After a recent trip to China I was awed by the development going on in the country. I have for years read about its massive growth, investment opportunities and its ability to weather even the worst financial crisis. Seeing it in person reinforced this view as the country uses its huge resources (financial and populous) to keep up with growth. But there is part of me that thinks this can’t continue – something surely has to give?
Visiting family or close friends gives you a better understanding of a country, and while I was just based near to Shenzhen (a province not far from Hong Kong supporting nearly 30 million people) I was able to see some of the city and surrounding countryside. Firstly there are quite a lot of similarities to India (which I visited about ten years ago) in the sense of absolute poverty next to obscene levels of wealth. Anyone who has seen the film Slum Dog will know what I am talking about. In China though, it seems less obvious as there is an order and structure to the new society being built, one that India lacks, probably due to the differences in politics. But I suspect that is the same of any developing country and just more obvious with these fast growing ones. You could assume if anyone from Victorian Britain was alive today to see it there would be many similarities when Europe went through the same industrial growth.
My issue with a potential bubble relates to a number of issues which appear to be making local and national headlines as the country continues to grow.
For years China has been the manufacturing the world’s goods and exporting meaning it has built up huge cash reserves of dollars. When we are borrowing billions to invest in our country, China is earning that in interest. The only problem is their wealth is directly proportional to how well the US does and with the President considering printing more money and borrowing reaching record highs surely the value in dollars is diminishing?
A big reason companies setup plants in China was to make the most of their cheap and eager workforce. But due to their success they are demanding more money and this year saw the minimum wage rise by 21%. No matter how much profit you make, that surely has got to hurt. The argument against this is selling to the consumers in China (of which there are 400 million or so earning a reasonable wage) but again western companies have struggled to customise products to the very finicky market.
Any factory needs power, and with warnings of blackouts already being given before I left, it looks like it will be turbulent year for factory owners. The moment a plant comes to a grinding halt is when big money is lost, so I would be concerned about companies investing new plants into China when they struggle to get the basics right. The issue apparently relates to the state setting the electricity price which doesn’t take into account the cost of commodities, so as the price of coal rises the power companies look to financial ruin if they run their plants at full power.
The one issue which has remained constant are the compromises a foreign company needs to make while operating in China. While this has remained the same the above issues make this a harder pill to swallow. The other issue comes around the relative lack copyright protection. I was very surprised that you had street sellers selling counterfeit Prada bags directly outside a Prada shop; I can’t see that being tolerated much longer.
So while I was hugely impressed with what they have achieved, I will put it out there that I can’t see the growth being sustained much longer. If the government continue to ignore the signals even I picked up on my short visit then they are in for a rocky future.