China Envy at Fever Pitch?

Some plusses and some minuses in this article by William Pessek in Bloomberg. India never was a 'basket case' for anyone with eyes. India's 'moment of opportunity' is not just a moment either. But at the same time we may not be all the way in yet. Growth in the IT sector is spectacular, but India is enorous and poor. 700 million people live in it's villages, and, although the birthrate is coming down fast, population momentum means that the numbers will keep going up for some time to come. How to cushion this rise, this is India's big problem, and it seems to be all to do with the balance between the rural and the urban. And remember, even if GDP is rising fast, it could be some time yet before per capita incomes really start to rise. ( Thanks to Rueben at the zoo station for the link. I see he's also picked up the topic of PLOS Biology ).

China-envy is reaching a fever pitch as nations struggle to compete with the world's most dynamic economy. The China-all-the-time mindset is making it difficult forothers in Asia to get attention. Nowhere is that truer than India. Even though Asia's third biggest economy may grow more than 7 percent this fiscal year, India is struggling to get onto more executives and investors radar screens. Those who ignore India may regret it. "The India story is a good story and it's likely to get even better", says Rajeev Malik, an economist at J.P. Morgan Chase &Co. Granted, India is getting more headlines as stocks rise, bond yields grind lower and the currency, the rupee, appreciates. Its benchmark stock index is up 49 percent this year in U.S. dollar terms, shining a brightening spotlight on one of the world's fastest-growing economies.

Yet many of India's attributes are being taken for granted, especially among corporate executives. Asking about different economies in Asia, you often get similar answers. China's economy? "Oh yes, we're excited about it", investors say. Japan? "Looking better." Thailand and Indonesia? "Sure, we're paying attention." And India?"Hmmm, well we've got big concerns about the place."

China bulls aren't necessarily wrong. The most populous nation has remarkable potential and its meteoric rise spotlights India's economic backwardness. Twenty years ago, India and China were close competitors, both struggling to pull their mushrooming populations out of poverty. Now India is being left behind. Ignoring India's long-run potential, however, could be one of the biggest mistakes executives and institutional investors make in the next decade. India has myriad problems. Even if the country grows the 7.1 percent groups like the National Council for Applied Economic Research expect, it may not be fast enough to raise 400 million of its 1 billion people out of poverty. New Delhi says it needs 8 percent growth over the next decade to do that. Dodgy infrastructure and notorious bureaucracy continue to steer away the kind of long-term investment China gets loads of.

Yet India is no longer a basket case, and it's likely to be one of the great investment surprise stories of the next decade. There's a reason Boeing Co., Motorola, Australian phone company Telstra Corp. and Accenture Ltd., which manages services and computers for clients including AT&T Corp., have all announced investments in India in the last 12 months. Its appeal lies as much in its pool of software engineers and English-speaking graduates as its billion-person market.

Southeast Asia also is eying India's promise. Last year, India got its first invite to the annual summit of Association of Southeast Asian Nations (ASEAN), yet Prime Minister Atal Bihari Vajpayee played second fiddle to Chinese officials. At last week's summit, Vajpayee was signing trade agreements with ASEAN. Where India has an advantage over China is the nature of its economy. China's is a political one and its success comes from a top-down approach to things. India, for all its problems, is a bottom-up economy in which entrepreneurs are pushing the government to reform and streamline. That tension could give India an edge in the long run. China's boom isn't hollow, per se, but it's heavily dependent on foreign direct investment (FDI); the economy mostly serves the demands and needs of foreign-owned firms in foreign markets. It explains the dearth of internationally known Chinese companies that operate on a global scale and market their products abroad. You would be hard pressed to find a global investor who hasn't heard of Indian software firms like Infosys Technologies Ltd. or Wipro Ltd. Ditto for drugmakers like Ranbaxy Laboratories Ltd. and Dr. Reddy's Laboratories Ltd. The presence of such names explains why India is attracting increased institutional investment, while China isn't.

