Showing posts with label S Curve. Show all posts
Showing posts with label S Curve. Show all posts

Friday, March 6, 2009

Super China

Without question, China has been handed a heaven sent opportunity, not to take advantage of the discomfiture of the developed world’s financial system which is simply counter productive, but to use the time out as wisely as possible to strengthen the internal Chinese economy itself.

This is when you establish the proper social support systems so clearly missing and establish a national Medicare system and provide more internal capital through the banks to encourage local village development. All those folks who just came back to the village prematurely are a fabulous resource if they are modestly bankrolled. Microcap is the flavor of the times.

A pause led by the expansion of the internal economy will hugely lower China’s exposure to similar financial shocks in the future. Steady internal growth will sponge up the surplus labor over about three years. After that the economy will be driven by the expansion of the internal consumer economy, already well entrenched.

In fact, since last year, China reached the point in which there were no more surplus workers to leave the villages, it has actually reached the point in which all able bodied people are gainfully employable in the modern economy and this will mean rising pay packets over the next decade and Chinese consumer demand driving Indian economic maturation.

In practice it has taken China thirty years to trace the same path traced by Japan in forty years. It is now entering an era of solid internal growth in which the benefits of the modern economy penetrates to every Chinese household. Economically China has reached the top of the development S curve and must now figure out how to maintain growth by reinvention just like the rest of the developed world.

Super China
Robert Peston
5 Mar 09, 06:25 AM
Much of what the Chinese premier, Wen Jiabao, described this morning to the 11th National People's Congress as his country's programme to combat the evils of global recession would have sounded very familiar to a European or American audience.

What have become the new orthodox policy prescriptions for this time of crisis were all there: tax cuts; big increases in public spending; massive jumps in public-sector borrowing; more lending to business; anti-protectionist rhetoric; calls for improved regulation of banking and financial services.

It could almost have been Gordon Brown addressing the 3000 members of the National People's Congress in the Great Hall of the People under the giant red star.

Except for one glaring and important difference.

The Chinese economy remains - by the standards of the US or the UK - exceptionally strong.

It's true, as I've been pointing out over the past few days, that growth in China has been slowing down - and regions particularly dependent on exports, especially the south, have suffered mass closures of factories and painful rises in unemployment.

But many economists believe that the Chinese economy is still growing, even if they also say that the official statistics overstate that growth.

Thus Stephen Green at Standard Chartered reckons there was 1% growth between the third and fourth quarters of last year, and that there'll be a similar expansion in the first three months of this year.

For 2009 as a whole, he's forecasting GDP growth of between 6 and 7% - which is only a little less than China's official forecast of 8% (which Wen Jiabao repeated today).

That may be a long way from the low teens growth of last year. But it looks pretty amazing compared with the very painful recessions in Japan, the UK, Germany and the US.

And here's another frightening comparison between China on the one hand and the UK and US on the other.

Wen Jiabao announced that China's budget deficit this year will be 950bn yuan. That sounds like a big number - and it is an all-time record for China.

But, in relative terms, it's a flea bite compared with public-sector borrowing in the UK.

Converted to sterling, that 950bn yuan is equivalent to roughly £100bn.
Which is almost 20% less than what the UK government expects to borrow in 2009/10.

When those numbers are expressed as a percentage of GDP, there's an even starker picture of Chinese prudence versus what many would describe as British profligacy.

China's deficit is less than 3% of GDP, compared with 8% in the UK.

And, of course, the US public sector is arguably mortgaged up to an even higher hilt than Britain's.

When you add in the near-crippling indebtedness of businesses, banks and consumers in the UK and the US, well at that point China's financial strength looks almost awesome.

Also, as I've been emphasising, China's giant state-controlled banks have been much more cautiously managed than our commercial banks - and have neither the capital or funding constraints of ours.

None of which is to retreat from what I've been highlighting, which is that China faces formidable problems - in particular the challenge of maintaining social stability at a time when wages are being squeezed and millions are losing their jobs.

It's just that - in a way - we'd be fortunate to have their economic problems (if not their social ones).

So what are the big messages I took away from Wen Jiabao's two-hour address (perhaps we should, at the least, be grateful that Gordon Brown shows no sign of adopting Chinese speechmaking habits)?

