By Prof. Bulent Gokay and Dr. Darrell Whitman
19 January 2011
The visit of the Chinese President Hu Jintao to the US this week is called by many observers as the most important US visit by a Chinese leader since Deng Xiaoping’s groundbreaking trip in 1979. The world has changed a lot over the last 30 years. In 1979, China was still a closed society with a third rate economy. Now, in the second decade of the 21st century, China is already a very active and self-confident player in the world economy and on the global political stage.
More than 8 % average annual economic growth set by a number of East Asian economies for the last 20 years is outstanding in the 140 years of recorded economic history. This is all the more outstanding in having been recorded at a time of total stagnation or near stagnation in most of the developed economies of the West. ‘The rise of China represents one of the most fundamental shifts in world politics over the past few decades.'
The opening up of China’s economy to global forces was part of US Cold War policy, with the intention of reaching a rapprochement with Mao Zedong in the 1970s against the Soviet bloc. The economic modernisation programme activated by Deng Xiaoping in 1978 accomplished consistent growth rates of 9 to 10 % throughout the 1980s and 1990s. Under Deng Xiaoping, whole approach to economic growth took a new direction: ‘the main task of socialism is to develop the productive forces, steadily improve the life of the people, and keep increasing the material wealth of society. … So to keep rich is no sin.' For more than two decades, China has marched to the banner of ‘reform and opening to the outside world’. Deng Xiaoping’s economic programme was regarded by many observers as one of those historical turning points of the 20th century. How ironic is that now, three decades later, the US increasingly regards a fast expanding market economy in China as a serious threat to US global hegemony.
The 2008 report of the US National Intelligence Council – which supports the Director of National Intelligence and is the centre for long-range analysis in the US intelligence community – published in November 2008, presents a detailed and comprehensive report on global trends to 2025. Most press coverage focused on the report’s key message of the ‘sun setting on US power’ (almost identical headlines in the Guardian and the Times). It is explicitly mentioned in the report that by 2025, the US will be less dominant, and ‘China will have the world’s second largest economy and will be a leading military power.’ Furthermore, the report identified China and India, together with the US, as the ‘three of the largest’ economies. It seems that the unprecedented transfer of wealth roughly from West to East now under way will continue for the foreseeable future. This unprecedented economic growth, coupled with 1.5 billion more people, will undoubtedly put pressure on world’s key resources—particularly energy, food, and water—raising the specter of scarcities emerging as demand outstrips supply.
One flash point with the US is China’s fast growing demands for oil. China has become the world’s second largest consumer of petroleum products in 2004, having surpassed Japan for the first time in 2003, with total demand of 6.5 million barrels per day (bbl/d). China’s oil demand is projected by EIA to reach 14.2 million bbl/d by 2025, with net imports of 10.9 million bbl/d.
All the existing evidence point out that even without a total collapse of the US global hegemony, there seems to be satisfactory evidence for a great and rapid shift of wealth and power to China and India, and other emerging economies. The transfer of power from the West to the East is gathering pace since the late 1990s, and Washington think-tanks have been publishing thick white papers charting Asia’s, and China’s in particular, rapid progress in microelectronics, nanotech, and aerospace, and printing gloomy scenarios about what it means for America’s global leadership. China, India and other emerging economies have so far boasted growth rates that could outstrip those of major Western countries for decades to come. China is currently the world’s sixth largest economy with an annual economic growth of more than nine percent. India’s annual growth rate is eight percent. China’s economy is expected to overtake France and Britain this year, be double the size of Germany’s by 2010, and to overtake Japan’s, currently the world’s second largest, by 2020. Due to its one-child policy, China’s working-age population will peak at 1 billion in 2015 and then shrink steadily. India has nearly 500 million people under age 19 and higher fertility rates. By mid-century, India is expected to have 1.6 billion people – and 220 million more workers than China. Of course, this could be a source for instability. But a great advantage for growth if the government can provide education and opportunity for India’s masses.
China has become the engine driving the recovery of other Asian economies from the recessions of the 1990s. Japan, for example, has become the largest beneficiary of China’s economic growth, and its leading economic indicators have improved as a result. Thanks to increased exports to China, Japan has finally emerged from a decade-long economic crisis.
