Going Long on ChinaGoing Long on China
By Ray Young
Last August, when I was talking with Craig Ueland, the new CEO of Russell Investment Group, I was thinking of China’s very high per capita rate of savings and the close to $1 trillion of American dollars sitting in China’s banks. I thought the Russell company could pry open the Chinese money market and sell some of its fund products to a country needing expert fund management.
Russell Investment Group wants to increase the company’s asset base to $760 billion over several years. China, thanks to an aggregate of Foreign Direct Investments (FDI) in the last two decades, would seem ripe for interest in Russell’s expertise.
But, by the beginning of this year, the U.S. responded to China’s growth in its own and more decisive way. The dual-listed Chinese ADRs and Chinese direct listings on the U.S. stock exchanges suddenly took investors by storm. Their share prices rose sharply. They dominated financial talks on Wall Street. Certainly, they have also lead to the debate on how long the Chinese boom can last.
This article will try to dissect the Chinese economic miracle and conclude with an economic forecast. It will try to explain where the real investment opportunities lie ahead in helping American and international investors maximize on China’s growth.
2003 was, in every respect, the crowning moment to date for China, whose long-awaited potential as the leading, emerging economy began to materialize. The Western economies led by the United States had finally recognized and embraced China as a major global player and a major destination for products and services. The multinationals suddenly started to make a lot of money in that market. China as a growth engine became significant in providing an impetus to the sluggish global economy. China built domestic demand for oil and metals and became a major market for cell phones, computers, cars, family appliances, television sets, motorcycles and other consumer goods.
The fact that China has become the global factory is another blessing to the industrial world. With its low capital costs and low labor costs, and its disciplined and skilled Chinese workforce driven by international and local companies, the Chinese have churned out mountains of products which help to keep retail prices low and help increase real wages in American and other Western economies. Outsourcing to countries like India and China appears to be an essential retool for companies to stay competitive and cost-efficient, and therefore, represent more value to their shareowners.
As a result, foreign money gushed into China. For successive years, annual FDI amounts remained above the $40 billion mark. While FDI was responsible for several percentage-points of China’s 9.1% GDP in 2003, most of its growth was internal and organic, and was not investment-driven. China may have opened an era of a latter-day gold rush, and could be the best place to invest in the world right now.
The big question arises accordingly: How can a nation muddled in poverty not long ago pull off this gigantic miracle, and can this boom last? To understand the Chinese Miracle Act, one needs to borrow the deconstruction technique from literary criticism.
In deconstructing China, what you first see is not its land mass, most of which is uninhabitable. What comes first to mind is its burden of population and the burden of history. Here’s where the invisible hand of the market has worked wonders. Ever since China excused itself from closed-door “self-independence” in 1978, China’s evolution from a central command economy to a free-wheeling market economy has been convincing. Unlike Japan, China wanted foreign involvement from the outset to help guide and improve its industries. The Chinese government has actually been very receptive to the ideas of market economy and international compatibility in economic life, partly because it wants to maintain its political legitimacy by raising the standard of living for its people.
The Chinese economy got another big push in 1992 when the late leader Deng Xiaopin issued an ultimatum to his subordinates to step up both economic reform and opening to the Western world, a practice that had become lackluster after the Tiananmen Square crackdown. Deng, who called himself the “Son of Chinese People”, was remorseful over killing those college kids, and was eager to compensate his people with the creation of wealth to some and an improved average living standard for most.
As a former work-study student during his early years in Europe, Deng understood that by making capitalism the order of day — at least in the business arena — his people could benefit. When Deng died in early 1997, his hand-picked successor, Jiang Zhemin, took over the march toward greater economic liberalism in regional centers such as Shanghai.
Consequentially, just as Deng’s slogan “ to let some people become rich first” foretold, the market-oriented reforms have lead to the flourishing of about 300 million people, largely dwellers on China’s coastal provinces, including Shanghai, Bejing, Guangzhou, Shenzhen, Ningbo, Suzhou, Wuxi, Tianjin. That’s out of China’s total 1.3 billion population. The coast is China’s new Sun Belt, representing most of the manufacturing centers and a large portion of the new wealth. For instance, the bulk of multinationals have operations along China’s coastline, which also boasts the highest concentration of the country’s successful private enterprises.
As a result of these policies, less than one quarter of the Chinese population have been the feeding ground for this upward economic spiral which has gone non-stop for twenty-five years, thanks to the forces of the market, a clear implant from the West.
Is there any linkage to the long-standing Chinese tradition and culture? You bet.
Throughout the history of China, one thing that keeps burning inside the Chinese is their entrepreneurial spirit, the resolve to pursue wealth and happiness and the responsibility that come with it. Even the puritan, Messiah-like Mao Zedong couldn’t quash the spirit of free enterprise among his subjects. The Chinese seers and prophets had long ago preached the Tao in doing good business and reward hard work, honesty and ingenuity with prosperity.
Prior to China’s ascension to WTO, what the country’s economy had achieved was largely fueled by a spontaneous outburst of “citizenry commerce,” when everyone tried to get involved in some form of doing business. There also arose a spectacular economic experiment guided by Deng’s political prowess. With the time up for China to fulfill its WTO commitments opening remaining sectors such as the banking and financial, energy, trade, travel and legal services to other WTO members, one can detect an increasing inclination by the current leaders to institutionalize market economy on the broader scale, and to assure that the capitalist traction will be irreversible.
One recent breakthrough of legal maneuvering came when an amendment was made to the Chinese constitution to protect private property as an inviolable and inalienable right of its citizens.