The question is how much China's rise shakes India out of complacency and catalyzes officials to modernize the economy. Privatization Minister Arun Shourie, whose progress in selling state assets has impressed many investors, warns that China's economy could surpass India's by six times over the next 15 years if the current pace of reform continues. Shourie argues that India's improving growth environment offers a "moment of opportunity" but "only a moment." It's an important point. New Delhi's bureaucracy gets in the way of that opportunity. Entrenched bureaucrats resist change because of political differences, not sound economics. While that's true anywhere, not every nation is dealing with such crushing poverty. Once India begins attracting more foreign direct investment, its comparative advantages over China "like entrepreneurial and management skills" might be reinforced and boost Indian growth. "Countries in Asia seem to be fighting for a shrinking FDI pool," says Gene Frieda, a strategist at the Royal Bank of Scotland. "That won't last forever, though." One sign of hope is the rupee's rise. It indicates a sense of economic maturity and confidence. It's attracting capital into Indian markets, boosting stocks, reducing interest rates and allowing the central bank to keep borrowing costs low. It also is prompting the government to step up plans to repay more high-cost overseas debt before it matures. China is going places, but so is India.
Source: William Pessek Jr, Bllomberg
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US Trade Balance With China Deteriorates

Latest data on the US trade deficit shows the balance with China continues to deteriorate. I have a feeling we will be hearing more about this. For the rest, we shouldn't draw too many conclusions, August is definitely an 'untypical' month.

The US trade gap with China widened to a record high in August even as America's overall deficit unexpectedly shrank. Figures released yesterday by the US commerce department showed the US deficit shrank to $39.21bn (£23.4bn) compared with a revised $40.03bn in July. It was the lowest gap in six months and undershot expectations that the deficit would widen to more than $41bn. But the bilateral deficit with China widened to$11.7bn in August, breaking the $11.3bn record set only a month previously. The widening is likely to worry US manufacturers, already concerned about the effect China's currency peg is having on US competitiveness. Most estimates suggest the tightly controlled renminbi is undervalued by at least 20 per cent.

Economists forecast the gap would swell further in the months ahead."Part of the reason is the currency in that the dollar is adjusting lower elsewhere, but it can't against the renminbi," said Ian Morris, economist at HSBC in New York. The National Association of Manufacturers warned that a continuation of the trend - where imports from China are six times greater than US exports to China - would result in the bilateral annual trade gap tripling in five years to more than $300bn. The narrowing of the overall US deficit led analysts to forecast even higher third-quarter growth in the US, with some suggesting gross domestic product could grow by as much as 6 per cent.

"This could take an already good number and turn it into an amazing one," said Carl Weinberg, at High Frequency Economics. Both US exports and imports fell in August. A 2.5 per cent fall in imports was led by a 13 per cent decline in imported cars and car parts. Exports fell 2.7 per cent, the biggest monthly drop since September 2001. Analysts said the August data were likely to have been affected by poor global activity and, more locally, by the blackout that paralysed large areas of the east coast. On the services side, both imports and exports set a new record and the services surplus widened by 5.6 per cent to $5.2bn in August.
Source:Financial Times
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Problems With Large Scale Domestic Appliances


Today is the day of the hard-look at potential problems in China. Obviously this article identifies one possible negative mix: Lack of marketing experience, bureaucratic state management influence, and absence of propriety technology. Still, learning is the name of the game.

China tumbles in white goods

Many of China's leading washing machine makers have been bought out or gone bankrupt in recent months, confounding expectations the mainland's low-cost manufacturers would become dominant international players. With the exception of Haier, the country's largest white-goods company, Chinese washing machine manufacturers have fallen by the wayside as foreign brands have doubled or in some cases tripled market share in China since 2000.

The foreign share of total washing machines sales in China has gone from about 15 per cent in 2000 to more than 25 per cent in the first six months of this year. But in some of the most profitable lines, such as fully automatic machines, the foreign share has gone from 15 per cent in 1999 to 42 per cent of the national market now. "A few years ago, foreign companies were not very familiar with the Chinese market, but they have made great strides in brand recognition and service," said Xu Jun of China Securities in Shanghai. The foreign brands that have carved out significant market share include Whirlpool, LG Electronics, Samsung, Siemens and Matsushita's National Panasonic.

Even with nearly 20 per cent of the market, Little Swan, one of China's best known brands, plunged into the red this year and the government's controlling stake was sold to a private entrepreneur in Nanjing. "Competition in the home appliance market is cut-throat - it is very hard not to lose money," said Chen Weinong, an investor relations official at Little Swan, in Wuxi, near Shanghai. Royalstar, whose brands are the third-largest sellers in China, has been bought by Elco Industries, an Israeli company, after struggling to maintain profitability for some years.