After China, India is emerging as an economic superpower. With economic growth topping 9 percent in 2007, an acknowledged nuclear capability, and a growing role in international relations, it has attained the status of a leading ’emerging power’. India is today playing an invaluable role in the global innovation chain. Motorola, Hewlett-Packard, Cisco Systems, and many other high-tech giants now rely on their teams in India to devise software platforms and dazzling multimedia features for next-generation devices. Intel has 2000 electrical engineers with PhDs in Bangalore designing absolutely the latest ships. Indian engineering houses use 3-D computer simulations to produce sophisticated designs of everything from car engines and forklifts to aircraft wings for clients like General Motors and Boeing Corp.
The post-war era witnessed economic miracles in Japan and South Korea. But neither was big enough to power worldwide growth, or change the direction of global economy in a complete spectrum of industries. China and India, by contrast, possess the weight and dynamism to transform the 21st century global economy. The closest parallel to their emergence is the saga of the 19th century America: a huge continental economy with a young driven force that grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights. But in a way, even America’s rise falls short in comparison to what has been happening in China and India for the last two decades. Never has the world seen the simultaneous and sustained takeoffs of two countries that together account for one-third of the world’s population.
What makes the two Asian giants especially powerful is that they complement each other’s strengths. All indications point out that China will stay dominant in mass manufacturing, and is one of the few countries building multibillion-dollar electronics and heavy industrial plants. The Chinese producers not only make textiles and cheap toys. They also make semiconductors and very advanced technology. Indeed, the world semiconductor fabrication capacity is dominated by Asia-Pacific region. India is a rising power in software, design, services, and precision industry. If Chinese and Indian industries truly collaborate, they would take over the world high-tech industry. These immense workforces are already converging. Because the global deployment of high-speed internet communication renders geography almost irrelevant, now multinationals are able to have their goods built in China with software and circuitry designed in India. Together they are combining Indian software technology with Chinese hardware technology to achieve world leadership in the global information technology industry. In 2005, India and China formed a ‘strategic partnership’. More recently, they agreed to hold their first-ever joint military exercise October 2008.
One obvious reason to this shift in the balance of power in many technologies is that China and India graduate a combined more than half a million engineers and scientists a year. The total number of graduates in America is only 60.000. In three years’ time, the total number of young researchers will rise to 1.6 million in India and China together.  Because these two countries can throw more brains at technical problems, their contribution to research and innovation is increasing fast.
Western business is not just shifting research work to Asia, because Indian and Chinese brains are young, cheap and plentiful. Thanks to comprehensive and intense technological education available in China and India, in many cases, the Asian engineers are better educated and they combine complex skills: mastery of latest software tools, a knack for complex mathematical algorithms, and fluency in new multimedia technologies. That is true that many Western companies came to India and China for the low cost. But they are staying for the quality, and they are investing for the innovation. China and India are rapidly moving from providing low-cost manufacturing and services to being innovation powerhouses. Now it is becoming more and more clear that China, and India (and some other emerging economies) are taking center stage in the global competition for innovation and talent. China and India now boast some of the world’s top science and research universities, including the seven-campus Indian Institutes of Technology as well as Beijing’s Tsinghua University. ‘One of the most striking features of the Chinese labor market is its growing level of education and skilling’.
Over the last decade, China has quietly cornered the market on rare earth elements – europium, gadolinium, dysprosium, terbium and others., and now supplies about 95 percent of the world’s consumption of “rare earths,” a dominance that industry experts say could give Beijing control over the future of consumer electronics and green technology. Rare earths are a class of minerals with properties that make them essential for applications including miniaturized electronics, computer disk drives, display screens, missile guidance, pollution control catalysts and advanced materials. In 1994, China’s share of the market was 46 percent, according to industry statistics. The rare-earths market, estimated to be worth up to $1 billion a year, is dwarfed by the global trade in bulk commodities like iron ore, but controlling the supply of these minerals gives China a strategic advantage as it seeks to build powerful high-technology industries and modernize its armed forces. The military requires rare earth in a significant way as it has become increasingly reliant on its widespread use, particularly in building advanced aircraft materials, guided missiles and blast protection. Environmental applications of rare earth materials have increased markedly over the past three decades. In many applications, REE are advantageous because of their relatively low toxicity. For example, the most common types of rechargeable batteries contain either cadmium (Cd) or lead. Rechargeable lanthanum-nickel batteries in computer and communications applications and could eventually replace lead-acid batteries in automobiles. Although more expensive, La-Ni-H batteries offer greater energy density, better charge-discharge characteristics, and fewer environmental problems upon disposal or recycling. -hydride (La-Ni-H) batteries are gradually replacing Ni-Cd. As the Chinese rare-earths industry grows, many of the processors and end users of these minerals are moving their advanced manufacturing and research and development facilities to China, increasing the growth of critical industries, particularly electronics. Companies like Intel, Nokia, Motorola, Microsoft and Cisco Systems have all invested heavily in manufacturing and research in China, which now accounts for more than 30 percent of consumption of rare earths. Rare earths are now considered to be an absolutely essential component in shaping modern and future technology.
