We have all become used to, or even complacent about, the continuing growth story of the Chinese economy. After all, we have seen record reserves, record exports, and come to that, record imports and seemingly any statistic that comes out of the People’s Republic is designed to impress.
But what if this Chinese juggernaut started to falter – what would the consequences be – not just for the Chinese, but for the global economy as well? So far its economy has shown some remarkable resilience as it rode out quite easily both the Asian Crisis of 1997/8 and then global slowdown of 2001. So is it immune from global and external pressures? Or can it also be fallible?
From 11.4% growth reported in 2007, expectations are already being pulled back towards a single digit figure for this year. Although this may not be disastrous it could certainly reveal some awkward issues which the authorities don’t like to reveal and would certainly have to address. The first issue that has arisen in recent years has been that of inflation where current figures show a number close to 7% against an estimated target of just 3%. This is not just a case of pricey pork aggravated by freezing weather conditions, but rather the huge growth in the money supply as a related consequence of the accumulation of the burgeoning foreign exchange reserves of close to $1.5 trillion which now translates as 24% of global central bank reserves (and growing at some $60 million an hour over the last hour! – although to be fair this is now slowing).
Fighting inflation is difficult enough anyway, but for China, even with a command and control economy, the pressures and expectations of the population will be difficult to manage. Rising domestic rates and investment “instructions” from the centre will have a certain effect, but inevitably any reduction will reveal the amount of industrial overcapacity that has been building up. Effectively the Chinese have chosen to keep their currency artificially low and have therefore lost control of their domestic interest rates and inflation. The knock on effect from that could certainly be somewhat worrying.
Additionally following the dramatic growth in exports as a proportion of the economy, this may well leave China more exposed than before as any slowdown in US and European demand will be felt directly. Such effects will reveal some painful social issues and reforms will be needed especially around the issue of social disparity and inequality which has become a yawning and potentially fractious divide (now apparently greater than even the US and Russia).
Proposals such as preventing companies from laying off employees with 10 or more years experience begins to sound more like EU employee protectionism, rather than market oriented reform – surely the Chinese aren’t becoming French?
The need for reform will no doubt grow but the longer it is left the more it could look like taking the lid off a pressure cooker.
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One issue that is an attractive contrary to our falling rates in the US and UK, has the rash of rate rises elsewhere in the world and especially in those countries with the trade surpluses. In the past few weeks, China, Australia, Norway and even Vietnam have all raised rates. This is part of a continuing trend for these nations who are running surpluses to try and address their own inflationary issues (although China would seem to have most to do). This will have an effect on their currencies which of course gives one of those rare opportunities to mention the gloriously titled Vietnamese Dong (which I can only assume must have been Edward Lear’s currency of choice).
The interesting issue though of the impact of these rate rises not only certain currencies but also their sovereign bonds may well make such an area an interesting investment opportunity – especially in a western world still focussed on bearish equity markets.
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And finally…a delightful story from Edinburgh of a rather unusual recruit for the British Army. Apparently in WW2 a bear, Voytek, was found wandering on an Iranian hillside by Polish soldiers attached to the King’s Own Scottish Borderers, and was adopted by them, given a rank, proper name and even serial number. More than this though he even saw action at Monte Cassino when carrying heavy mortar rounds and also developed a liking for the odd fag and a bottle of beer. He subsequently retired to Edinburgh zoo where he had a habit of continuing to cadge cigarettes off visitors. He probably unknowingly also qualified for a pension given the efficiency of army pension records. Now apparently a campaign is underway to erect a memorial – quite right too.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited