Are You Optimistic About China?

Wednesday, August 26, 2009 19:23
Posted in category Uncategorized

Over the last 6 months, the question “Are you optimistic about China?” has been coming up on a regular basis. For some who ask me this question it is a economic question – can china weather the current economic cycle, while for others it is a question of environmental sustainability – Will China drown in its own filth before it has time to clean up?

Earlier this week though, I was asked to answer essentially both questions at the same time though by a professor from a leading US university, and it prompted me to sit down to write this off because I am curious to know what the common consensus really is out there given the complexity of both questions.

It is a topic that a lot of people have written on and studied recently (Shenzhen Article China’s (Optimistic) Future, Pew Report Prosperity Brings Satisfaction – and Hope, and even a whole chapter of a book (download here) called China—Confidence Tempered with Unease.. all equally interesting, and based in a reality that is based in their own experiences, but for some… it is not all happy times, and clouds are looming

From my perspective, and I said as much when I answered, let it me known that I am optimistic. That were I pessimistic over the long term,  I would have already exited and gone home because the end game here for me is a scary one should the dominoes fall.

However, it is impossible to deny the complexity and severity of the dynamics that exist on the ground here, and that for as much discussion about 8% growth targets, there are an equal number of conversations about the costs of growth in China, environmentally and fiscally.

That, all this is for not should the ecosystem fail or the housing market fall over like a building with a poor foundation.

Adding further complexity to the analysis, and getting a clear perspective on the real picture is the fact that I have witnessed an amazing amount of progress in the last 8 years in China, and so there is a clear history of leaping buildings in a single bound to look back on. That, like in the past, I can see are in for a lot more economic and environmental reforms whose intended goal will be to create a systematic stability within markets, ecosystems, and populations.

That being said, my optimism not limitless and is heavily tempered by a number of big external factors, issues that are largely out of the control of China as a state, ecosystem, or economy. For example, should the US economy continue to sour (some would argue the likelihood is high), China’s efforts may not achieve the growth performance that its leaders say is needed to sustain job growth and keep people happy. Another example being if the world’s banking institutions experience another round of toxic assets that lead to another jamming of the credit system, that would hit the export economy and foreign investment again square in the teeth, perhaps resulting in a knock on effect internally in consumer confidence, jobs, etc.

No simple answers, a lot of moving pieces… and big implications.

So what are you? Bull in a China shop, or hibernating bear? What are the signposts that you look at?

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6 Responses to “Are You Optimistic About China?”

  1. Chris Devonshire-Ellis says:

    August 27th, 2009 at 2:04 am

    I remain somewhat skeptical about what lies in store for China. My own concerns lie in several areas: the overreaction to China’s first half GDP figures, the lack of economic modeling reform, and the weakness of China’s banks.

    The 7.9 percent growth rate that China announced for its first half year performance may have made a lot of people feel better, however, a recovery requires rather more substance than hype. We would do well to note that such growth comes at a huge cost coming from China’s economic stimulus plan injected into the economy at the beginning of the year. Were it not for this, I would suspect that China’s real growth during the period would be far lower at about 3 to 3.5 percent.

    China can only pull off the economic stimulus factor once, and I cannot see where such a huge impetus is going to come from to be able to continue such figures into 2010. The government, in trumpeting the GDP figures so loudly, have effectively made a rod for their own backs.

    There is also the matter of the sky-rocketing Chinese stock market mentioned in Jim Lowell’s article published last August 5. This year, the Shanghai stock market is up by 80 percent. While impressive in itself, unlike Lowell, I do not believe such a performance to be healthy.

    Clearly, a mature market would not react in such a fashion. So what’s going on? Back to the Chinese economic stimulus plan again and the estimated 20 percent of the US$4 trillion stimulus plan that China injected has apparently been invested into speculation instead of infrastructure projects.

    In an effort to curtail this practice, the central bank has begun curtailing bank lending. It’s also altering interbank bond holdings in attempts to get its banks to be more careful when booking loans. China’s property sector too, has shown signs of a bubble developing. Again, speculative investments to make a quick buck rather than invest long-term into more necessary projects has hijacked the good intentions.

    Longer term, China’s current economic model during the financial crisis has shown strong signs of stress mainly through its reliance on exports with little appearing to have been done to radically shift the Chinese economy into a consumer driven society.

    The hope that the United States will recover and start buying again seems to be the reason. When this will happen is still questionable as American growth still continues to shrink and it may be awhile before it starts to ramp up spending again. China’s economy remains addicted to 40 percent of its GDP coming from its exports. Until that unhealthy reliance can be altered, China has no choice but to await an American recovery.

    While the rest of Asia- notably India- look like value for money, I suspect China doesn’t have a plan to project its economy forward in 2010. Its economic model is wallowing in America’s ocean of debt and its recent growth figures look manipulated by speculation and skewed by its stimulus plan. I cannot see what will come next to boost growth. China businesses would be wise to concentrate on investing and building their domestic infrastructure for the next two years rather than expect an immediate return to healthy dividend declarations. – Chris

  2. Whoamishanghai says:

    August 27th, 2009 at 8:49 am

    @Chris: China’s stimulus was 4 trillion Yuan, not Dollars, so that is a huge difference.

  3. Chris Devonshire-Ellis says:

    August 27th, 2009 at 9:00 pm

    Spelling mistake. I meant RMB. Thanks for pointing it out. It’s not a small amount of money…

  4. William D Strong III says:

    August 27th, 2009 at 9:15 pm

    Very optimistic.

    The American economy will start to pick up in the middle of 2010

    China will continue to grow but will rely more and more on internal demand
    which will also be good for America and for the global economy as a whole.

    Mark my words.

  5. adsfasd says:

    September 1st, 2009 at 5:18 pm

    Long term very optimistic. China and its economy is built on the backs its each and every citizen. I see the economic drive, dynamism and determination in enough of them to better themselves that, with the low base level china is starting from, can only grow the whole economy and themselves exponentially. I realize that china has serious problems, but betting against china’s continued growth would mean saying that chinese citizens will forever be fractionally as productive as their developed country counterparts.

  6. William D Strong III says:

    September 1st, 2009 at 10:25 pm

    hear hear