What is driving innovation in Asia, however, is not only the Western demand, but increasingly more so, fast rising home-grown consumer class. China is currently the world’s third largest travel market, with 120 million air passengers in 2004. China is currently the world’s second largest market for automobiles, after the US. For instance, Volkswagen is producing more cars in China than in Germany. China has the world’s biggest base of mobile-phone subscribers – 350 million — and that is expected to rise 600 million by 2009. The fastest growth in demand for semiconductors is overwhelmingly concentrated in China. Much of this growth is in the expansion of the mobile phone market. With over 100 million Internet users this year, China is a dominant presence in the Internet world. In two years, China should overtake the US in homes connected to broadband. The rapid growth of Chinese Internet market has turned the country into a promised land for many Internet giants, like Yahoo, Google, MSN and eBay. Recent studies show that the attitudes and aspirations of today’s Chinese and Indians resemble those of Americans a few decades ago. Surveys of thousands of young adults in both countries found that they are overwhelmingly optimistic about the future and believe success is in their hands.
In terms of size, speed, and directional flow, the global shift in relative wealth and economic power now under way—roughly from West to East—is without precedent in modern history. The last 10 to 15 years have witnessed 3 billion people entering into the global economy. In many past examples, newcomers were generally those who were doing unskilled, labour-intensive tasks. What is interesting about today’s Chinese and Indian population is that, while, on average, they are poor and while most of them are unskilled, there are such a large number of them, and a small percentage of 3 billion is still a lot of people. A small percentage of these 3 billion, 300 million of them are highly skilled and very well educated and ready to produce everything with the latest scientific methods. These 300 million, still a large number, as large as the US, larger than Japan, and any European country, make a big impact on the global economy. Both India and China would become major power centres by 2015 even while remaining middle-income countries on account of their having the highest population in the world. Their fast integration into the world economy during the last 20 years has already dramatically changed the pattern of world economy, which is considered as ‘the most significant global shift in the geography of the world economy during the past 40 years’. As the global crisis churns, China and India are emerging as more vital players in limiting the economic damage from the worst global financial crisis in almost 80 years. Together, India and China, two of the largest economies in the world, clearly have the wherewithal to take a leading role and reshape the world order.
In the coming decades, how these Asian giants integrate with the rest of the world will largely shape the 21st century global order. All these powerful trends may soon be followed by increasing geopolitical strength in Asia as well. To explain the current financial crisis and economic downturn within the context of an epochal shift in the world-system away from North American/ West European dominance and towards Asia would provide us a longer term and deeper understanding of the global economy in the current century. The 21st century looks set to be fashioned by the rise of China and India at the state level; and the formidable rise of Pacific-Asia-India as the foremost economic zones at the regional level.
All this should not really be surprising. Asia, and especially East Asia, was already dominant for most of human history and remained so until very recently, that is less than two centuries ago. China and the area that is now India then accounted for about 75 percent of global GDP. Even in 1820, China and India together were worth more than 50 per cent of world trade. Europe’s share was relatively insignificant, and America had been discovered but was still not important enough beyond the Atlantic. Only then, for a number of reasons, Asian economies lost their position to the West, but it seems only temporarily. Leadership of the world system has been temporarily centred in the West, Europe and America, while Asia had slipped into increasing economic insignificance. That shift happened in the 19th century, and another shift appears to be happening again at the beginning of the 21st, as the centre of the world economy seems to be shifting back to the East. Measured by purchasing power, China had 13 per cent of the world’s gross domestic product in 2007. By 2050 it is expected to reach 20 per cent. India will grow from 6 per cent to 12 per cent, the US will slip from 21 per cent to 14 per cent and Europe from 21 per cent to 10 per cent. Peter Dicken describes this ongoing process as ‘the changing global economic map’, arguing that ‘old geographies of production, distribution and consumption are continuously being disrupted and that new geographies are continuously being created. In that sense, the global economic map is always in a state of becoming …’.