The country’s crop of private entrepreneurs have applauded this late-arrival but welcome change so that they won’t worry that their hard-earned assets could end up nationalized by some irrational local government bodies. Now, they have the legal system working in their favor. One can also detect trends in business hubs such as Shanghai, which hosts the most regional headquarters of foreign multinationals to establish internationally compatible legal frameworks that will better protect the interests of international companies.
In February, the Beijing central government convened its yearly finance summit which gathered the heads of all its large banks, insurance companies, brokerage firms and investment banks. They were assembled to roll out stabilizers for sustained growth, including macro-control adjustments based on the American and European experience and of much lesser Chinese Socialist market economy models, as well as intense measures to help improve readiness for further markets opening in the financial sector. That sector will focus on making the Chinese financial institutions stronger in the face of the much anticipated competition from their international counterparts.
China’s conscientious effort to establish norms and framework to safeguard an unfolding open economy is applauded. However, nothing is more sacred than the market itself. Nothing is more driven than a national will to create wealth and comfortable living, and for their children to have a secure economic future.
As the hand of the market is at work, you certainly cannot take back KFC chicken and toys from the kids, or take back the Buicks, the Volkswagens, or the Hondas from their parents. Neither can you pull people away from the all informative Internet and the online video games. Let’s just face it. The better way of life, the capabilities of wealth, the free flow of information on the Net brought in by opening to the world and championed by multinationals operating in China, have now become a national pursuit by a nation of 1.3 billion. No way can China go back or even show signs of slowing down for at least the next twenty to thirty years. It is just the beginning of what the market can do to the Middle Kingdom, a civilization with a 5000-year chronicled history.
All the pieces seem to fall into place: an open-minded new leadership, a government that is pro-business and cozy with their international business partners, a citizenry fired up by the raw energy of commercialization and industrialization, a social decorum that befits from more economic growth, and, most importantly, a market economy which cannot be turned backwards.
This means the birth of China, Inc. — a nation and society concentrated on economic development, on the spirit of free enterprise, and on growth.
Rather than a love-hate relationship with the multinationals, China has chosen to accept and embrace them, and has seen it as the optimum opportunity for its own businesses, state owned or privately-held, to play the catch-up game by improving their competitiveness and productivity. The result of this approach is equally encouraging.
The average Chinese company operated on much better performance in 2003 in terms of improved fundamentals and profit margin, thanks to the multinational counterparts they’ve been copying, partnering and competing with. China has a new game of “three strikes out” in corporate life: if a state-owned business doesn’t perform for three consecutive years, it will be either privatized or closed. Are the Chinese corporations stronger by this water torture inflicted upon their non-performers? I bet they are.
China is so in sync with corporations, with a stable political regime a huge plus, and with the new infrastructure that has been built, plus low capital costs and labor costs, it has become the best place in the world to do business and to invest for a foreseeable and solid return. The market and manufacturing potentials are so powerful that whatever you want to do there — target the domestic demand or have goods made in China - if you’re good enough to compete, you are almost guaranteed to win. The revived, or newly-created and rising purchase power and demand for goods and services are just limitless. When it comes to China, the cliché still holds: “If everyone in China buys a pair of shoes, then, there are 1.3 billion pairs of shoes sold.” With the opening of its financial market, if every Chinese family seeks personal finance products, if every Chinese family wants an automobile with the newly available auto loans, you go figure.
This helps to explain why China’s growth for the next 20-to-30-years can transcend the conventional wisdom of a boom and bust cycle. If the last two decades of continuous growth have only benefited a quarter of the population, it will take at least thirty years to spread the benefits and comforts of modern society to the rest of the Chinese nation. The cycle will actually go the other way: creation of wealth = added growth = creation of more wealth. Even thirty years from now, supposing China will have a $6 trillion economy, it will still be far from being a rich country per capita, and there will be ample room for further growth before it will become a true mature economy.
It is widely anticipated that China’s economy will reach the $4 trillion benchmark by 2020. Optimists such as Bill Gates of Microsoft predict that China will surpass the United States as the largest economic body in twenty to thirty years. The bottom line is that a lot of wealth will be created and the process of creating this new massive wealth shall greatly help the balance sheets of companies who are now leading the pack on China’s phenomenal domestic front. The leader’s list includes a number of multinationals, but also includes a group of emerging Chinese corporate powerhouses and those listed on the American exchanges. Particularly those Chinese direct listings who are subject to tough U.S. stock market regulation are more transparent in corporate governance, and are more responsible to their shareholders, and, thus, represent high investment value.
As the country looks to better manage its monetary resources, for instance, it’s important for state-owned banking conglomerates to shed some non-performing assets, and to offer more personal finance products to people who invest their capital in a bank savings account. The financial service sector is clearly a place to put your money to work. Mutual funds to help grow the pensions and social security assets to knit the much needed safety net for the retired and unemployed are in demand, especially those that have strong money management credentials from the U.S. and other leading capital markets.
Secondly, retailers, including super stores will be in demand. The auto industry, the mobile carriers, the consumer goods suppliers, the energy and infrastructure sector are all sure winners amidst the new wave to urbanize a chunk of the country’s 800 million rural population.
In conclusion, China has come of age as a significant market and as a supplier to the world, owing to decades-long foreign involvement and willingness of the Chinese to learn and accept advanced industrial and market experiences from the Western powers. There are even compelling signs that this largest nation in the world is becoming the backyard of corporate America.
China’s market and companies represent the best opportunity to do business or to invest. It is the only lasting “sweet spot” in today’s global economy. China and its growth is an anchor of confidence to the world.
(Ray Young is a China expert and former associate editor of Asia Economic Review)
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