodigal Greeks with a bailout, socializing their ills and taxing once again the prodigious Northern European workers," he said.

The bailout could have "disastrous consequences" for the European Union and Europe, Bacon warned.

Sovereign-wealth funds have bought trillions of euros to diversify away from U.S. dollars. That's supported the euro and allowed European investors to "flee their debauched currency," he wrote.

When sovereign-wealth funds "finally realize what they own, they may stand aside," Bacon went on. "The euro will find a new level while these large funds instead seek currencies in the emerging markets where solvency is not such an issue."

European leaders criticized hedge funds for betting against Greece government debt earlier this year as they worked on a plan to support the country. In February, Moore and other hedge funds such as Brevan Howard, distanced themselves from the trade. Moore said at the time that it wasn't betting against Greece government debt.

"There were many recent newspaper reports citing that Moore Capital and others were shorting the Greek bond market," Bacon wrote in an annual letter to investors dated Feb. 19. See story about the 'PIGS' trade.

"We are positioned with a net long duration exposure to Greek bonds, which explains a drag on performance month to date," he added at the time. "We are expecting the European authorities to move beyond uninformed blame-casting and begin bailing out Greece."

Still, Bacon noted in February that tensions between better-performing economies in the euro zone and "laggards" such as Greece may signify larger issues in the region.

Not Going to End Well

Two weeks ago we had this:

"Chinese Premier Slams U.S. 'Protectionism,' Says Yuan Is Not Too Low" (Los Angeles Times)

Wen Jiabao criticizes the U.S. at an annual news conference, denies having kept China's currency artifically low to increase exports. He challenges American leaders to improve relations with Beijing.

In an annual news conference Sunday that took direct aim at the United States, Chinese Premier Wen Jiabao defended his country's currency policy and said it was up to Washington to mend Sino-American relations.

Rejecting charges that China kept the yuan artificially low to boost its exports, Wen said the Chinese currency was not undervalued and that the government's policy of controlling the exchange rate had boosted imports and helped spur economic recovery across the globe.

And today we have this:

"US Report Faults China for Unfair Trade Rules" (Financial Times)

China uses a large array of dubious measures to prevent foreign companies competing fairly in its market, a US government report said on Wednesday.

The annual report on trade barriers to American exports, produced by the US trade representative’s office, acknowledged that Beijing had reduced official trade tariffs and quotas. But the Chinese authorities still used domestic tools such as restricting trading rights, skewing government procurement towards Chinese companies and hoarding raw materials for internal use.

“Eight years after China’s WTO accession, many US industries complain that they face significant non-tariff barriers to trade”, the report said. “These barriers include, for example, regulations that set high thresholds for entry into service sectors such as banking, insurance and telecommunications . . . and the use of questionable sanitary and phytosanitary measures to control import volumes.”

China’s agricultural inspection and quarantine regime, for example, gave too much discretion to officials, who often slowed down shipments without warning, it said.

American officials partly blame Chinese protectionism for the bilateral trade deficit with China, along with the politically explosive question of the renminbi’s peg to the dollar. On Wednesday Tim Geithner, US Treasury secretary, said he expected China to move towards currency flexibility, though he did not give a date. After touring a steel plant in Pennsylvania, he told reporters: “I am very confident that they are going to decide it is in their interest to move on currency reforms.”

Doesn't seem like it's going to end well, does it?

Fully Emerged?

A post at Newsweek's Wealth of Nations Blog, "By the Numbers: Buying Up the West," makes you wonder just what it means to be an "emerging" economy nowadays:

As the recession eased in the second half of 2009, rich nations continued to scale back acquisitions in emerging markets, while developing economies--led by China--began buying up Western companies even faster, according to a new study from KPMG:

• 16 percent drop in developed-country acquisitions in emerging markets in second half of 2009
• 30 percent rise in emerging-market acquisitions in the developed world
• 47 percent drop in developed-country acquisitions in emerging markets since 2007
• 52 percent rise in China's acquisitions in developed countries since 2007

Drawn Apart By Hard Times

Many observers seem to think that globalization is some sort of unstoppable force, carrying on regardless of what is happening in the broad economy. But like many of the other assumptions people had made before the crisis struck, this one, too, appears to be wrong. The fact is that good times encourage disparate interests to work together. In contrast, as Newsweek's Wealth of Nations Blog reveals in "Anti-US Trade Deals Grow During Recession," hard times tend to draw them apart.