Modern world system has gone through several rounds of hegemonic shifts and several cycles from unicentric to multicentric organisations for centuries. In the 17th century, the Dutch were hegemonic in the European world-economy. Then the British rose to hegemony in the 19th. The shift from British to American hegemony in the early 20th century was spectacular and significant, but it was a routine change. In the Rise and Fall of the Great Powers, Paul Kennedy shows how economic data indicated clear signals about which powers were rising and which ones were falling back between 1500 and 1980s. In his survey, Kennedy detects a pattern repeated over and over: ‘Wealth is usually needed to underpin military power, and military power is usually needed to acquire and protect wealth’. Kennedy argues that the strength of a Great Power can only be properly measured relative to other powers and he argues that Great Power ascendency (over the long-term or in specific conflicts) correlates strongly to available resources and economic durability; military ‘over-stretch’ and a concomitant relative decline is the consistent threat facing powers whose ambitions and security requirements are greater than their resource base can provide for. He argues that military superiority by itself is often deceiving, since it may be weakening a state’s ability to compete economically and fund future conflicts. Kennedy demonstrates that while it is true that in the year 1900 Britain stood as the world’s greatest power, the writing was already on the wall. The figures for ship building, military spending, amount of coal produced, GDP, and other relevant categories clearly showed that Britain was being overtaken by Germany and the US.
If one looks at China’s economic figures for the last 20 years, one realises a truly global power rising at a stunning rate. If one considers that ultimately geopolitical power is built on economic power, then there exist every reason to anticipate that China will soon become one of the two or three superplayers on the global arena. Former deputy treasury secretary Roger Altman has written in Foreign Affairs: ‘the financial and economic crash of 2008, the worst in 75 years, is a major geopolitical setback for the United States and Europe… No country will benefit economically from the financial crisis over the coming year, but a few states most notably China will achieve a stronger relative global position… Beijing will be in a position to assist other nations financially and make key investments in, for example, natural resources at a time when the West cannot.'
China and India are not the only new global players in the world. In 2006, for the first time, new (emerging) markets accounted for over 50 % of global output. If this development continues at the current rate, all forecasts project a very different world by mid-century. A 2006 research by the accountancy firm Price Waterhouse projected that in 2050 the Chinese economy would be as large as that of the US in dollar terms, and that India would be the third largest in the world. Another projection, last year, by Goldman Sachs predicted that China would indeed surpass the US much before the mid-century, by 2027, and India’s economic power would become greater than the US before 2050.
Price Waterhouse research also predicts that soon the collective size of E-7 (emerging 7 economies: Brazil, China, India, Indonesia, Mexico, Russia and Turkey) would be about 25 % larger than the collective size of the current G-7 rich economies. According to the same research, the banking sector is growing faster and stronger in the emerging economies comparing with the G-7 economies. ‘By 2020, China, India, Brazil, Indonesia and Russia will between them account for 30% of global GDP. The change will bring an important shift in the global balance of economic power.' Observers now talk of the emergence of a new ‘Seven Sisters’ (a term used to describe the seven major Anglo-American companies that controlled the world oil after the Second World War). Today it is not ExxonMobil, Royal Dutch Shell, and the other western companies, but Russia’s Gazprom, CNPC of China, Venezuela’s PDVSA, Brazil’s Petrobras, Saudi Aramco, and Malasia’s Petronas that are seven giant producers.
