China’s Prospects for 2009 – Follow Up

Saturday, January 10, 2009 10:13
Posted in category The Big Picture

Prior to the new year, and in preparation for an interview, I asked readers to send in their thoughts on the prospects for the new year.  I received some interesting responses, none of which were willing to do so using their name on All Roads, but I convinced one person to allow me to post them on their behalf as I found the answers very interesting.

What I can tell you is the person who wrote the comments they have a strong basis in economic analysis, investment banking, and China… and has been based in Shanghai for 5 years.

1) What role does China have in correcting the current imbalances?
General status:  China is a major exporter to the world.  US (and West generally) is a major importer of Chinese (and Asian) goods.  This trade surplus naturally leads to an appreciating RMB.  To stop the appreciation, China intervenes and buys USD, which leads directly to its huge FX reserves.  Now China is the largest owner of US treasury debt.

Given that the US (and West) are likely to be facing a heavy economic downturn, this pattern of trade is unlikely to continue.  US consumer can no longer support US and Chinese growth.  Negative impact on Chinese exporters, implies excess supply in China.

China:
* government should push stimulus package
* should strongly encourage domestic consumption
* do not push increasing export-driven growth
* do not push further investment into capital goods (excess supply)
* Should lower trade barriers
* Allow appreciation of RMB
* Allow slow reduction of accumulated FX reserves or actually use FX reserves as fiscal stimulus
* Consider reduction in tax (consumption taxes – VAT tax)
* Government Investment into education, social services
* continue with all the other usual good stuff (transparency, anti-corruption, etc.)

2) What will be the growth rate for 2009 and where will the growth come from?
I couldn’t break out the components of that growth now, so I can’t give you an intelligent answer.

I suspect you’ll see a significant increase in government led investment and consumption.  Construction from what I hear is declining.  A suppose a lot will depend on consumption.

3) If China took an approach to protect its economy first, what steps would be taken?
This would be exceptionally foolish to take a beggar-thy-neighbor policy.  Global macro problems are (almost always) a coordination problem.

Enlightened protecting economy first is as stated above:
– what’s good for world is generally also good for China
– especially in the long term

Not Enlightened “good for China” policies
– protective trade barriers
– promoting national champions
– promoting exports
– RMB depreciation

4) Will China be able to spur domestic consumption, and if so, would that save the global economy?
I would say it would start with aggressive consumption tax cuts, aimed at lower class.  Cut all those taxes on the agricultural economy.  Keep trying to fight corruption, because that deters small businesses from trying.

Would that “save” the global economy?  No.  Not alone.  Serious Chinese consumers are too small a subset of overall economy.  The super-rich here aren’t exactly spreading their wealth around.  The economic dividends system is not progressive enough – rich get stupidly richer — even more so than in America.  World can’t count on consumption by Shanghai and Beijing elite to save global economy.

5) Where are China’s most exposed joints, and where are the tipping points?  what is hiding in the shadows?

Exposure:
– Inflated Asset Markets
– Real Estate ?
– Equities ?

– Financial panic / crisis
– Banks in China may not have had CDOs and credit default swaps, but they’re sitting on plenty of bad debt.
– Many corporates in China are going to get hurt in this process (business damage)
– That is going to have a knock-on effect in terms of credit

– General over investment
– China has a talent for overbuilding
– This can work in a rising environment
– Now they are going to see what over investment looks like in a falling demand environment

– unemployment
– social instability
– lack of safety net
– people’s expectations about future could reverse
– corruption hurts when things are good (it’s not fair, but we’re all getting better), but it’s lethal when things are bad (it’s not fair, and I’m suffering)

Tipping points
– If you start to see high profile bankruptcies
– If there is noticeable rising unemployment effects — like > x% unemployment and enough people are milling around.

6) What sectors offer the most opportunity for foreign firms to participate in the new China?

– If you have interesting technology to bring to China, which you can adapt to China, I think that is still interesting.
– China has problems on a scale like no other country.  So your small idea to make things better, might actually get scale in China
– Of course, most foreign firms probably do not know how to handle China, nor do they know which of these ideas could actually take root in China.

Green technologies
Agriculture
Poverty / low-resource focused

Finance:  highly regulated, entirely dependent on government I think
Internet Technology:  Local competition is already awesome

7) What sectors / geographies offer the most interesting plays for China firms looking to buy global revenue and distribution streams?

Anything in the US
– I imagine US assets are going for a song right now
– This is a good time to make strategic moves, provided you actually have the talent, capability, to handle it
– That being said, you have to do it sensitively considering the environment.  China isn’t going to look good if it is pushing beggar-thy-neighbor policies while trying to take advantage of other countries’ open economic system.

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3 Responses to “China’s Prospects for 2009 – Follow Up”

  1. ian channing says:

    January 10th, 2009 at 10:58 am

    Couldn’t argue with a single point here, so thanks for a concise and informative wrap, whoever did it. Would only add that, on a bright-ish note, so much needs to be built in the countryside at the small town and village level that there seems to be plenty of scope for useful ‘over investment’ there. The saying is still true–yao xiang meng, yao xiu lu (sorry if I have mismembered the phrase, which means if you have ambitions, fix the roads or something like that)

  2. Tim says:

    January 10th, 2009 at 7:39 pm

    Rich,

    Excellent post and one of the few analyses I’ve read on China’s prospects this year that didn’t get hung up on one point signaling the end or China’s glorious rise.

    Tim

  3. Rich says:

    January 11th, 2009 at 7:02 am

    Ian/ Tim – thanks for the comments

    Ian – I think your translation is right as well, and would agree on the size of the opportunity in rural China. for me, I think this is where the biggest gains can be made.

    R