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China Economic Focus – January 2012

An update by the British Embassy, Beijing

Download China Economic Focus - January 2012

  

China's engagement with Africa

In a two-part serices "Thorns in the African dream" in China Dialogue dated 31 January and 1 February 2012, Wang Xiaojuan, a project manager at the Heinrich Böll Stiftung China office, explains why China needs to adopt a more sophicated, and more socially and environmentally responsive strategy in her trade and investment projects in Africa. 

Part I - Click here

Part II - Click here

Short of colonization and slavery, China is essentially treading the footsteps of earlier Western industrializing powers, promoting trade in exchange for Africa's resources.

While China struggles to project her soft power of peaceful co-existence and win-win foreign policies, the Chinese state and Chinese businesses have not been coping well with a changed and changing Africa.

In addition to an integrated model of investments and infrastructural projects designed to benefit the host economy, China needs to put in place a mechanism to ensure that corporate social responsibility, ecological concerns, community livelihoods, social integration, civil society and a multiplicity of other local and international stakeholders are taken good care of.

Working more closely with the United National Development Program as well as local and international NGOs may well need to be China's first step.

For a "Paper on A New China-Africa Financial, Investment & Business Partnership", please Click here

How China is innovating - McKinsey Quarterly

A series of two McKinsey Quarterly reports in February 2012 shows that contrary to popular perceptions, China is innovating rapidly in ways that harness what is the world's fastest-growing economy soon to become the world's largest. Such innovation is driven by quick commercialization even if the product is less than perfect, a rising and often foreign-trained talent pool that is increasingly competitive, superior local knowledge that stays on top of constant changes in consumer demand and market conditions, emphasis on indigenous innovation, and strategic supportive government policies and infrastructure.

Leveraging the gigantic market potential of China's economy, "Some Chinese companies are now moving to the forefront of a “built in China, for China” movement. Their clout is likely to mean that more semiconductor platforms will be designed locally. Consider the fact that in 2010, Chinese consumers purchased 19 percent of all PCs sold throughout the world, 18 percent of the LCD TVs, 14 percent of the mobile phones, and 26 percent of the automobiles (all by unit volume)", says "Three snapshots of Chinese innovation", one of the McKinsey reports covering, inter alia, China's semiconductors industry. Click here

"Chinese companies also benefit from their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence," according to "A CEO’s guide to innovation in China", the first of these McKinsey reports. Click here

For global players, playing the Chinese market is posing increasing challenges. "..... the dilemma is clear: how to participate in what will probably be the world’s most dynamic technology growth environment while safeguarding core IP and know-how. These companies must remember that China seeks to use transferred IP and manufacturing methods to create its own champions that can compete with global countries around the world, not just in the local market,"  explains the "Three snapshots of Chinese innovation" report.

"One option is for foreign companies to launch indigenous R&D centers with Chinese universities and institutes and to focus these facilities on developing technologies for unproven but promising next-generation domestic markets. Multinationals that participate in such ventures align themselves with China’s goals while they contain IP risks to markets that are still evolving. Another approach is to focus on local product development in partnership with downstream players such as auto manufacturers. This strategy helps multinationals meet local-technology requirements and provides for more active risk management," the report continues.

"China hasn’t yet experienced a true innovation revolution. It will need time to evolve from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common. The government will play a powerful role in that process, but ultimately it will be the actions of domestic companies and multinationals that dictate the pace of change—and determine who leads it", concludes "A CEO’s guide to innovation in China." 

In any event, innovation, by definition, is never static. Moreover, on a global scale, the winners will be those who manage to stay constantly at the leading edge, to re-invent what has been invented, and to ever expand the horizon of human endeavour. They are likely to be those who could capture the spirit of President Kennedy's clarion call, "Some men see things as they are and ask why. I dream things that never were and ask why not."

"Russia, China, Iran redraw energy map"

Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign Service. His article "Russia, China, Iran redraw energy map" on The Asia Times Online dated 8 January, 2010, shows how the world's biggest energy network has been re-defined, with momentous implications for energy finance, security, and geopolitics at least in the coming decades. Click here

Harvard Business School’s 2012 Survey on U.S. Competitiveness

An in-depth survey amongst nearly 10,000 Harvard Business School alumni decision-makers in October 2011by Professors Michael E. Porter and Jan W. Rivkin reveals that 71% of respondents expect U.S. competitiveness to decline over the next three years, with workers’ living standards under greater pressure. 

Download 2012 HBS Survey on U.S. Competitiveness

Respondents considered the underlying business environment in America as still strong in critical areas, but not keeping pace with other economies, especially emerging economies. The greatest current or emerging weaknesses were perceived to be in America’s tax code, political system, K-12 education system, macroeconomic policies, legal framework, regulations, infrastructure, and workforce skills.

Interestingly, 42% of relocations out of the United States involved R & D while multi-function
activities as a group were more likely to be considered for relocation out of the U.S. than for
movement into America. (Fig.6). More job-rich activities are moving out than moving in (Fig. 7). The most common negatives for locating businesses in the U.S. are given in a pie chart with over-regulations, relative lack of skills (talent), un-business-friendly tax system, ineffective macro-economics and politics accounting for over 75% (Fig. 13).

"The threat to U.S. competitiveness we face today is far more complex than the one America confronted in the 1980s. Now the challenge is not just from Japan, but from many nations with growing strengths and diverse capabilities. The U.S. government is more fiscally constrained and politically gridlocked than it was three decades ago. Leaders of global enterprises are less invested in the United States, or in any single location, than they were in the 1980s. The problems taking root in the American economy are potentially much more serious. Responsibility for the problems cuts across party lines and involves both the private and the public sectors", says the Survey report. 

