Wednesday, August 29, 2012

Untitled - My Rare Rant on Current Affairs


I wanted to write something on macro economy for a long while but never found the time and I think it is a good time to do so mainly because I am in the mood to do so. Marco economy may not be the right term for what I am going to talk about but something in relation to that perhaps. Hey, I am just expressing what I have in mind aka BLAH! ... Anyhow, here we go. Over the past year or so, the world economy has been in turmoil for various reasons, one key concern is of course the EU debt crisis. I am not here to talk about that but rather on the overall development of China which the whole world has been paying attention to for more than we care to admit.

News over the past year have been covering how the Chinese economy has been slowing down especially the manufacturing / export sectors. Why are we so surprised with that? All developed countries such as USA, UK and even Hong Kong as a developing city have been through such development stages in the past. Low value manufacturing often takes up a huge percentage of GDP for  developing nations during the initial stages and gradually moving upwards to either valued added manufacturing or the service industries or hopefully both in order to remain competitive. Is China moving towards that trend? Can China's so-called amazing growth be sustained in the long run? Who knows, it all depends on the actions / policies being implemented in the distant past and future.

Let's travel back in time for a bit for a brief history review. China was a gold mine for cheap labour in the 1980s when the nation first open its door to foreigners and manufacturing of course was the first industry to be concentrated on along with along of capital injection into infrastructures by the local and central government which contributed a large % of growth even to this date. What I am more interested in is to look closely at the FDI (Foreign Direct Investment) over the last several decades ... by companies of different NATIONS. Again, I did some simple research and the following statements are based on my own researches and please correct me if otherwise. 

Entrepreneurs in Hong Kong took the most benefits out of the open door policy initially. Hong Kong is close to China especially near initial Special Economic Zone in southern China where cheap labours were plenty. Most if not all Hong Kong businessmen took advantage of the cheap labour (and being Chinese of course) and started manufacturing of all sorts of items for export. Oh there were plenty of riches but most if not all items being manufacturing during that period or even up to the late 1990s by these Hong Kong-owned factories were low-valued products which gradually have lower margins due to higher labour cost and etc. Many of these factories were closed down in recent years especially those without the vision of upgrading their production line or business objectives to more valued added products or change their whole business model to fit into the current macro development of China.

What about the many US-based MNCs which wanted the cheap labour in the manufacturing sector of China as well? True that they wanted to take advantage of the cheap production but the main objective of many US-based MNCs including that of McDonalds, Wal-Mart, GM or Nike for example are beyond that. Their target is China's growing domestic consumption market which has tremendous growth simply due to the size of the population. Cheap production can be migrated whenever needed but the high savings rate and huge domestic consumption potential is what many US-MNCs are looking at! The pie is getting larger by the day as the income level of Chinese is increasing as we speak. The size of the so-called middle class  is the drive of consumption and the US MNCs can see that way back in 1980s while many Hong Kong-owned factories in China were busy pumping out socks or plastic toys.

What about the Japanese? Yes they did put an effort in the manufacturing businesses as well like the Auto industries but their key contribution to the growth of China over the past few decades was in the infrastructure businesses. Equipment, technology and even skills were somewhat transferred as well. Many roads, bridges, highways and high-speed railways were built with the help of Japanese firms and their investments. The same applies to German's investment during the past few decades of rapid growth in China. Oh almost forget about the many energy projects and infrastructures which the Japanese and German investment have contributed. Guess who invested the most on the construction of the Three Gorges Dam, especially the power turbines and generators etc?

The named nations above are just a few examples of how they contributed to the growth of China in the recent years and what their major focuses, specialisations or objectives were / are for China. So what can China do to avoid being led by other nations and be great economically speaking? Well, I think many State Owned Enterprises (SOE) or formally SOE now public companies are moving in the right direction by acquiring new technologies, management skills as well as specialisation in producing value-added / high-valued products in the manufacturing sector and rapidly developing the financial & service industries. This is the best way to turn China into a consumer-based market.

So what exactly is my point of writing this post? I am not quite sure, just want to share what I have in mind for a while and hence the title of this post. I guess one thing we should be careful is how to evaluate a situation from both sides. A drop in the manufacturing / export figures may not be a bad sign for the overall growth of China as a whole and the amazing growth over the past few decades may not be solely the results China itself but with contribution from companies that you may not pay attention to normally. These companies / MNCs have long term interests in the Chinese market with their respective objectives.

Of course, one should also pay attention to how much China has been spending on infrastructures since the 1980s and how much of those monies are borrowed in terms of debts. Airports, roads and highways are great and necessary infrastructures for the development of a city / countries, however, international airports built geographically NEXT to each other in terms of provincial regions using tax payers / borrowed monies may not be so wise in all aspects. The reasons as to why such White Elephant infrastructures were built without much planning between provincial governments are matters cannot be explained fully in this post because of the complications and complexity of how the Chinese government works, or more accurately how the officials are being evaluated annually in terms of performances. I will not open the can of worms in this post, perhaps the next?

end of blah blah blah ... more to come perhaps?


Anonymous said...

-If you read the papers and are in touch with the world, this is on everybody's minds...its worrisome. The doom and gloom about the bubble in China's economy is especially a concern. Some economist speculate that it is bigger than the US housing bubble. I've read that the profits of China's top two companies are more than the their top 500 combined!
-As we know, times change and empires wane. If/when the US stops being the world's police, who or will fill the void. I'm also worried about this territorial dispute. I highly recommend a book by George Soros: The Soros Lectures: At the central European University. It is part historical, economic, and social science. Really good. One thing he states is that the future will depend highly on China. But considering the bubble..if it bursts, then you will have a country with huge economic issues and a growing military. We know that the China-US political relationship is mature and developed. But freak decisions or actions have been known to occur in the world. Basically this could be a potential for massive conflict/war...

Anonymous said...

this seems like a case on a scale bigger than what most foreclosure attorneys handled before. Might be far worse than 2008.

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