Where is the World’s Next Investment Hotspot?

Chinese leaders are walking on a tight rope as they try to balance the need for political-economic reforms with a potential economic downturn.

world-investment-hotspotThey are conducting reforms because (1) Real estate construction accounted for as much as 16 percent of GDP in 2013. (2) China’s debt-to-GDP ratio in upwards of 200 percent in 2014.

As a result, in 2014, China’s growth slowed sharply to 7.2 percent in the first quarter, only marginally better than 6.2 percent in 2008.

With the microeconomic and social potential, China could still grow at a high rate for many years. But individual investors should be aware that the slowdown of China’s economy would lead to crises in some other countries and economic slowdown in others.

So first, investors should not put their money in China and her trading partners. China’s credit markets seized up earlier this year. The Chinese money market slowed to a near halt putting a break on the Chinese economy. China is the lead trade partner for 124 countries, compared to just 76 for the United States.

As a result, the Chinese economic slowdown will inevitably change others countries’ political and economic situations. For China’s traditional allies, countries like North Korea, Cambodia, Pakistan and Myanmar and Laos, China definitely has critical economic influence. Other countries with raw materials such as Argentina, Brazil, Colombia, India, Indonesia, Thailand and Venezuela all are vulnerable to the economic slump because of their strong ties with Beijing’s economy.

Middle Eastern countries are not good prospects, either. In the Middle East, China’s economic slowdown will have a negative effect. China’s extraordinary economic growth has led to a massive rise in demand for energy. In 2011, the share of oil imported by China from Middle Eastern countries was 51 percent.

However, in 2014, as the poor economy could reduce Chinese demand for oil, the price of oil might hover around $100 per barrel or even fall. According to a United Nations report, oil prices need to be higher than $130 per barrel for some countries in the Middle East such as Bahrain to strike a balance. Middle Eastern countries are still wealthy, but in the long-term, the relatively low oil prices will create budget deficits, which can destabilize the region.

In African countries, China’s slow economic growth will reduce the African economic development, according to one IMF report. The average GDP growth rate in developing countries is projected 3.3 percent this year. According to a fund in Washington, China’s economic slowdown accounted for about 2 percent decline in average developing countries growth. This slower economic development will also cause damage to the African middle class.

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For example, in sub-Saharan Africa, where China has been highly involved among these economies, Deloitte and McKinsey estimate the size of the African middle class at between 200 million and 300 million. However, less than 14 percent of them have stable income, earning $10-$20 a day. As a result, a million people are at risk of slipping out of the nascent middle class and back into poverty if economic growth slows. To sum up, Africa is not a good place to invest.

If African and Asian countries are not safe targets to invest, then where should we turn to? The most easiest and obvious answer is to turn to another a critical economic superpower: the United States.

This is not only because the US has a better business environment and rule of law. Washington accounts for 4.4 percent of the world’s population producing 22.3 percent of world GDP in 2012. The IMF predicts that the US will have 2.8 percent of GDP growth rate in 2014, 3 percent in 2015, higher than 1.3 percent in 2013.

The breakthrough in energy development is also a hot topic. Compared to the Middle East where it is unstable, investor confidence is higher in the US. Furthermore, American innovation and technology cannot only improve its economy but also boost GDP growth in other countries.

Looking back to China, in 2014 and 2015, the potential economic downturn and financial market distress will test Beijing’s ability and resolve. What remains an unknown is how China will manage the economic reform and how severe the economic downturn will be. The only thing we can say for sure is that we can never ignore the domino’s effects on other countries, where one country’s economic downturn will affect another.

Chia-an Chan is a Taiwanese focusing on International production and trade, and its relations with law and governments. He is a NYU Master’s student in International Relations. Before coming to the United States,Chia-an studied political theory in Taiwan. After his graduation in 2012, he went to military service for a year serving as a member of the tactical unit. Read other articles by Chia-an.