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China: The new normal’s new number one?

May 23, 2009

A confluence of powerful forces arising from the financial crisis and already at work before the crisis has been tagged “the new normal”, by Mckinsey’s worldwide managing director, Ian Davis. Lower leverage, old fashioned return-on-equity (ROE), increased regulation – global and national, more transparency and disclosure, and realignment of incentives ie compensation in the banking industry commensurate with the risk taken, are part of the new normal.

As financial regulation is upped, governments with a greater say in how capital is deployed and in the bid to reinflate their respective economies are pushing protectionist policies eg, “British jobs for British citizens”, buy and employ American clauses. Two forces of the new norm: more government and less leverage, consequences of the financial crisis, are salient features of China.

The FICC side of China

Of the touchstones for gauging a country’s dominance: technology, military and demography, China’s economic prowess – ranked number three in terms of GDP according to the 2008 CIA World Factbook, is being complemented by its population. Still, China’s foreign-exchange holdings, trade volumes (within and beyond Asia) and FDI inflows give only a part of the picture. On a per capita basis these yardsticks place China down the rungs. However, it would be interesting to see the pace of growth per capita compared to other countries.

Yet China’s ‘stabiliser effect’ on the global economy: its growing need for energy, commodities and investments for its surpluses, is crucial to its role as a major player on the global economic stage. You could say there’s a fixed income, commodities and currency (FICC) side to China ie, $1 trillion in US assets, $2 trillion in foreign reserves, an unceasing demand for commodities eg, Chinalco’s purchase of shares in Rio Tinto, the Australian mining giant. Despite losses incurred by investing early in US banks, China’s two sovereign wealth funds China Investment Corporation (CIC) and State Administration of Foreign Exchange (SAFE) are scouring for more investments[1].

Past economic crisis in Latin America, Asia and Russia to the present meltdown, have confirmed that export–dependent economies are more prone to external shocks[2].  Deep and broad capital markets, a stable polity and policies, and local demand can make do for losses from exports. Otherwise an economy will continually be affected by global economic booms and busts cycles. China is learning fast. A breakdown of China’s stimulus package shows that money will be spent to enhance local consumption and provide social-safety nets.

Though China may not become a world leader in technology, its pragmatic decision-making process, was recently displayed by the decision to deploy resources in the bid to for world leadership in electric cars. Sceptics of a “Beijing consensus” undermine, to their dismay, China’s growing regional and global influence. China’s rapidly growing influence is riding on demographics and economics.

Opinions, mainly Western, say China isn’t there yet. It lacks soft power ie, moral sway, military might, cultural clout etc. Nonetheless, post the current crisis – amid debates about a one-size fits all economic model, the role of governments in markets etc, China’s ascendancy onto the world stage is a given. To drive home this point, The Economist began a weekly column ‘Banyan’ on Asia. According to the newspaper “We have taken a while [in dedicating a column to the idea of Asia], but is this not, after all, to be the Asian century? We think probably so.”

Too big to ignore

China’s search for the resources it needs through economic means is being fast tracked by the current global economic crisis. In spite of positive signs of recovery in the US and European stock markets, the grind ahead cannot be ignored. Unemployment rates and ballooning public debt – which will have to be paid by future generations mean that, though on the road to recovery, the journey is a long and arduous one.

In search for new growth areas post-financial crisis, companies will look more to emerging than developed economies. Besides, US consumption as the engine of global growth is tanking[3]. Asian economies, assuming they still subscribe to Western-style capitalism, will become the catalyst for global economic growth. All things being equal, “the world’s economic centre of gravity will continue to shift eastward”.

China, meanwhile, is not in a recession (yes, its coveted double digit growth rate of 13% will drop to 6.5%-8% in 2009). But above all, it has the cash to spend without incurring any debt. Her Asian neighbours, though affected by recessions in Japan, the US, and Europe, will bounce back sooner.

