In World politics time is measured in decades, and many will call the 00s the decade of China. It is just a simplification, these 10 years are nothing but part of a longer process started in 78, and probably still ongoing for another decade more. And yet, if we have to choose one event that marked the decade in World politics, like the end of the Cold War marked the 90s, the rise of China is the most reasonable choice. No other event is likely to be be more decisive in the history of the World.

In the first post of this Year End edition we proved that, within the general growing trend of the decade, 2008 was a peak for China’s presence in the World media, and 2009 has gone back to relatively normal levels. This peak cannot hide the general trend: that China is growing inexorably to become a World superpower and that it is already changing the power balance of humanity.

Measuring the Chinese decade

If we have to chose one single parameter to measure this rise, it is the economy that can give us the best clue. There is no point in going to the decimals when analyzing decade trends, so the calculation is simple: China has grown roughly 7% faster than Western countries in the last decade, and all seems to indicate that this will continue into the 10s.

The calculation* is straightforward:  1.07^10 = 2

At a rate of 7% differential a year, the size of China’s economy relative to the Western economies is doubling every decade. Today most estimates of GDP place China between 1/4 and 1/2 of the USA economy, depending if it is measured in nominal GDP or in PPP. This means that, if nothing else changes in the next decade, Chinese economy will be the biggest in the World anytime between 2020 and 2030.

The consequences of this calculation are enormous, and they are already operating today. That is because in politics we behave like in the stock market: decisions are made taking into account the foreseeable future rather than the present. China is already displacing the EU in World politics, even if it is a fraction of the European economy, even if it doesn’t want to be the protagonist. The media and the politicians are betting on the future value of China.

The Question of the Decade

Of course, nothing guarantees that the growth patterns of the 00s will continue in the 10s. There is one important school of thought that insists on the unsustainability of the Chinese system. They mention corruption, growing inequality, lack of civil rights and a civil society, repression of creativity and free market, the inability to build World class brands and a financial system in disarray, among other problems, to justify their prediction that sooner or later the Chinese economy is bound to crumble.

Those of us who live and work in China know that these problems are serious and very real, and that somewhere down the line there is bound to be a serious readjustment. And yet, the same predictions have been made regularly almost every year in the last three decades, and the collapse has not materialized.

The real question of this decade is When?

Will the Chinese economy stop growing before or after it has become a superpower as large as the USA? Will the Chinese seriously demand more rights and liberties before or after China has become a developed country? Will the economic and political readjustments be done progressively with the new generation of Chinese leaders, or will there be a dangerous explosion in this decade?

We don’t have the answers to this today, and you should not believe any China expert who claims to have them. All we can do is frame the question above, and watch out for early signs to answer it in the coming years.

There is however one statement we can make today. Looking at the World, it is obvious that many important players are already betting on the rise of China, and this view is gathering more support every year. As we have seen above, to the extent that the majority in the World believes in the superpower scenario, China is ALREADY a superpower. The political power comes years in advance of the GDP, and the new World order is already a fact today.

Photo: Eric Risberg

*This is an engineer’s calculation, the nightmare of any serious mathematician. And yet, most bridges we do are still standing, and when we speak of decade trends anything more accurate than this is a joke.

When it comes to Chinese economy I have always been a bit of  a pessimist. This year I am getting to understand better the situation of public finance – I recently read the informative Finance and Factions, by Victor Shih-  and now the outlook looks even bleaker. On the surface China is doing well, but the more you look into the details the more unsustainable it looks. Which is exactly how systems look when they are about to snap.

And yet somehow I will not be surprised if in 10 years time we look back and find that we are still in the same situation.  After all, there were experts writing similar predictions already 10 years ago…

“Who gets rich in China? The Chinese!”

I am afraid I don’t have a better answer now than I had then, but recently I’ve been talking business with some entrepreneurial friends, and one problem has come up so many times that I think it is worth a post. And I hope this is useful for foreign start-ups in China to avoid making a bad decision from day zero and ending up, a few years down the line, mumbling the bitter phrase. The problem I refer to is the market dilemma, otherwise called the expat trap.

The Expat Trap

The idea is simple. In China there are two completely different markets: the massive Chinese market and the tiny market (but strong in per capita spending power) of the foreigners stationed here. If you plan to sell something in China, you need to choose one, and usually there is only one good choice. Of course, most large companies are after the Chinese markets, and the question expats/locals never arises. But for small entrepreneurs planning to start a venture in China, it is an essential decision, and all too often they take the easy road.

The expats are rich, they are accessible, they speak the same language and they have lots of time to spend reading your website or speaking about your product. Who wants to dive into the complicated world of the Chinese, where competition is cut-throat and many consumers have the wrong tastes? For many first-time China entrepreneurs, expat is the obvious choice, and so they move on with their idea. And sometimes they make a good job of it and they build up a nice little company that becomes popular in the expat community. And then, they are in the trap.

Now, I don’t pretend to have a solution for everyone, and surely not all business ideas area applicable to the Chinese market. But the point is many startups don’t give enough consideration to the market question. Even businesses that were intrinsically meant for foreigners can find ways to appeal the Chinese public. Look, for example, at the popular Chinese teaching company ChinesePod, which is now looking to turn around its business with the new website: EnglishPod. Unfortunately, this change is often impossible for a company unless it has been looking at the Chinese consumer from the beginning.

The barriers are enormous to switch markets: the product positioning, the culture of the company, the pricing strategy, all things you can’t change without upsetting your existing customers. Language is also a big problem, especially in the case of internet companies with active content, which find translating a whole website into Chinese is an impossible task.  Finally, the company has not been learning about the Chinese all this time, and chances are somebody else has instead. By the time a successful start-up figures out it should be looking into the Chinese markets, there are already a bunch of Chinese copycats that have taken its place.

In most of the cases, starting a company focused on expats is just a bad decision. Some might argue: there are enough expats in China to run a successful business, and there is nothing wrong in staying small. Right, they might be the kind of pretzel-selling Marge Simpson who is contented with little, but normally this argument just hides frustration. If you came all the way to China to start a business it is because you had big ideas in mind, and the only big thing here that you don’t have in Europe is the Chinese market.

Put it this way: you have moved across continents to have access to a market of 500,000* people at most, roughly the population of Luxembourg, and probably with a lower average income. Besides, these Luxembourgers are weird clients. They keep moving out all the time and a large part of them is replaced every year, which has a strong impact in their loyalty. Worse still, although their numbers are growing, the trends in expatriation policies indicate that their average income will be going down, as massive expat packages disappear from the scene and more locals are able to do the jobs expats used to do.

And the answer to the Question

Of course, the expat trap is only applicable to companies selling in China. Some business models are doing just the opposite, selling China to the World. Often they sell information, and their markets are far away, which makes them resistant to Chinese traps. Another possible exception might include businesses that manage to franchise their model to other expat cities around the World, or even run it back home. This is possible in theory, especially for internet companies, but I don’t know many start-ups around who have succeeded.

On the other hand, I know many companies in China that have seen the expat market work as a sweet bait, and then found themselves caught in a dead end. I was going to give some examples here, but I don’t like to hurt the image of companies that I know and admire in other ways. Instead, I can give a couple of examples of foreign entrepreneurs, like the ones behind Tudou, Neocha or DaD, who worked with Chinese partners and got their markets right from the outset.

So, in conclusion, if you are an entrepreneur and you plan to sell in China, beware of the dangers of the expat trap. And for the curious who scrolled down this way, this is and has always been the correct answer to the question above:

Who gets rich in China? Those who find their way to the Chinese market.

NOTES

* I am, of course, only considering Western expats. The large Korean and Japanese communities tend to have their own companies here, and are usually not a good customer base for Western companies. Other communities, like Russian workers, are also difficult for Westerners. Remind me to do a post about the number of foreigners in China.

The Time

Economies don’t grow indefinitely.  Low cycles follow high cycles and after 30 years it is about time. China cannot break the laws of economics, so the recession must necessarily come in the next X years. The country hasn’t prepared itself politically and psicologically to face this period. In the end, we are sure to have trouble.

Of course, this argument is of little value without the X, and many proponents of a time limit have failed in the past. This is the field of technical analysts and other mystical thinkers. Mythology also plays a role:  In Chinese history, cataclysms mark the end of a cycle. An earthquake preceded this crisis, and a solar eclipse is coming in July, the dynasty has lost its virtue. These arguments tend to work better with a bit of hindsight.

The Markets

The World’s economies are interdependent today. China’s economy is largely dependent on exports and FDI. The weight of these external factors in China’s growth has been much discussed, but regardless of the exact numbers, few doubt that it is a significant motor of the economy. External motors failing, China turns to internal ones: investment and consumption. Today, strong public investment, mostly in infrastructure and energy, is making up for the loss.

