Heading South-South

By 2015, the largest trading bloc in the world is expected to be neither NAFTA nor the eurozone but the inter-Asia region, orbiting China.

By then, China is likely to be the world’s top importer and exporter. By 2030, according to the U.N.’s 2012 Review of Maritime Transport, it is likely that the world’s busiest trade corridors will lie between advanced and emerging Asian nations.

Ladies and gentlemen, before long it’s going to be a south-south trade world, one that is dominated by developing nations rather than industrialized countries with mature economies.

As outlined in our story “Go West,” China is no longer content to be the factory to the world. Across Asia and the developing world, nations that previously relied on the U.S. as their major trading partner now increasingly rely on China.

Asian trade is already deeply interconnected: fabric woven in India or Vietnam, for example, is sewn in Cambodia and finished in China before being sent west, according to a recent Prosperity Index report from the Legatum Institute. Australia is China’s coal cellar. China is Africa’s chief construction partner.

There are plenty of potential pitfalls ahead, however.

China’s weak banking system could stop the engine cold. Chinese banks, according to the Prosperity Index report, are not independent. They do not make loans based on the client’s ability to repay or the viability of its business plans. Rather, the banks function in a quasi-government capacity, lending billions, for example, to fund infrastructure projects for local governments. These loans will not be repaid, but it’s no matter because the national government always bails the banks out.

Meanwhile, the actual business sector’s needs are ignored, so it relies on an unregulated, “shadow banking” system. This distorted banking regime is surely as perilous as the financial missteps that culminated in the West’s Great Recession. China’s house of banking cards could remain upright — or the wind could blow it over, with knock-on effects resonating worldwide.

So far the cards are standing. China’s 2012 slowdown appears to be dissipating. According to China’s National Bureau of Statistics, the country’s GDP grew 7.9 percent during the final quarter of 2012, bringing full-year growth to 7.8 percent. In December, industrial production was up 10.3 percent over the previous year; retail sales were up 15.2 percent.

The growing importance of China-anchored, south-south trade will also have profound effects on the shipping industry, diluting the importance of the classic east-west trade lanes. Carriers without a strong presence in Asia may find themselves shut out of the busiest trading region in the world.