In anticipation of the change in events, China is building relationships with her stash of cash. Take the $10 billion ASEAN development fund recently announced by the Chinese government. A beguiling alternative to the IMF, whose past handling of the Asian crisis left sour memories – Asian countries were made to raise taxes, cut spending and devalue their currencies; the US, and European countries are doing just the opposite measures today and IMF cannot dictate otherwise.

Half of the world’s population is located in Asia. So also is a significant portion of the world’s growing middle-class. Forty percent of this burgeoning income class is based in China. Of the 1.2 billion people living on $2-13 per day in East Asia, 72% are Chinese. This class of people need not access credit through Chinese banks dependent on foreign credit lines. Today the top three banks in the world are Chinese, up from nothing three years ago.

A survey: Tomorrow’s markets, conducted by the UK Investment & Trade in cooperation with Economist Intelligence Unit (EIU) forecasts “an annual average of around US$87 billion in foreign direct investment (FDI) over the next five years going to China, and a dramatic annual increase in FDI into India, from US$23 billion in 2007 to a forecast US$60 billion in 2012.”

Most of this investment will be directed to outlying regions of the BRICs. This in turn will boost employment and income growth generating new demand that was hitherto concentrated in cities like Beijing and Mumbai. The allure of the hinterlands is further backed by the search for lower labour costs as costs rise in the developed regions of emerging economies.

Low-cost base, a sizeable population, strong legal structures and regulatory institutions and adequate infrastructure are factors that attract investment in newer emerging markets; not as alternatives to BRICs, but rather as an addition.

Who will bell the cat?

Waiting for government to bell the cat is to wait indefinitely. African economies, like Nigeria, are touted as the new frontier. Yet titles can only go so far in making this a reality. Like-minded Nigerians have to pool capital, human and financial, together to realise the potential. Partnering with government to build roads, rails and bridges are concrete ways of pooling resources. Private sector expertise has been proven to help deliver one of governments’ social contracts.

A thing or two can be learnt about the ‘Chinese way’. Though myths about China’s rise need to be debunked, in order to learn how China did it. Modern China is characterised by an adamantine focus on achieving goals eg, an annual GDP growth of 8%; an unrelenting reliance on meritocracy and technocracy to set and attain such goals, and pragmatism best captured by two of Deng Xiaoping’s oft-quoted dictums to “cross the river by feeling for the stones” and “no matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat.”

China’s ‘cat’ is state-guided capitalism. With structural fixed costs eg, a bloated bureaucracy, this type of cat may be a tough, almost unviable, choice for Nigeria. However, there are other types of capitalism: oligarchic, big-firm, and entrepreneurial capitalism.  Of the lot, big-firm and entrepreneurial capitalism need less of government ‘patronage’. Oligarchic capitalism (crony capitalism?) evokes the Japanese keiretsu and South Korean chaebols; and is more likely to cement corruption and inequality. This won’t augur well for Nigeria either. Entrepreneurial capitalism, the preamble to big-firm capitalism, is populated with private initiative.

Entrepreneurs, purveyors of value creation, go against the grain, are honest, frugal and prepared for the long term. What sets them apart is the knack to identify and bridge, along the continuum of Maslow’s pyramid, society’s unmet needs. The return of Nigerians from Diaspora, the rediscovery of agriculture as an economic mainstay and reform of the capital market are consequences related to the financial crisis.  These changes are generating needs that the patient, persevering and pragmatic entrepreneur can provide.

This article originally appeared in BusinessDay, 27th April 2009

[1] See The EIU ViewsWire, On the prowl, April 29th 2009

[2] The emerging markets that are best poised to enjoy a speedy recovery (following a V-shaped recession) are those that do not depend excessively on external finance and on external demand. Willem Buiter, Maverecon, “Green shoots: grounds for cautious pessimism”

[3] While the Big Three from Detroit are fighting for their lives, China has more than 100 domestic car makers competing with multinational carmaker to get a piece of the growing Chinese car market. For the first quarter of the year, 2.7 million cars were sold in China — besting U.S. sales of 2.2 million for the first time to become the world’s largest car market. “Will Chinese consumers rescue the world economy” Kevin Voigt,, April 29th 2009.

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