But infrastructure on its own does not move an economy, an empty highway is dead weight. Its value lies in the economic activities that are created or improved by using it, and those activities need markets to get them going in the long term. Optimists have pointed out that the crisis might turn developed economies to cheaper products, but international markets are saturated with cheap Chinese wares, and the latest news are discouraging. This leaves the Chinese consumer.

The People

Since the urban consumer was already developing at full speed, it is to the masses of Chinese peasants that all the eyes turned when a new market was needed to replace the failing exports. The peasants had been left out of the economic miracle, and measures were announced to get them back in.  But few of those social measures have materialized in any significant way, and the government seems to realize that this is a long term effort, not to be mistaken with an emergency financial package.

 Chinese peasants don’t like to spend money. They like to save it.  Some argue this is an immutable principle of a post-confucian society, others attribute it to the lack of “safety nets”, such as  health care plans, and the fact that poverty is still seen as a very real option.  Perhaps Chinese have too much common sense, and in the face of all evidence, they continue to act as if working hard and being thrifty will make you richer.

Meanwhile, the optimists of internal consumption see hope in the low-tier cities, the segments of the population that have already abandoned the peasant lifestyle, but still have a long way to reach East Coast level. 

The Government

China’s authoritarian system has some advantages over Western systems. The executive can take strong, quick measures unhindered by parliament debate and popularity surveys. A good example is the stimulus package. China was the first major country to announce it, and it is has been the biggest  relative to the size of the economy. Government technocrats tend to know more of economics than voters.

But some see in the system the seeds of disaster. The Son of Heaven is human, and bound to the wheel of favours, factions, patrons and clients. The lack of checks and balances makes it easy  for personal interests to take precedence over the common good. Some have a stake in the stock market, others in real estate, there are ways to pump up these markets with the connivance of Beijing. One day they might all decide it is time to cash in, and the rest of the population will be caught by surprise, watcing the CCTV report with the 8% growth spreadsheet. Lack of transparency usually works well to bubble up crises. 

The Package

China has a good package, timely and sizable. Few doubt now that it has delivered the desired stimuli. The thrust in infrastructure and energy investment is spilling its effects over the rest of the economy, and the feared legions of the unemployed are still nowhere to be seen today. 

But the package can only be a temporary patch, as we have seen above, and its function is just to cover the gap until the economy gets back to normal. In the meantime, the investments should be preparing the path for the return of sustainable growth.

Optimists point at the positive parts of the package, such as social measures, education, or development of new sectors of the economy in biotech or renewable energies. Pessimists note that the bulk of the package is actually flowing into very few sectors related to heavy construction, and this will cause unbalances and excess capacities the minute the financial tap is turned off.  In their view, the package is just postponing/aggravating the consequences. Some mention the devastating and unpredictable specter of deflation.

The Chest

China has also a nice chest. It is a war chest, and it is full of foreign-exchange reserves denominated in dollars. Optimists and lovers of logic alike see salvation in these reserves. They like to point out that China has room to go on with its package for a long time, thanks to all the years that the country has spent saving saving money and acting as “Americas banker”.

From a plain logical point of view, this makes sense, but unfortunately financial logic is anything but plain. The specialists in the area are quick to remind us that these reserves are not unencumbered wealth, and not free for the government to use. The central and provincial governments finances are already under stress, and the banking system is channeling all financial resources to the package SOEs, with the consequence of drying up available finance for other sectors of the economy.

The Riots

One of the main subjects in the Crisis discussions has been the possibility of large scale riots caused by unemployment. These riots could have the effect of destabilizing the system, with consequences in politics as well as in the economy. Perhaps because of the political derivations, unemployment has attracted a lot of attention from Western observers. Around the turn of the year, when the Western Christmas season was over and many semi-seasonal workshops were closing, the discussion reached the peak of popularity.

But the package has kicked in, and for the moment unemployment doesn’t show signs of getting out of control. The riots have increased in number, but they remain essentially local in nature, directed to claim arrears from a particular company, or against local authorities. There is a climate of relative optimism among the Chinese, and it looks like the the propaganda package that came with the financial one is having the desired soothing effects.

Inflation/Deflation

Predictably, another high point will come when the investment package is left behind, or when the financial situation makes it unsustainable to continue pushing it. At this point, we might see more passionating discussions, with the added appeal of possible deflation risks. 

