In ’95, as young “pad-wan” in international business field, I had to represent my college class in a debate about the future of the world economy. At that moment, John Naisbitt and Alvin Tofler were my bibliography references; and their trends have become quite correct: China is apparently challenging the lead of the world economy. However, as I have visited this colossus this year, I may confirm: yes, China is a miracle! And no, I don’t believe in miracles! I don’t like figures, even if they are relevant in China’s case. Therefore, I will express very qualitative impressions about this fascinating country.
The economic growth pace is impressive; the Government is therefore concerned. The demand is described mostly by a significant consumption increasing trend and a credit spillover grater than ever, both in household and corporate segments. As a consequence, inflation is hard to control. Government makes efforts to stop this rate. But behind this, there is a problem in my opinion with the free market behavior: it does not offer proper leverage for calculating CPI! In other words, as consumer, you don’t know the real price and the quality associated to that guessed price. What can be more confusing? How can a market work soundly, and on sustainable principles? One may say that “invisible hand” is proving its merit. My concern is that in China act many such “hand”. Heterogeneity in price for similar products in different corners of the same market, and subsequently in different cities is too high.
If you look carefully, we may notice that not so many companies are present in China, despite everybody talks about the huge opportunity given by the retail potential. Starting from the description above (unknown price for unknown quality), smart, agile entrepreneurs might take advantage from both growth and decrease, if they feel the business culture out there. Not to mention the corruption and weak rule of law.
However, if you look carefully on infrastructure development and real estate, you may not disregard that business presence in China is a must in the next decade for anyone looking for high returns from large investments. China means variety from all perspectives: social, economic, cultural ones. There are pregnant wealth inequality, which cannot but sharpen in the future; lack of educated people; poor financial services. I am not talking about Hong Kong, I am talking about Shanghai where a petty currency exchange last between one and two hours… and you still need passport!
I personally see a significant correction in less then three years. Olympics in ’08 will bring more consumption; more visitors are likely to come and understand the shortages of the Chinese model. Apparently, a crash can be supported, if we look to the foreign exchange reserve with central bank and also to the confidence index brought by professional surveys. One may also be optimistic while China extends its financial “support” in infrastructure and development in Africa.
The main threat is in my opinion linked to the speculative hot capitals invested in infrastructure that shall not meet the investors return. A rush of capitals would not be desirable. Concurrently, the expansion of the industrial plants from West is likely to affect the environmental balance; air in great metropolitan areas is not healthy at all, mostly due to millions of cars and thousands of square meters of factories, concrete, and steel!
Conclusion: China needs fundamentals to prove it is a lasting miracle!