Another brand, Little Duck, a listed manufacturer in Shenzhen, southern China, is in talks with a local lorry making company after two consecutive years of losses. "We are still doing well in terms of market share, but several years of price wars have cut our margins very thin," said Wang Jinxia, a spokeswoman. "On top of that, since last year, prices of raw materials have risen; steel prices have gone up 40 per cent and plastics by 20 per cent."

Until recently, growing Chinese exports of goods such as washing machines, fridges and television sets had prompted speculation that local companies could become global players in consumer electronics and white goods. While China might still create some global champions, weak brand management, state ownership and lack of proprietary technology has made it difficult for its companies to be anything other than low-cost producers, and vulnerable to aggressive foreign competitors, even in their home market. The restructuring of Chinese industry, however, has been made easier by Beijing's backing of sell-offs of state-owned shares by city and provincial governments.
Source: Financial Times
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China's Coming Collapse?


Here's another book about China, Gordon G Chang's Coming Collapse of China. Again two Amazon reviews give a good flavour of the argument. An remember, I am not endorsing these arguments, I am simply recognising that they exist:

From 1978 through the mid-1990s, China had the fastest-growing economy in the world, and it appeared poised to dominate Asia, and beyond, in the near future. But after focusing on facts rather than theory and looking at the conditions behind the spectacular numbers, Gordon Chang presents the People's Republic as a study in wasted potential: "Peer beneath the surface, and there is a weak China, one that is in long-term decline and even on the verge of collapse. The symptoms of decay are to be seen everywhere." For a nation that has always taken a long view of history, time is quickly running out. Chang believes China has about five years to get its economy in order before it suffers a crippling financial collapse--a timeline he seriously doubts can be met.
By failing to complete its reformation, China has maintained an illusion of progress, Chang explains, but in reality has caused more problems than opportunities for would-be entrepreneurs and foreign investors. Because reform has not been fast enough or comprehensive enough, China is unable to benefit from its modernization or keep up technologically with much of the world. The government's reluctance to get rid of state-owned enterprises has not only rendered China uncompetitive just as it prepares to join the World Trade Organization, but is causing the banks--which were forced to lend money to SOEs--to fail alongside them. Widespread unemployment, corruption within the Communist party, millions of resentful peasants, and a general lack of leadership further threaten stability. The Communist party "knows how to suppress but it no longer has the power to lead," Chang writes, arguing that the party is maintaining control only through the use of brute force and the people's instinct for obedience--popular support that could deteriorate as soon as the economy plunges. Simultaneously, societal ills such as gambling, drugs, and prostitution have become huge problems.

Stuck between Communism and capitalism, "China is drifting, unwilling to go forward as fast as it must and unable to turn back." It is uncertain what will be in the way when the giant finally falls.
Reviewer: Shawn Carkonen



At a time when almost everybody is enthusing about China and its economic prospects, this is a sobering book. Chang argues that the economic and political system of the People's Republic is teetering on the verge of collapse; in 5 to 10 years after China's accession to the World Trade Organization (WTO) the whole house of cards will finally fall, and the Communist Party will be ousted from power in an eruption of violence. In Chang's opinion, neither the economic nor the political system can be reformed; the regime in Beijing will not win time during a slow process of reform ("crossing the river by feeling the stones"), but just make things worse as even more money is squandered by inefficient State Owned Enterprises and the corrupt Communist Party.

It is usually when people get overly optimistic and write books like "Dow 36,000" or "China as No. 1: The New Superpower Takes Center Stage" that things take a turn for the worse. Therefore, we should be glad that someone provides an antidote to the euphoria. After all, China and its 1.3 billion inhabitants produce an annual Gross Domestic Product (GDP) of just about the size of Italy's GDP. Italy has about 58 million inhabitants - and nobody considers Italy a superpower.