Inflation has historically been a major cause of riots and wars, so a logical mind would assume that its opposite -deflation- has opposite effects, forcing everyone to stay in at home reading self-improvement books and drinking green tea. I doubt very much the economists will let us get away with this theory. In the meantime, I will stay tuned to the blogosphere for any interesting development to add to this list.

And in the meantime, we have read so much about her that the debate gets old, the initial guessing game we merrily joined some months ago giving way to a phase of weary expectation.

So, finally, is there going to be trouble in China or not – Will the Wall Fall? I have my own opinions about this, but I’ll keep them clear off this post. Instead, I want to  summarize some ideas appeared in the sinosphere, list the main arguments from each side, and let the reader choose which make sense.  Luckily, this is the kind of discussion where the same arguments are fluently used to support all views, so the list can be made manageable.

But first of all, let’s examine the parties. In this business of Chinese Crisis Watching there are 3 main schools of thought,  which can be roughly classified as follows:

A. The Optimistic Executives:  Old China hands with long memories, bullish consultants with short ones. Optimistic people with or without a stake in the optimism of their clients. Just to list some recent ones.

B. The Academics of Doom:  Everybody knows the highest fulfilment of a dismal scientist is to announce doom and then have doom come. On the other hand, there might be something in what they say…  some examples.

C. The Rosy Men of the Republic: This 3rd group is endemic to China. It consists of a set of highly prepared bureaucrats who resolutely believe in the Feelings of the Motherland, in Santa Claus and in the Theory of Scientific Development. You can see here some of their latest achievements.

The English-speaking sinosphere is a little world, and we rarely see the big names that populate other provinces of the internet. But we do have a great advantage: debate here is relatively free from partisan politics.  There is not much in the way of left-wing China blogs, for instance, and American republicans don’t go about throwing  green tea parties just because grandpa Wen announced a healthcare plan. 

In fact, the left and the right in China are conveniently concealed behind the red walls of Zhongnanhai. There are few leaks, and the real data which analysts use is pretty much available to anyone with an internet connection and some notions of mandarin. This is a level field where you can browse around, draw your own conclusions, and enjoy your tea leave reading with Armstrong’s great cover of  ”La vie en rosy“.

But enough if the rosy chit-chat. Here’s the points.

Thank you for adding now pictures to your yesterday’s article :  China’s “scientific development” works to counter economic downturn. And thank you for choosing the most beautiful of the slides you published last week, the one which I call:  “La vie en rosy”

Now it has the completeness I was looking for. I will keep your article for further reference in my database of Crisis Commentary, and I will look at your slide every time that Shanghai weather makes me feel down.

BEIJING, March 8 (Xinhua) — China’s relatively fast economic growth has caught the eye of the world at a time when most of the countries are experiencing the full wrath of a raging economic slowdown.

As some Western media questions why China works, the world’s economic experts and scholars are also wondering the same thing: What tools China has to keep its economy resilient and why it is well-positioned to weather the financial crisis?

The answer lies in the nation’s unique growth mode featuring a “scientific outlook on development.”

Economists and bloggers of doom, read and learn.  For the sceptics, this editorial is based on the work of recognized specialists, such as:

• “Analysts”
• The vice president of Stellenbosch University
• The Colombian ambassador to China
• “The international community”
  
• Velia Hernandez, professor from the A.N. University of Mexico

And many other “economic experts and scholars”.

Finally,  science at the service of the community.  And the question is, what do I do now with my two months worth of canned tuna?

Today I am starting my review section with one of the books on Chinese economy that has impressed me most in the last year, “Capitalism with Chinese characteristics”, by MIT professor Huang Yasheng. It is a book that clearly stands out from the recent China books, and it might be destined to become one of the big references in the field.

There is no shortage of good China books in the last years. Many are written from a business perspective, by people with first hand experience who will tell you exactly how things are done here. Others look at the available economic data and build interesting theories to explain them. Few go deeper than this, to look into the heart of the matter: the politics behind the Chinese economy.

The problem is:  it is so difficult to obtain reliable information on Chinese policy that most efforts in this field turn into circular arguments over the same limited data. Professor Huang breaks the circle by going back to the sources and questioning directly all the mainstream assumptions, leaving many of them upside down. The situation in China requires this approach, as he says in the preface:

In studies of American economy, scholars may debate about the effects of, say, “Reagan tax cuts”. In studies of the Chinese economy, the more relevant question would be, “Did the government cut taxes in the first place?

