"It’s the same the whole world over” - Part Two

(by Richard Holway) As you might have gathered by now, I’ve been away in Japan and, for the last 10 days, in China. I could repeat the “It’s the same the whole world over” title I used for Japan two weeks back again for this post on China.

I love reading local papers whilst in the country I am visiting. On Saturday, when I left China, the front page story in the South China Morning Post was about the protests outside of one of China’s largest toymakers which couldn’t pay its workers’ wages because of a significant fall off in US orders from Mattel. “52.7% of China’s toymakers – 3631 companies - have ceased operations in the first 7 months of 2008” the article said. Another report was of orders for TV remote controls from the US slumping by 80% this year. Indeed, electronics was quoted as one of the worst hit export sectors.

If we think our stock markets have been badly hit, just look at the Shanghai Index which is down 2/3rd in the last year or the Hong Kong Hang Seng which is off 50%.

Our guides throughout China all voiced concern about the deteriorating economic environment. I was particularly interested as we passed so many brand new houses and apartments that were unoccupied. Our guide told us that nobody could afford to move in any more and that house prices were slumping. Indeed, it was this very building programme which created the demand for raw materials which sent that sector rocketing in the last few years and is now causing it to crash to earth again.

As over 70% of the Chinese economy is with the outside world, they are bound to be affected greatly from the current financial climate.

But China does have some things in its favour which we don’t. China is running a massive trade surplus -$29.3b in September alone. This has enabled China to build up foreign exchange reserves of $2 trillion. They could probably buy all of the US financial services sector plus its automobile sector and still have enough change to buy the odd Nordic nation.

China is a nation of savers. Their inhabitant’s savings ratio is 52% of GDP compared to minus 1% in the US. The Chinese Government is now actively encouraging its citizens to spend some of their savings. Our guide said “we are told it is the patriotic thing to do”. If demand from the rest of the world slows, China will accelerate internal demand. Afterall it does have 1.3billion people who all want mobile phones, cars etc. I understand that (just like the UK has announced today) China will now bring forward big infrastructure build projects.

I’m now back in the UK. I found my China trip a big eye opener. I’ve read many articles and seen many programmes on China, but they were no substitute for my own eyes and ears. China is amazing. Its cities are huge, crowded and vibrant. Its people amazingly friendly. Its infrastructure is already mind boggling. For example, the many internal flights I took were all on time with my baggage arriving immediately I entered the arrivals hall. Its airports are dazzling and, as far as I could see, every airplane I was on was brand new! In the streets I saw no litter or graffiti. I saw none of the extreme poverty and malnutrition I saw in India. The schools I visited seemed full of happy kids.

But, of course, it has its downsides too. One of our guides told us that he had been given just one month to vacate his home in Shanghai which was bulldozered to make way for yet another skyscraper. I was surprised at the lack of free healthcare and the quite different benefit entitlements for those living in rural and urban areas. I was quite perturbed at the consequences and methods of enforcement stemming from the “One Family, One Child” rule.

But, regardless, the people I met seemed immensely proud of their country, supportive of their government (even if, as one guide said, “Sometimes Great Leaders make Big mistakes”) and very positive for the future.

I now have no doubt that China will become the world’s economic superpower in the next ten years – eclipsing the US. We should all view China as the most important market to go crack.