The China Effect

Back in 2009 I wrote a blog warning of the dangers of investing in China referring to it as the new Russia of the late 1990’s. Since then there have undoubtedly been improvements in the opportunities to invest in China…but should we? 

As the world entered a global recession (or what felt like one) and still continues to be in one, there were parts of the world that still continued to grow - China being one of them. The reason? Under orders from the government, China's banks flooded the economy with credit in 2010.

It was the biggest wall of money since the People's Republic of China was founded in 1949. The loans were part of a stimulus package to spur domestic investment and consumption and help their economy through the financial crisis. However, a significant proportion of this package has been diverted into shares and property. Several economists believe that a large part of the government's four trillion Yuan state aid package has also failed to reach the "real" economy. This means much of the money has gone into speculation, and the China market looks set to produce a bubble in the near future.

There are two interesting issues here. One is that Chinese wages are going up because of internal pressures (mostly improving standards of living) and external pressures from public interest groups. The other is that because of widespread corruption, with global corporations in on the deals, workers are getting screwed.

Wage hikes in China have set off a chain reaction throughout the region. Under intense internal political pressure, Thailand and Indonesia have increased their minimum wages. Malaysia’s cabinet recently approved the country’s first-ever wage standard. The result is that the developing world looks like a great bet at the moment, but when the bubble bursts - and it will - the impact will be felt by the world.

The second issue is China’s continued investment in the West and, more importantly, the developing world – particularly Africa. One of these was a promised $20 billion in investments to various African countries. US secretary of state Hilary Clinton said in a speech that African countries should consider partnerships with more responsible countries, rather than those that exploit resources - an unmistakable reference to China. 

Africa, a group of nations exploited by the West for so many years, now looks like a very interesting location on the investment map.

What we see is that China is playing both the short and the long term games, a trend to be both admired and feared. As Africa is a continent of one billion+ people with finite resources (and those becoming scarcer), perhaps this should be cause for concern, rather than trumpeted as an opportunity in world markets.

20120912-China Effect Graphic-2

So is China damned at home as wages increase and internal economic pressures impact on productivity and competitiveness, and also damned abroad for investing in developing areas of the world and milking resources into the future?

Let’s ask what the effect would be if China had a hard landing? Probably more than we realise or have thought through.

Over the past ten years, the growth of the Chinese economy has undoubtedly empowered western economies, has allowed investment in the developing and developed world as they have bought their way into manufacturing, production, and service delivery, has acquired vast tracts of land in Africa for agriculture and has provided infrastructure for projects worldwide that would not have happened as fast.

With a hard landing these and many more investments would stop dramatically or at least be left for another day. The impact on western economies would be felt through the balance of trade dropping off and a decline in demand for western goods being manufactured in China. The result? An even greater slowdown than over the past four years, as well as some potential long term worldwide imbalances.

There will be those that say that we have enough issues in our own economy to worry about rather than focusing on what happens in China. True. However, if we don’t consider the impact of China on the world stage then we are likely to see the western world slow further and struggle to shake off the malaise that has embraced it over the past four years.

China is indeed an important part of the solution to world growth, but at what cost? China’s human rights record, although improving, is not great. Are we going to look the other way just to achieve growth?

As G8 nations write off debt and interest payments to African nations ill-equipped to deal with them both politically and economically, are we prepared to stand by and watch China lend even more to these nations, so that they can develop a stranglehold on their resources in the future?

There are many questions about the continuing growth of China, but surely the main one on everyone’s agenda should be “How fast does China need to grow to keep the world growing?”

Rightly or wrongly, China is a main player in both the East and the West and will continue to be so in the future. If we do not start now to understand how to work with it, influence it and develop alongside it, the West will certainly slow and become less influential on the world stage. As someone told me a long time ago the Mandarin character for crisis includes the concepts of both danger and opportunity.

Lets all look to China as the new opportunity for world growth, but it with some realism.