By going back to the archives of what, in his own words is “some of the world’s most medieval record keeping”, Huang Yasheng is able to come up with a whole new picture of Chinese economic policy in the last three decades. This book is the result of painstaking archival research into rarely examined files, such as a “22 volumes compilation of internal bank documents” or the archives of the Ministry of Agriculture.

A qualitative leap from the classic tea leave reading, and one that deserves some careful consideration, even if the conclusions drawn will not be to the taste of every reader.

The book

“Capitalism” is the work of an academic, it is published by the Cambridge University Press and it comes with all the scholarly bells and whistles. But the occasional reader should not let this scare him off it. It is a readable piece, with chapters drafted following the tested formula: attractive anecdote – presentation of the argument – easily skipped statistics – groundbreaking conclusion. Add to this some juicy celebrity bashing (including Nobel J. Stiglitz) for just the right spot of gore, and you get a read that you can thoroughly enjoy. Selling for a surprising  23$ (cheap for a Cambridge Uni hardcover) this is clearly a book designed to be read.

I will not do a detailed summary here, you can find some more in this excellent review posted last month on China Beat. Instead, what I will do is highlight some of the points that Huang makes that I find most relevant. These they are, as I understood them:

• China is much less capitalistic today than most observers assume it to be. The real miracle of private entrepreneurship happened in the 80s, but has since been deliberately suppressed, largely through financial repression.

• The 90s and 00s policies favour FDIs and large SOEs against privately owned Chinese companies on one hand, and the cities against rural areas on the other, with very negative effects on some aspects of the economy. These aspects, which are not represented in the sexy GDP figures, are essential to ensure the sustainability of China’s growth. They include: education, productivity, creativity, entrepreneurial spirit.

• The large developed cities, and Shanghai in particular, are Potemkin metropolis. The sparkling new infrastructure of Shanghai and Beijing, from the Maglev to the recently burnt CCTV tower, are for a good part “white elephants”. While these investments -mostly executed by SOEs-  have helped boost the economy in the 90s, they have questionable returns in the long term, and their opportunity cost will have to be paid dearly.

• China is failing to develop the necessary “soft infrastructure” to ensure a sustainable economy. Worse still, it has actually regressed in this field during the last decade. This spells trouble for the future. The “soft infrastructure” – a term used in many China books and which I suspect originates from previous Huang Yasheng works – refers to those immaterial conditions such as the rule of law, open financial institutions, a civil society and entrepreneurial spirit that many consider essential for the long term development of an economy.

Wrong Shanghai: Observations on the Ground

The book opens with a statement that is sure to catch the eye of many living in China: there is something wrong with Shanghai.

Yes, no less than Shanghai, the city that has been fooling us for years with its aura of dynamism and openness. Huang Yasheng arguments, with precise data in hand, that entrepreneurship has long been eliminated from the city.  Shanghai’s wealth is made of SOEs, FDIs and transfer of resources from other parts of China. It is in fact an economy of CPC members and risk averse “iron bowls”.

From my viewpoint of an observer on the ground, it is this statement that I found most exciting. I went straight to chapter 4 and then I went straight to ask all my Shanghainese friends what they though of it. The response I got almost unanimously: “No kidding, do you need to read a 300 pages book to see this?”

Which led me once again to this reflection:  We continue to pay too much attention to foreign experts, and not enough to the Chinese themselves. In spite of the growing efforts of bridge bloggers and media, there is still a massive divide between the two worlds. The successful China books are mostly written by foreigners who don’t read and write Chinese. It is still too easy for an old China hand to position himself as an expert in everything China. And the circle feeds itself.

And the sheer dismalness of it all

It is always amusing to read these scholarly works in social sciences, where findings are measured against some -ism pattern, and where partisans tear each other apart mercilessly.

Reading this book one cannot help feeling that there is an underlying model in all of its arguments. A conviction -some might call it an ideology- that free markets, a small state and liberalism are the fundamental bases upon which a healthy economy is built, and that there can be no long-term “China miracle” based on exclusive “Chinese characteristics” if it doesn’t follow this model. A line of thinking that is understandably very critical of the Chinese policies in the 90s and early 00s.

On the other hand, while this partisanship may lend the book a more unscientific feel than one might like -and what is so scientific about economy anyway- , it also makes for a more compelling reading, not unlike watching a football match where the author scores a spectacular hat-trick. Should anyone be ruffled by the treatment of authors like J. Stiglitz, I would suggest a read of his own popular book “Globalisation” to get a taste of what it means to tear apart your opponent.