Gordon Chang's diagnosis is to the point. His prognosis, however, is debatable. After working for three years in Shanghai, I can only underline what Chang says about the sorry state of China's State Owned Enterprises and its banks. Doing business in China requires a good portion of sarcasm, and a lot of hope that despite the flaws in the system the whole state simply cannot collapse. In the words of a former executive of ING Bank: "The bad news is that the Big Four [banks] are insolvent; the good news is that they're sovereign." Chang's prognosis that China will collapse after 5 years because the country will honour its commitments to the WTO and open its economy to international competition is not very convincing. China will find ways to curb competition where it sees fit. Japan and the EU have been successful in protecting their agricultural interests for decades, and foreign banks have not managed to get a real foothold in the big Japanese market to this very day. In my opinion, the Chinese will be even more inventive in finding means to keep foreign products and services out of their country. No, the WTO is not the nemesis of Communism in China. Will the Communist Party be overthrown in a violent revolution? I would not bet on it. The Communist regimes in Eastern Europe went with a whimper (not a bang). Which will it be in China? I don't know. I don't pretend to know.

"The Coming Collapse of China" is an angry book written by the son of a man who "left China before the end of the Second World War and [the son] grew up hearing him say that Mao Zedong's regime would have to fall." The son returned to China to work as a lawyer in Shanghai. When he wrote this book - his first - it was a polemic in which he pounded away at the evils of Communism and predicted that Jiang Zemin's regime would have to fall. However, he would have written a better book if he had not tried to play the prophet (and defender of his father's faith). The best parts of the book are the stories in which he lets others speak for themselves, or when he pokes fun at the authorities. Unfortunately, he comes across as self-opinionated too many times. But don't let it irritate you: listen to the message even if you find the messenger annoying at times.
Reviewer: Boyse

The China Trap?

Those of you who are still labouring under the weight of my latest bout of blathering about fertility, fear not. Worse is to come. I am now trying to get into doing some sort of halfway-serious assessment of the China debate. In preparation I am looking round the arguments. One pole can be found in Joe Studwell's The China Dream . In fact I find one of the Amazon reviewers sum this line of argument up pretty well:

There's an incredible amount of hype about China's economic market. Its huge population, high-skilled low-wage work force, and relative political stability for a developing country all act as a powerful lure to multinationals eager to set up shop and begin selling to one-quarter of the world's population. Under tough negotiations from Chinese officials, these companies tend to give away the kitchen sink to ensure they get access to the huge market. But what do they get in return?

Joe Studwell does a service to the informed public by clearly demonstrating that almost all the businesses who have gone to China have gotten next to nothing for their technology transfers, special fees, and tremendous time and effort they've dedicated to the market. Almost uniformly, they have high-balled their expected sales and profits from the Middle Kingdom and found immense barriers such as unseen regulations and fees, corrupt officials, unenforced laws, local spin-offs to their products, etc., that should have sent them packing. Yet almost all of them push on, undeterred.

As Studwell explains, the reason for this is an old phenomenon among Western businessmen he calls "The China Dream." Despite continual setbacks, these hard-headed businessmen are too attracted to the possibility that they have something to sell that even a small percentage of Chinese may want to buy. Those huge potential numbers are too much of an enticement to businesses to easily let go of their foothold in China.

But Studwell's book is more than just about the experience of foreign businessmen in China. It also shows that the China market is becoming a trap for the Chinese people themselves. They work hard and save, and the government confiscates and then destroys their money by trapping it in state-owned banks that are insolvent because they lend to state-owned enterprises that are unproductive.

"The China Dream" is well-written and informative. Its thesis is provocative, but well supported. Studwell argues there is no rational basis for much of China's economic success and that most of its market is as closed and overregulated as the Soviet Union's. This book should be required reading for every CEO of a multinational who dreams of selling in China.
Reviewer: Jeffrey Steele

Is China Underestimating Its Growth?

Now here's a strange one, a very strange one. It has become extremely fashionable recently, and especially in the pages of the WSJ (which I'm proud to say I don't read, but which they do tell me about - this reminds me of a piece of UK Wittgensteinology, he reputedly used to start his lectures with things like: they tell me Kant said.......Ok, Ok, so they tell me the WSJ says..........), as I was saying it has become extremely fashionable to say that China's growth is a fiction. This is a strange claim to make, since if China's growth was pretty much an invention of the Chinese Communist Party I can't for the life of me understand why those at the opposite ideological pole (in the US Republican Party) would be taking it so seriously. It is a strange claim to make, but nonetheless it is being made. Clearly, there is, as we have all seen with SARS, a serious problem with using official statistics. But there are other measures. One of these is power consumption. Another is the level of exports, which are a lot easier to measure. A separate question is whether this growth is sustainable. Clearly China's institutional infrastructure has, to say the least, enormous shortcomings. However it is important to note that China's growth is export driven, it is not simply an internal speculative boom. In addition, the rapid shedding of labour from the more-or-less moribund state enterprises means that inflation does not seem to be a present danger. Bottom line: Andy Xie may well be right, and we may even be underestimating the scale of China's growth explosion.