Last month, Latin American nations proposed a new regional bloc--�excluding the U.S. and �Canada--to serve as an alternative to the Washington-dominated Organization of American States. Predictably, the leaders of Venezuela and Bolivia praised the step as an emancipation from U.S. "imperialism." But even moderate players such as Brazil and Mexico seemed to agree that the region's interests--especially its trade interests--might benefit from fewer ties to its big, recession-plagued neighbor to the north.

Latin America is hardly alone in this epiphany. Asia has long toyed with the idea of a trade bloc, but for years the notion was hampered by Japanese and Chinese infighting, as well as Tokyo's and Seoul's eagerness to forge stronger ties to the American market. But experts say the recession has made Asia realize it can no longer rely on the U.S. to consume its exports. To counteract declining trade volume with the U.S., China and others have started engaging in a flurry of intra-Asian free-trade deals. Japan and China have both even advanced the idea of a common regional currency, leading some analysts to predict Asia will become a NAFTA- or EC-like free-trade zone within the next decade. 

This opens up the prospect that U.S. trade to the east and south could eventually be eclipsed as governments prioritize regional commerce. Still, any bloc would face internal hurdles. Latin America has a poor record on �integration--its Mercosur trade bloc has stagnated in recent years, and its leaders are for�ever quarreling. Old rivalries could also derail an Asia bloc, as Japan and smaller economies fret about Chinese hegemony. But this recession may mark the moment when the developing world decides it prefers to trade among �itself.

Catching Up Fast

Ten years ago, China's gross domestic product was ranked seventh in the world after the United States, Japan, Germany, the United Kingdom, France, and Italy, according to the International Monetary Fund. However, a decade of booming growth in that country has changed things. Based on the latest data, as detailed by The Telegraph in "Chinese Economy Overtakes Japan," it appears that the emerging Asian power has now surpassed all but one of those that used to be ahead of it.

China has almost certainly overtaken Japan to become the world's second-biggest economy after state officials dramatically upgraded their estimates for the country's growth last year.

The fast-growing emerging economy had been expected to surpass Japan next year, but the transition looks to have happened in 2009, based on China's new growth estimates. Its statistics bureau said that China grew by 9.6pc – rather than 9pc – in 2008, meaning its economic output was 31.405 trillion yuan, or $4.6 trillion (£2.9 trillion), last year.

According to the World Bank, Japan's annual output was the equivalent of $4.9 trillion last year, but it is expected to shrink by 6.6pc this year. Meanwhile, Chinese officials project that its economy will grow by more than 8pc this year. It means it is likely that China became a larger economy than Japan some time in the second half of this year.

Statisticians said the bigger-than-expected expansion last year was fuelled largely by strong growth from the services sector, something which was only uncovered after a detailed census into economic activity during the year. The revisions continue a recent trend of officials upgrading their estimates for previous years' economic growth.

In 2005, its statisticians dramatically upgraded their estimates of the size of the economy, catapulting it over Britain to become, at the time, the world's fifth biggest economy.

Peng Zhilong, the head of the bureau's national economy calculation department, said that the main difference was in the overall size of the economy, rather than its growth rate, adding that China would expand by more than 8pc this year.

David Cohen, of Action Economics in Singapore, said: "The big underlying factor propelling China's growth is the migration of people from the agricultural sector to the more modern economy – industry and services. There's no stopping China."

But although China's breakneck expansion looks likely to continue for some time yet, there are concerns over the country's path.

Some economists compare China's position – with the authorities combining low interest rates with high government investment and rising asset prices – to Japan in the late-1980s, warning that it, too, could fall victim to a crash.

Some worry about the country's demography. The one-child policy means that in the coming years its population is likely to age extremely quickly, increasing the pressure on its public finances and dampening its long-term growth prospects.

Nevertheless, the news about the country's strong growth will add to hopes that it will help support the wider world economy out of recession next year. Whereas 2009 was the year that brought the first worldwide economic contraction since the Second World War, the opening quarter of 2010 is expected to see the major economies back in growth again.

Although Britain contracted by 0.2pc in the third quarter of 2009, according to the latest official statistics, it is expected to move back towards growth in the final quarter of the year.

However, economists said the first quarter of 2010 would be marked by increasing tension over the fiscal position of various countries. Having had to borrow unprecedented amounts in order to prevent a deeper recession, a number of countries have generated large deficits, which may scare off international investors.

Turning Inward

In a recent presentation, I argued that individuals, businesses, and investors must rethink all of their assumptions about what the future holds and allow for disruptive developments that might once have seemed unlikely or even far-fetched.