Well he said some very striking things about allowing inefficient businesses to fail, about reducing the country's reliance on low-cost manufacturing of the basics, and about wanting to stimulate consumer spending.

All of that is both a threat and an opportunity for developed economies like ours.
There should be scope to increase our exports to China. But the competitive threat to the companies of developed economies will - if anything - intensify.

And over time (but it will take years) China's massive financial surplus - which was in part responsible for the glut of cheap money in the US and UK that fed our dangerous addiction to debt - should diminish.

For what it's worth, however, every Chinese person I've met over the past few days - from the lowliest factory work up to the Chinese Commerce Minister, Chen Deming - lays the blame for the global economic crisis on crazy risk-taking by American banks (Britain's aren't famous enough to register with them) and excessive borrowing in the US.

In that context, here's my favourite quote from my interview with Chen Deming, which pokes gentle fun at those who say China was at fault for saving too much and then lending that surplus to spend-spend-spend consumers in the west:

"Personally I can't agree with some people on their point that they [US households and businesses] borrow money from others, they overly spend this money and they make trouble for the rest of the world, but finally they blame those who lend them money for making these troubles. According to Chinese philosophy this kind of accusation is totally ridiculous and unreasonable."

I suspect that many of you would agree with China's equivalent of Peter Mandelson.

That said, China's leaders recognise that the country's prosperity is wholly dependent on ours.

So even if they believe that our mess is our own fault, they see that they have a powerful interest in helping us to clear it up.

In that context, it was striking that Chen Deming strongly disagreed with me when I described China as an economic superpower, perhaps because of a fear that as such China would have to take on the heavy burden of new responsibilities to the global community.

By contrast, today's rhetoric from Wen Jiabao's was all about a more open, outward looking China.

Wen Jiabao's China seems to want to play an important role in making the global economy safe for all of us - and is not revelling in our economic humiliation.

Thursday, September 27, 2007

Middle Class Energy and Opportunity

Last week, it was reported that 75% of China's villages no longer have any available young workers to send to the cities. Oil traded at its all time high of around $80. And the US dollar continued its historic decline against other currencies.

The global middle class will soon count 50% of the global population, and the rest will be directly supported by them by remittances home. Everywhere we will be seeing a steady unrelenting improvement in living standards that is continuing to accelerate.

For those who have worked through the logic of sea ice melting, you will recognize the same very nonlinear phenomena. I have had the advantage of knowing that the world we are living in could happen thirty years ago. The S curve is well known and a powerful predictive tool. But I could not anticipate the enthusiastic conversion of the Chinese and the Indians to economic and governmental sanity.

Today, the footdraggers remaining around the world are simply temporary speed bumps. Does anyone not believe that the day Cuba is able to normalize its place in the world, that it will quickly emerge as the most dynamic country in the Caribbean? And let us not forget that Brazil has fully embraced the modern economic system and is now showing dynamic growth.

Right now the US is feeling pain because of a wave of unregulated lending in the mortgage market, whose principal victim is the institutions who bought the bundled crap. The little guy got the equivalent of a walk away mortgage. Yes, I know some who surely should have known better wrote deals in which they put up hard won equity for short term gain and a kick in the head later. They actually have a triable action to work with to attempt to save their ass.

That was not who really got to play. The fact is that the salesmen mortgaged the fence posts in order to get commissions as they always will if you let them. It remains that the real bag holders are large institutions who will now have to absorb massive losses unwound over the next several years.

After all, if you walk away from a $500,000 mortgage, with no money down, and get a good job, chances are you will be able to buy the same property for $200,000 in a couple of years with a $50,000 down stroke. You are on the winning side of a $500,000 swing if you include unpaid interest. Guess who paid?

That means that their ability to lend is hugely curtailed and their over supply of cash is gone. The next few years will be the best time to buy a house since the second war because of this.

While the US economy is once again sorting itself out, the problem with oil is not going away. The Global growth machine is eying a global middle class that wants to share in the luxury of owning a car. The real projected demand for oil based fuels is insatiable and will need to be redistributed through the market place. I have already warned of the advent of $200 plus fill-ups. You and I have to be able to say ouch!

And that level of pain will herald the rapid advent of biodiesel in particular, hopefully by way of an algae culture.

This means that young middle America gets to buy their home at a fair economic price and to keep fit by riding their bicycle to work. This is not a bad deal for the children of the baby boomers.