Of course, the problem with all this is that it makes all works very vulnerable to world fashions. “Capitalism” was written before the financial crisis developed, and unfortunately for Huang Yasheng, the winds of economics are since blowing in the opposite direction. The moment marked last year by the fall of Lehman Brothers  and the crowning of some other partisans have tipped the scale to the Big State ideas. More importantly, China’s economy is still holding strong compared to the West, and this is feeding the side of those who feel that China’s miracles can save the World from the greedy free-market ideas of the Washington consensus.

While I am of the opinion that China has still a lot to offer to the World, and I certainly see some sense in the famous Beijing consensus in the field of international politics, when it comes to economic policy I tend to agree with Huang Yasheng’s point of view. Being based here and working daily with Chinese companies, it is just too difficult to believe in the soundness and “entrepreneurialness” of China’s economy.

In any case, and whatever the opinion of the reader, Huang Yasheng drives his points home with argumentative skill, and making good use of an admirable research work to shed light on some of the least understood aspects of China’s economic development. Moreover, it is to his credit that, based on the new data, Huang goes against his own previously held ideas -namely, that the 90s reforms were more far reaching than the 80s. It is always comforting for this humble, unenlightened engineer to see that, in social science too, empirical data can change a theory rather than the opposite.

Who knows, it is very possible that the economy’s Wheel of Fortune will turn again sooner than we expect. Then China’s  economic system might suddenly show all its contradictions, and people will need to turn to books like “Capitalism” to try to understand what has been going on all this time.

Tom Pellman is Double Handshake. He was an editor in a well known economics magazine in Shanghai, he is almost trilingual in Chinese and he is now in Peru to see that Latin America’s largest population of Chinese are enjoying their Pisco.

Have you noticed that, in China, most of the people you hear speaking Spanish are not European, but overwhelmingly Latin American? Did you ever wonder why so many Chinese are flocking to the Salsa Dancing schools, and why in Shanghai there is a latin night scene more active than the one in Barcelona, for example?

Well, in some places, language is not the only means of communication. And if you want to smell the Juan Valdes, you better keep and eye on these two continents, because things are moving fast under our very noses.

Double Handshakes.

Still, on our return from the double New Year’s season, many of us are suprised to see the sky is not falling on our heads, and the dire predictions we did before the holidays have not quite turned true. Indeed, the Crisis in China seems to have a very annoying quality for bloggers: it is not happening. Yes, we’ve had bad news coming every week for the last months, we’ve seen experts we respect telling us how bad the unemployment is, how many factories are closing. And all of them are right, if we look at the numbers. Yet, on the street, no Crisis to be seen.

What is going on here? Who is taking our Crisis away, depriving the dismal scientists of their fair share of joy and fulfilment? And more importantly: is it not time to deem the whole affair a bluff, and go join the ranks of the optimistic, together with the guys at the World Bank and the CPC?

Where are all the Crises Gone, long time passing?

You might remember that post I wrote where I started out wondering about the different perceptions of the Crisis in China and in the West. 3 months have passed and this contrast is, if anything, sharper than before, as I have seen during my New Year’s travels. Right now Europe is bleeding, there is no question about this. China, on the other hand, looks to the casual observer like a normal, almost healthy economy. One cannot sense the Crisis.

In Shanghai, Zhejiang, Fujian, three of the engines of China’s economy, I have seen nothing going on but normal everyday life. The shops are full of people, “we hire” signs are on the windows, and taxi drivers remain for the most part optimistic – at least those who didn’t buy shares. One of them even told me: “Riots only happen in Guangdong, in Shanghai we are civilized”

Back to the office, in my work with industrial investors in China I see the same picture: while some Western clients have cancelled or postponed their 2009 FDI projects, not a single project has been stopped by our Chinese clients, which are all large SOEs.

The time’s for the Ox and don’t give me no Bull

Here are 3 reasons that might explain this strange gap between theory and observation: delay, transparency and inertia.

• Delayed effect: The crisis comes to China in a very different way than to the West. In our case it was a bursting financial bubble,  hitting us all with the speed of sound. In China, it is different. They didn’t have the “complex financial instruments”,  their financial system was relatively isolated. In China the Crisis is caused by exports and FDI, which is a far less explosive mix. Look at FDIs, for example: a typical project cycle to build a factory is 3 years, and there’s a point of no return somewhere in year 2, when the construction is mobilised and the equipment paid for. This introduces a long delay while the ongoing projects finish and until the absence of new projects cause panic in subcontractors. Same effect with the production of factories which had a large backlog in 08.