One threat I highlighted was deglobalization, which Wikipedia describes as "a process of diminishing interdependence and integration between certain units around the world, typically nation-states" -- that is, where the world is no longer "flat."

To support my case, I pointed to reports and polls, including a global survey conducted by Nielsen, which showed that there was growing support for barriers that inhibit the free flow of goods, services, capital, and people across borders.

I also made reference to data, like that presented by Barry Eichengreen and Kevin H. O'Rourke in "A Tale of Two Depressions," which highlighted the dramatic slump in trade volumes that has occurred since the crisis began.

In "Deglobalization: The Surprisingly Steep Decline in World Trade", Slate's Daniel Gross follows on from that development and points to other evidence suggesting that the long-running trend towards greater integration has shifted into reverse:

In November, I met with an executive at one of China's new private equity firms. He talked up the firm's investments in energy software and mobile communications. But companies that export? He wouldn't touch them.

The fact that China's smart money is now looking inward and avoiding the sector that brought it so much growth in recent years highlights a surprising and spreading new trend: deglobalization. For the last few decades, goods, services, and people have been whizzing around the world at ever-greater speeds and over ever-greater distances. The presumption was that globalization was the most efficient way to organize the world's economic affairs. But now comes the backlash, motivated by economics, politics, and the shift of wealth from West to East.

In the months after September 2008, pretty much every metric that testified to the growing interconnectedness of the global economy collapsed. Between April 2008 and April 2009, foreign currency trading volumes in London were down 25 percent.

The Inter-American Development Bank in August reported that remittances from Latin America and Caribbean expats would fall 11 percent in 2009, back to the level of 2006. The International Monetary Fund projects that the volume of world trade in goods and services will plummet nearly 12 percent this year.

Of course, you'd expect such developments when the global economy shrinks, as it did in 2009 for the first time since 1944. But the decline in trade was far larger than the quite small drop in global economic output. It turns out that many aspects of globalization were overleveraged. Exports, currency trading, and cross-border investment were fueled by debt and credit. In the United States, consumption of imports was stoked by borrowing and the booming housing market.

While trade has rebounded from its lows, the volume is nowhere near its peak. In September, the combined total of U.S. imports and exports was 24 percent below the level of July 2008. Countries stung by the sudden drop-off in demand from foreign buyers have realized that they can no longer simply export their way to prosperity. China's exports fell 23 percent between August 2008 and August 2009. Smart investors are channeling resources to companies that produce domestic goods for domestic markets.

There's also a greater appreciation on the part of Western firms that cheap labor isn't the be-all and end-all. Businesses have learned in the past two years that the longer the supply chain, the more possibilities there are for disruptions—from flu viruses, geopolitical disturbances, and spikes in energy prices. While China is still the world's factory, in an age of volatile demand, some companies have realized that manufacturing closer to home is more efficient, even if production costs are higher. In March U.S. Block Windows, an acrylic block window manufacturer based in Pensacola, Fla., bought competitor Hy-lite, a division of Fortune Brands. Hy-Lite was outsourcing the molding of acrylic blocks to China. "It became very evident to us, that we could do it cheaper in-house, because we had the facilities, and we were operating at less than capacity," said Roger Murphy, president of U.S. Block Windows. More significantly, manufacturing in China had its downsides. U.S. Block Windows ships orders within four days of receipt. But the lead time in production from China was 12 to 16 weeks. In a period where it's difficult to forecast demand far out into the future, "it's very difficult to match those two things up," said Murphy. In September, U.S. Block Windows moved Hy-Lite's molding work from China to Florida.

Politics is also playing a role in deglobalization. The plunge into recession triggered a predictable set of protectionist responses. Developed economies in Asia, Europe, and North America have erected new tariffs, offered subsidies to exporters, stipulated that stimulus funds be spent locally, and provided special support to home-grown banks and automakers. This trend has led American and foreign companies alike to reconsider the way they've approached the vast U.S. market, especially in areas that are getting a boost from the government: energy, finance, automaking. For example, Suzlon and Vestas, Indian and Danish wind-turbine makers, respectively, are making massive investments in U.S. manufacturing not only because it's expensive to ship turbines long distances but also in order to be perceived as "American" to state and federal officials involved in green purchasing.

In November, Ted Strickland, the governor of Ohio, one of the states hit hardest by globalization, showed up at a corporate campus in Milford, a suburb of Cincinnati, to celebrate the fact that Tata Consultancy Services, the Indian outsourcing giant, now employed 300 workers at its North America Domestic Delivery Center. The outsourcer has become an in-sourcer. Perhaps we're not seeing deglobalization, but rather, reglobalization.