Whatever one may think of the details and differences of such projections, there is no doubt that momentous changes are happening in the global economy. With the rapid rise of alternative economic power centres, the relative weight of America in the global economy is plainly declining. The balance of economic and political power is shifting to China and India and other emerging economies, placing the Asian region, under Chinese leadership, in a much more competitive position vis-à-vis the US. The increase in output in the emerging economies means the departure of numerous industries from the old industrialised countries, as a result of which real wages in the US and Western Europe are steadily declining, strengthening the trend to chronic employment (which is also one of the main reasons behind the current financial crisis). As a result of this still continuing trend, the buying power of the populations in the advanced economies will diminish even further. The unconstrained development of global economy in new regions brings devaluation to previously leading centres through intensified international competition. In general money and influence go hand in hand, and the wealth accumulation in China, India and other emerging economies will eventually change the geopolitical landscape. The central question arises as ‘what are the implications of China’s (and India’s) rapid rise for the political-economic trajectory of a global system in which the United States finds it increasingly difficult to act effectively as the hegemonic power?'
All indications point out that the current financial crisis, and economic downturn, is going to confirm, and possibly accelerate the shift in economic power to Asia, in particular to China. IMF predicts that ‘despite the emerging economies’ cooling momentum, they are still expected to provide a source of resilience, benefiting from strong productivity growth and improved policy frameworks.' In its November 2008 report, Global Trends 2025: A Transformed World, the US National Intelligence Council alerted that ‘The international system as constructed following the Second World War will be almost unrecognisable by 2025 owing to the rise of emerging powers, a globalizing economy, and historic transfer of relative wealth and economic power from West to East, and the growing influence of nonstate actors.' It seems that many producers in emerging market economies are not suffering as much as their counterparts in the developed world economies in the current global crisis. It is obvious that their exports have been hit, but many of them have found that domestic demand is relatively buoyant. That is because their own economies are on an upwards growth path that is not so cyclical, so they can turn to the domestic market and exploit pent-up domestic demand. Of course not all emerging market economies are the same, and the recent troubles have confirmed that a separation is occurring between the more and less robust emerging economies.
Emerging market countries are naturally feeling the effects of the global financial crisis and economic downturn. ‘The data so far suggest the economies of China and India are growing (not as fast as in the past but still growing), while America’s economy shrinks in absolute terms’. Thanks to its capital controls, its huge saving surplus and its publicly owned and state-controlled banking system, China seems to be well shielded from the Western financial and economic difficulties. Mortgage assets and the housing market in China shows much greater stability and strength compared to the shaky and risky mortgages and lending structures set-up in the US and other Western economies. China’s banks are now the strongest in the world, with capital ratios far above almost all other large banks in the world and debt levels that are far lower.
China has already become a major actor in world currency and financial markets. The country holds $1.8 trillion in foreign exchange reserves. In particular, China’s dollar holdings are a source of considerable financial leverage in the global financial markets. China has an especially effective financial system, which seems to be well positioned to finance the next phase in its economic expansion. Many observers also agree that the Chinese economy has a much bigger margin of maneuver, because its exposure to those speculative toxic assets, which lay at the root of the recent financial crisis, is much lower than the exposure of the American and West European economies. Furthermore, China’s yuan remains basically stable at a reasonable equilibrium level, which helps to prevent the international financial and currency market from further turbulence. In a way, China faces the global crisis from a position of strength.
In financial terms, China is little affected by the crisis in the West. Its entire financial system plays a relatively small role in its economy, and it apparently has no exposure to the toxic assets that have brought the U.S. and European banking systems to their knees. China also runs a budget surplus and a very large current account surplus, and it carries little government debt.
It seems that while the rest of the world is grappling with the global slowdown, China is figuring out ways to exploit it. Squeezed between falling profits and the credit crunch, a growing number of troubled corporations and countries are turning to cash-rich China for a bailout. China now appears to be in a much stronger bargaining position than they have been in the last few years: Flush with cash at a time when most countries and global corporations are struggling to gain access capital, China has spent nearly 60-billion US dollars in less than a week in February 2009 in a series of deals that will secure a long-term supply of iron ore, copper, zinc and oil. Brazil signed a deal to supply China with 100,000 to 160,000 barrels of oil a day in exchange for billions of dollars of investment. Under the agreement signed in Brasilia, state-owned China Development Bank will provide financing to Brazil’s state-run energy company Petrobras to develop its massive oil reserves. In 2008, trade between China and Brazil totaled $36 billion making China Brazil’s second largest trading partner.