• Inertia: China is a massive system that has been moving at high speeds for 30 years. This doesn’t stop in one day. It is not only the phisical momentum of the thousands of ongoing projects, it is also psycological inertia. in the minds of many Chinese the system is strong, and there is no reason to believe in a Crisis that has never happened in their working lifetime. Behaviours do not reflect fear, and many go about their New Year’s shopping like any other year. Worse still, some seem happy to believe that it is America’s fault and this is an American Crisis; and mind you, not all agree that smart China need lend the old brother a hand.

• Transparency: This is the most important reason of the three, and the one that scares me most. For all the good things that one can say of CPC’s economic policy (yes, they did draw 300million out of poverty) there is one serious fault that nobody fails to notice: Lack of Transparency. With the largest part of the economy dominated by SOEs or following direct orders from the party, it is not unreasonable to think that there might be a bigger soup on the fire than we are led to believe.

I don’t want to cause alarm or instigate hoarding behaviours like that of our old professor, but this is not looking good. If there’s one single best way of making a Crisis more deadly, that is withholding information and letting it burst only when it is too late.

The two pillars of China’s growth in the 2000s were SOEs and FDIs. The FDI leg is seriously failing now, and the effects will be felt progressively. Even with all the financial might of the Chinese State, it is hard to imagine the SOEs taking the place left by the FDIs, let alone going out to take over the World. I cannot see the Chinese companies leading the effort, I can’t see their necessary creativity and initiative to open new markets to replace the lost export ones. All I can see is a bunch of Giant SOE’s which are better at leveraging their massive size and influence than at impressing us with their products.

There is something quite anomalous in this perceived calm of today, and this blogger thinks that he can smell a Rat. But the time is not for Rats anymore, it is for Ox.

Which is one 2 bits short of a Bull.

Global Risks 2009: a new report from the World Economic Forum, identifies a deteriorating global economy, a hard landing in China…

In the report , which you can download here, they go on to speak of China 09 GDP of “6% or below”, a point which the international media is quick to report. How’s that for the confidence. Ouch, one 2 good points below the waistline of the CPC’s 8% , and right in the family jewels.

Mind you, I am not writing this to pick on Wen’s predictions. First of all, the WEF’s report is only making hypothesis, to see their possible impact on the World economy. Second, I think Wen would be as likely to get it right for China’s economy as the gurus of the WEF. After all, the CPC prepares its predictions with the advantage of insider information, and it suffers less distractions than the vedettes at the Convention of Dismalness.

On the other hand, it is a long time already since the Forum passed the heigh of its influence and it looks this year more irrelevant than ever. In the end, the important decisions for the World economy will be taken by Obama’s team and the CPC, and it is unclear how either of them will listen to the WEF. Most importantly, the role of the Forum as a brainstorming event has largely been taken over by the econobloggers, as we saw in this fascinating article you might remember from last month.

Inexplicably, we have not been invited to Davos this time, so we’ll hit the road in Shanghai instead and see how the faith and determination is doing, and whether there are signs of  faltering in the good old Shanghai shopping spirit. A big part of China’s economic Wall is made of the faith of its consumers, who are the ones supposed to make up for the lack of exports. Here’s how they are faring in Shanghai:

Nanjinglu: The usual mobs of shoppers and sellers in spite of the biting cold.

Xujiahui: It is difficult to walk the Street, the shops are as full as ever and the official sign on the Bridge reads: “Do Well Your Economic Survey, capture the situation and the strengths of the District, and promote the development of XuHui.” This district is also undergoing an economic survey, like the one done by these funny villagers, but hopefully using more standard statistical methods.

Sitting 牛: Hordes of consumers worship the goddess of consumption, the Sitting Cow.

We Hire – I got this last night right next to my place. I haven’t been keeping track of the changes these last weeks, but all I can say is that we still see many signs like this. The red character means: We hire.  1200RMB a month plus extras. Searched: waiters, shop manager, dish cleaners, etc.

So there you go, in Shanghai, in spite of some people getting worried and a few foreign startups having a hard time to meet ends, it looks like the F and D are still holding stong. Let’s hope they stay right up there throughout 2009, and we might avert this one of the Global Risks.

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]]> http://chinayouren-free.com/2009/01/15/1236/feed 6 http://chinayouren-free.com/2009/01/13/1148 http://chinayouren-free.com/2009/01/13/1148#comments Mon, 12 Jan 2009 17:09:17 +0000 Julen Madariaga http://chinayouren-free.com/?p=1148 You will excuse me for writing two serious posts in a row. It’s been ages we don’t do anything on the Crisis, and these days there’s been a series of articles on the subject that I couldn’t just let pass.