China's economy may be growing much faster than official economic statistics suggest and is in danger of overheating, according to an emerging consensus among foreign and local economists. The economists say a surge in investment, bank lending, construction and car manufacturing has put the Chinese economy on course to grow at about 11 per cent this year, well above official forecasts of just over 8 per cent. "Right now, it is as high as it has ever been," said Jonathan Anderson, of UBS, in Hong Kong.

Using the bank's own system for measuring Chinese gross domestic product, Mr Anderson said third quarter growth was running at 14.2 per cent and would be close to 11 per cent for the year, once the slower rural economy and other factors were taken into account. Few of the economists believe that the present growth rate is either sustainable or desirable for the central government, which is now tightening credit in an attempt to rein in credit growth.

UBS's view is broadly backed by some of China's best-known economists, including Wu Jinglian, of the State Council's Development Research Centre, and Zhang Jun, of Fudan University, in Shanghai. Mr Wu said at a recent seminar that China's growth for the first six months of 2003 was more than 10 per cent, compared with the official figure of 8.2 per cent, and was likely to beat the government's whole-year forecast. Prof Zhang agreed that the official figures were understating growth, saying the figure for GDP could be "bigger than people have expected".

China's official GDP statistics have long been criticised as inaccurate because they do not measure significant parts of the economy, use outdated methods and rely on questionable provincial data. Local officials, used to meeting targets set in a command economy, have consistently reported growth rates that outstrip the national average. The inconsistencies were most glaring during the late 1990s, when official statistics recorded high-speed expansion at a time of falling energy consumption, weak jobs growth and declining prices. This year, however, most leading economic indicators are pointing steeply upwards.

Exports, property and cars accounted for about one third of the economy in terms of their value-added contribution to GDP, said Andy Xie of Morgan Stanley in Hong Kong, and all three were growing by more than 30 per cent. "One third of the economy is growing by about 30 per cent - that's about 10 per cent already," he said. Power consumption, one of the most important independent indicators of Chinese GDP growth, was up by 15 per cent so far this year compared with 2002, Mr Xie added. China's growth rate this year is especially fast in the light of the crisis over severe acute respiratory syndrome, which brought travel and much retail activity to a standstill.
Source: Financial Times
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China Reins-in on Institutional Reform

This is not good news for those who look towards a future of serious and substantial institutional reform in China. It is also further evidence that the current attempts to 'browbeat' China into currency flexibility are likely to prove counterproductive:

China is set to postpone indefinitely a landmark scheme that would have opened the Hong Kong stock market to legal investments by mainland institutions. The setback might also delay progress toward satisfying US demands for a more flexible renminbi exchange regime, officials and financial industry executives said.


Official opposition has been building towards any early approval of the Qualified Domestic Institutional Investor (QDII) plan, under which a crack was to be opened in China's closed capital account to allow some mainland funds to change their renminbi into hard currency and invest in Hong Kong's capital markets. "There is really a lot of opposition to QDII at the moment," said one official. "There is no way it will be approved by the end of this year and probably not early next year either." The postponement will come as a blow to investors and the government of Hong Kong, which first proposed the scheme as one of several means to integrate the territory's lacklustre economy with a booming China.

Last month, another Hong Kong proposal to turn the territory into an offshore centre for trade in the renminbi was also relegated to the backburner by Beijing. The main official reason for opposition to the QDII scheme has been that it would divert funds away from Shanghai's languishing stock market, possibly causing further erosion in stock prices.

Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), the market watchdog, was one of the main opponents of early approval for QDII, officials said. The People's Bank of China, the central bank, which has pledged to ease capital controls selectively to create a more convertible currency, was broadly supportive of the QDII plan but sympathised with the objections of the CSRC at the moment, officials added.

The mothballing of QDII highlights a dilemma for China. On the one hand, it has promised John Snow, US Treasury secretary, that it will move toward a more flexible exchange regime to allay Washington's concerns over a record $103bn (?88bn, £62bn) Chinese trade surplus last year. But on the other hand, the weakness of domestic markets and financial institutions is frustrating progress in this direction.
Source: The Financial Times
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