A host of suggestions for government and for firms is listed at the end. Saner minds should be well-advised to examine the findings of this Survey amidst the political hot air that US jobs and global competitiveness would somehow return if only foreigners like China stop "playing games" with their currencies and "unfair" trade practices.

Best regards,

Andrew

www.andrewleunginternationalconsultants.com 

“Nobody Understands Debt” – Paul Krugman

In his New York Times op-ed article on new-year day 2012, Paul Krugman advances the view that America should not be paranoiac about debt. Click here

The reasons, according to him, are that unlike families, “governments don’t (have to pay back their debt) — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation”.

In addition, “U.S. debt is, to a large extent, money we owe to ourselves.”  

Krugman doesn’t seem to think that this time is very much different from the past. “It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors.”

He opines that “nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years.” 

With a great deal of respect for the New York Times columnist and Nobel laureate, it appears that Krugman’s arguments would beg the following questions –      

(a)   During the Second World War, America became the world’s biggest factory for wartime machinery and materials, turning  the United States’ into an engine of economic growth at a time of unprecedented global turmoil. This time around, the opposite would seem to be the case.

 (b)  The reference to the time of the British Empire suffers from a similar lack of analogy. While the Empire was in full swing, there was no credible rival for Britain’s domination of the world’s resources and markets.

 (c)  If the Krugman model of debt tolerance can be sustained, then national debt can theoretically multiply for ever without any insurmountable  problem.

Maybe what Krugman is saying is that America is exceptional. This time around, it can continue to enjoy the uniqe signiorage of priniting the greenback indefinitely to finance its debt. After all, the greenback is still preferred as a reasonably safe global reserve currency in the absence of few alternatives.

Krugman may be right, up to a point, until the ever-enlarging American debt mountain suddenly collapses - like an unstable sand pile with sand being kept adding to it until only the last additonal grain seems to be able to bring down the whole edifice.

The "fingers of instability" dynamics in an unstable sand pile are explained in "Endgame - The End of the Debt Supercycle and How it Changes Everything" by John Maultdin and Jonathan Tepper, John Wiley and Sons, Inc. 2011.

"Niall Ferguson wrote about how unexpected and unlinear collapses happen... Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overreach suggests that the United States may be the next empire on the precipice" (p. 187).

"...If the present trends are left unchecked, we will need to find $15 trillion in the next 10 years just to pay for US government debt, without counting state, county, and city debt". (p. 201)

"..we will eventually have to deal with the $70 trillion in our off-balance-sheet liabilities in Medicare and Social Security and pensions." (p. 207).

"As Reinhart and Rogoff wrote - "Higly indebted government banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits." (p. 97)

"Without any meaningful fiscal reform, the only reason to hold a government bond is because someone else might pay more for it than you bought it for; that is, there might be a greater fool out there somewhere. The problem is that eventually,  markets run out of fools" (p. 199).

Instead of fools, the United States is relying on the kindness of strangers to continue to buys its ever-increasing debt. It's Krugman who invents the term China's "Dollar Trap".

While China may not be able to get out of the dollar trap immediately, the country  is quietly and gradually diversifying her hard-earned savings out of US Treasuries by

(a) internationalizing the RMB to build up its acceptability as a means of exchange for international trade until it reaches full convertibility on the capital account;

(b) exporting more of her savings as Overseas Direct Investment (ODI) in acquiring overseas assets, technologies, expertise, brands and markets; and

(c) diversifying more savings into alternative currencies.

China is also pushing for an alternative supra-national reserve currency in the form of IMF Special Drawing Rights. With the greenback continuing to be debased by successive QEs, other surplus countries including oil wealth are beginning to find the Chinese idea increasingly attractive.

Maybe another way of looking at the Krugman assertion of possibly perennial American debt is the adage that "If something sounds too good to be true, it probably is."

Best regards,

Andrew 

London Reflections

A compendium of precious moments of a working sojourn in London 2000-2010, captured in a series of concise prose of exactly 50 words each excluding the title, with illustrative images selected from the internet.

Download London Reflections - Precious Moments of a Working Sojourn 

Resource Revolution: Meeting the world’s energy, materials, food, and water needs

A research report Resource Revolution: Meeting the world’s energy, materials, food, and water needs by McKinsey Global Institute, McKinsey Sustainability & Resource Productivity Practice, November 2011 suggests that resource productivity opportunities could meet nearly 30 % of 2030 resource demand and that 15 groups of opportunities offer 75 % of the resource savings. 

Download MGI - Resource Revolution- Meeting the World's Energy, Materails, Food and Water Needs - November 2011

I have extracted the most salient infomation in a resume.

Download MGI - Resource Revolution November 2011 - A Resume

China up close - A kaleidoscope

(a) Fujian Tulou - A World Heritage Site - A short visit to the Fujian tulou cluster, a UNESCO Worl Heritage Site, at Yongding County in Fujian Province from 15 - 18 November, 2011  

Download Fujian tulou - A World Heritage Site

(b) Impressions of the Zhangjiajie National Forest Park, a UNESCO World Heritage Site - My visit in October 2010 to the UNESCO Heritage Site in Hunan province which inspired the 3-D movie Avatar, a nearby pristine mountain lake, and a breath-taking giant karst cave

Download Zhangjiajie National Forest Park

(c) Shanghai Expo 2010 - Impressions of the Future and the Past

Click here

 

 

What China's five-year plan means for business - McKinsey Quarterly,July 2011

Click here