In exchange for the financing, Russia will provide China with an additional 300,000 barrels a day over 20 years through a dedicated pipeline. China Development Bank is also lending the money to the Russian oil companies as part of a loans-for-shares deal. This would oblige Russia to supply 15 million tons of oil a year to China in 2011-2030 in exchange for $25 billion in loans to the state-controlled Rosneft oil company and Transneft pipeline operator. Other recent multibillion-dollar deals include the purchase by China Petrochemical Corp., the country’s second-largest oil producer, of Canada’s Tanganyika Oil, which works in Syria, and the bid that China Minmetals has made for OZ Minerals, an Australian zinc producer on the verge of bankruptcy. The current financial crisis has opened the door to a wider range of takeover possibilities for Chinese state and private companies. So far, Australia has been the country most often targeted by China for strategic investments. It seems cash-rich China has a clear advantage over Western countries in the current worldwide downturn and will be able to continue making significant acquisitions and deals at good prices while Europe and North America are in the throes of the global financial crisis, and that China will emerge from this crisis owning large new chunks Americana and the resources of Africa, Russia and beyond thanks to its strong financial balance sheet. It seems more likely that China may be able to exploit the current economic crisis in such a manner that she will emerge as the dominant economic power in the world.
A Free Trade Agreement (FTA) between the Association of South East Asian Nations (ASEAN) and China came into effect on 1 January, New Year’s Day, 2010, creating the world’s third largest free trade bloc behind the European Union (EU) and the North American Free Trade Association (NAFTA). The FTA is a continuation of processes that have been developing over the past decade. Trade with China played a significant role for many ASEAN countries in their recovery from the devastating impact of the 1997-98 Asian financial crisis. Two-way trade between ASEAN and China amounted to $US19.5 billion in 1995, rose to $57.6 billion in 2003 and hit $231 billion in 2008. China has supplanted the US as ASEAN’s third largest trading partner after Japan and the European Union (EU). The combined population of the free trade bloc is 1.9 billion people and its combined GDP is $6 trillion. This is the latest indication that Asian economies are beginning to vote with their feet as the relative decline of US capitalism continues.
Source: Global Faultlines
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 Paul Kennedy, ‘American Power Is on the Wane’, The Wall Street Journal, 14 January 2009,http://online.wsj.com/article/SB123189377673479433.html [accessed in March 2009].
 China’s banking sector is controlled by the so-called “Big Four” (China Construction Bank Corp., Industrial and Commercial Bank of China, Bank of China Ltd, Agricultural Bank of China).
 Chinese banks have recently cemented their position as the most highly valued financial institutions, taking four of the top five slots in a ranking of banks’ share prices as a multiple of their book values. China Merchants Bank, China Citic, ICBC and China Construction Bank lead the table, followed by Itaú Unibanco of Brazil, all with a price-to-book multiple of more than three. (Financial Times, 10 January 2010,http://www.ft.com/cms/s/0/1c13f7f2-fe16-11de-9340-00144feab49a.html?nclick_check=1 [accessed in January 2010]).
 Albert Keidel, ‘THE GLOBAL FINANCIAL CRISIS: LESSONS FOR THE UNITED STATES AND CHINA’, Carnegie Endowment for International Peace, October 16, 2008,http://www.carnegieendowment.org/files/China_and_the_Global_Financial_Crisis3.pdf [accessed in December 2008].
 Roger Altman, ‘The Great Crash, 2008, A Geopolitical Setback for the West’, Foreign Affairs, January/February 2009, http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html [accessed in January 2009].
 Jason Simpkins, ‘China Continues its Commodities Binge with Brazilian Oil Deal’, Money Morning, 24 February 2009, http://www.moneymorning.com/2009/02/21/china-brazil-oil/ [accessed in February 2009].
 Andy Hoffman, ‘Cash-rich China on buying spree’, ReportonBusiness.com, 20 February 2009,http://www.theglobeandmail.com/servlet/story/LAC.20090220.RCHINA19/TPStory/Business [accessed in February 2009].
 Peter Ford, ‘China’s buying spree in global fire sale’, The Christian Science Monitor, 23 February 2009,http://www.csmonitor.com/2009/0223/p01s03-wosc.html [accessed in February 2009]; Peter Navarro, ‘Power in Beijing balance sheet’, Asia Times Online, 6 March 2009,http://www.atimes.com/atimes/China_Business/KC06Cb01.html [accessed in March 2009].