Two of them have to do with the growth projections for 2009. Yawn. We’ve been seeing new projections and discussions thereof almost every week, and after the holidays break it looks like here it is all over again. It is mostly fruitless, because there’s not enough new information between one projection and the next, and so most of the times the changes reflect the mood of the expert more than anything else.

It was however interesting to read this PD article Sunday where one CPC “renowned economist” worried that “China is likely to lose 3.9 million jobs in 2009″ if GDP growth slows to 8 percent. Well, he need not worry anymore, according to other top CPC officials quoted here the very next day, “China Risks Missing 8% Growth Target”, which will be “extremely arduous” to achieve. They are starting to change their tune, again.

And this brings us to a more interesting subject which, although it is as difficult to predict, at least it is more telling than the empty statistical artifice of GDP. I am speaking of Unemployment.

There has been two contradicting articles over the weekend, by Wang Tao from UBS and by Victor Shih. They hold different positions as to what will be the unemployment figures in 2009 and what will be their social impact. In any case, it is worth noting that both of them, with their 15 Million (Tao) and 35-50 Million (Victor) figures, are way above any calculation by the “renowned economist” of the People’s Daily, who gives 1 Million for every % of GDP lost.

Needless to say, I am with the relatively pessimistic predictions of Victor on this issue. Partly because I deeply distrust socio-economic projections issued by banks (you can hardly blame me on that). But mostly because the arguments that Victor puts forward are more solid than Tao’s. Based on his deeper knowledge of Chinese politics,  Victor goes on to analyze the possible consequences of his prediction in a worse-case scenario.

Noting that, even if the government has the capacity (as he calculated here) to subsidize the unemployed families for an extended period,

the current wave of layoffs affects a young and vibrant cohort most capable of carrying violent collective action against the state. Without any systematic triggers, we at least will see a spike in localized riots which necessitate the mobilization of People’s Armed Police (PAP) units all over China. The central government would also be compelled to (and they are doing so already) roll out generous unemployment benefits for migrant workers and college graduates (to the tune of 300-400 billion RMB). If a systematic trigger occurs and instability spreads to a sizable city, we will see the large scale mobilization of both PAP and army units and possibly substantial bloodshed. In most scenarios, the CCP regime would still survive a large scale, cross regional rebellion. However, “overall investor confidence” will be lost.

What is the “systematic trigger” which I refer to? I don’t know exactly what it would be. However, if we look back in history, it can be a wide range of events, including the death of a popular leader, a serious natural disaster, the spread of a deathly infectious disease, a small student demonstration turned violent, religious groups…

This idea of the “trigger” (I called it the “Spark” on my previous post) is right on. It is exactly the element that is missing and the one that will make all the difference: when we have social tension to get the people in action, and intellectuals to draft the road map, the mix is an unstable equilibrium waiting to get in contact with a spark. Of course, Victor doesn’t know what exactly this spark would be, and neither do I because its own nature makes it unpredictable. But I would add to his hypothesis one of my own:

The emergence of a massive wave of protest on the internet that extends to all the forums and BBS simultaneously, with new sites being created faster than the government can block the old, which could create a cascade effect that would force the government to commit its worst mistake: close down the internet altogether. This would add to the protesters millions of online game addicts released from their cybercafes, constituting a serious army of instability.

Check out today’s post by Imagethief on the subject, showing with 2 nice graphs that we have an unprecedented situation in China. Also,  yesterday Jeremiah of the Granite Studio did an interesting comparison of the present situation and the one in 1919 during the May 4th movement. In those times, there was a clear “trigger”: the humiliating treatment of China by the Western powers in the Treaty of Versailles after the First World War, including the unforgivable transfer of territories to Japan.

One last note for the optimists: this weekend I learnt of a reputable economics professor living in Shanghai who recently bought 3 months advance of canned food to store in case the situation gets rapidly unmanageable. In a city like Shanghai, if the logistic networks are disrupted we can run out of food in a matter of days. I am still not quite there myself, but I must admit that, since I heard this, the idea hasn’t quite left my head and I tend to go more generous on every visit to Lawson’s.

UPDATE: Oops, I completely missed this one. All Roads has been doing the same comparison and drawing his own conclusions. You can see it here.