DECODING THE CHINA MYTH

Myths die hard. Among these is the great myth that China's poised to take over the world. Here, James Rickards debunks that myth.

-  James Rickards

NO one seriously disputes the importance of China to the global economy. It's the world's second-largest economy after the U.S. and accounts for 17 per cent of global GDP (or an even larger percentage if one uses an alternative accounting method called purchasing power parity). It has the world's second-largest population at 1.41 billion people, just slightly behind India. It has the third-largest landmass in the world behind Russia and Canada. China also has the world's third-largest nuclear arsenal after Russia and the U.S.

But size can be deceptive. Most observers translate China's large economy into the status of global superpower soon to surpass the U.S. in economic and military strength.

That extrapolation has been a chimera for some time. In reality, China's economy is fragile and weakening by the day. China may soon find itself in economic turmoil including a credit crisis, currency crisis and economic recession all at the same time. Following is a close look at China's inherent weakness. Unfortunately for U.S. investors, China's problems threaten to drag the global economy down with it.

China: The Helpless Giant

China's economic problems exist at two levels the long-term macro level and the short-term technical level. Let's consider these in order: At the long-term level, China is confronting three material obstacles -the middle-income trap, declining demographics and wasted investment. The middle-income trap afflicts developing economies that have reached the middle-income level of about $10,000 per capita annually. Moving from low-income (about $5,000 per capita annually) straightforward.