Resources – Production – Markets

China’s government aims “to elevate a majority of its people to middle-class status by 2020”. (² This alone will lead to the demand for natural resources to blow up even more. China offers to help African countries build infrastructure, in return for lucrative exclusive contact for natural resources, which stretch many years into the future”.

East Asian nations, with China foremost, have taken the dominance in manufacturing from the West. Increasing labor costs (often with a simultaneous strengthening of the local currency) amongst other issues drive production to these developing countries. China is a clear winner of the economic crisis (where it never arrived in some industries). This position of strength is ‘fortified’ by increasing domestic consumption, technological progress, more professional production processes and continuing demand for consumer goods from the West. China has a huge supply of cheap labor, so its basic manufacturing cost will always remain competitive, even if its economic rise and expansion would dwindle.

In summary, although China is rich in labor its exploding demands for natural resource for example will accelerate the price increases; perhaps to become permanent as some of them are in limited supply.

Currently most manufacturing occurs under contract to Western/Japanese companies. I.e. Chinese firms subcontract rather than generate new products.  However, China as an ‘outsourcing production facility’ is slowly replaced by a China with a tremendous (independent) domestic market asking for its own ‘indigenous’ industrial and consumer goods.

Hence the decision to outsource not only production for cost efficiency purposes but also R&D units for the development of expressly tailored local products becomes a compelling alternative. In this case, however, intelligence and experience gained have to flow back to the parent company in order to avoid a ‘Brain-drain’ of production skills and research results. At home, the production of complex, difficult-to-copy, high quality a/o luxury products still have a change due also to the image of the brand (e.g. “Swiss Made”).

When competing with Chinese firms it is important to remember that the state owns most of the ones active abroad as well as entire industries – and the state can be brutally pragmatic. China’s aggressive economic, political and cultural engagement with the rest of the world is an assertion that China claims a role in the global community that matches its own progress.”⁽²

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Money Matters

Although the Chinese currency* is gaining value, this happens at an extremely leisurely speed. Currently less than ½% per month (since mid 2010) despite its obvious under-valuation. The liberalization is likely to remain a long-winded process since the Chinese know too well that full convertibility and the resulting revaluation and/or volatility could cost them dearly.

Nevertheless, the process has been started. With Hong Kong as an extremely fast-paced pilot (see Dim-Sum-Bonds a/o cross-country billing in Yuan). The Bank of China has woven a network in 27 countries and regions with over 600 overseas operations by 2010. At the beginning of 2011 it offered on-line banking in 18 countries. -  The Bank of China (Suisse) FUND MANAGEMENT SA, “will offer institutional asset management services to Chinese, Swiss and international institutions. It will also manage funds in both Chinese and global financial markets.”

Best positioned at present for a Yuan-Liberalization are Goldman Sachs and UBS which hold the farthest reaching licenses of all foreign banks in China. Foreign-Exchange, Money-Market, Deposits, Repos, Derivatives and Bond products are provided in RMB.^(NZZ

The cheap labor will continue to fuel exports and allow China to retain/build massive trade surpluses with its commercial trading partners.⁽¹

However, even for the bullet-proof RMB potential gloom can be spotted mid- to long term. Despite the stalwart base and history, some Chinese economists forecast a 30% chance of things going seriously wrong. Although the recently created middle-class or elite has money, hundreds of millions of people are cripplingly poor. And the wealth is mainly concentrated at the coast and will spread inland slowly only. Nevertheless, others forecast that China will reach a standard of living most western countries achieved in the 60’s.

Whatever the currency developments, it is a fact that China and especially the US are mutually dependent on a (indirectly) coordinate currency policy. Martin Jacques notes “The Chinese have invested heavily in numerous US financial instruments” including Treasury and other bonds. “China essentially lent the US the money to fuel its spending and mortgage spree. Despite the US economy’s near collapse in 2009, China keeps buying dollars – it can afford to.” … “if China were to transfer a significant portion [of its US dollars reserves] into other currencies, (such a) transaction would have a profound effect on the US economy.”  China holds tremendous amounts of cash (foreign currency reserves are estimated to some USD 2 trillion) whilst some dominant nations and businesses fight with liquidity.

From the afore mentioned, major conclusions for financial management should include at least two elements. First the currency strategy of covering Yuan obligations whilst letting (some) receivables open [or: short XYZ currency against long CNY positions]. And second, the interest rate management strategy of counting on a more stable CNY interest rate scenario for China then most of the developed Western countries.
*[Renminbi also known as Yuan; in China abbreviated as RMB - ISO code: CNY]

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This synopsis of Chinese idiosyncrasies (in terms of risk/opportunity issues), to be taken into account when doing business in or interacting with China, is a composition of input collected from experts on site, articles in the NZZ and the two books often referenced in the text.

Country and Culture

China is leading an historic (paradigm) change as world power shifts from the West to developing nations. The 300-year reign of Western dominance is coming to an end as China’s rapid modernization spawns a transition with global impact. ⁽¹

We might be tempted to take Japan’s economic history as a “looking glass” to understand China’s development and growths. As opposed to Japan – (that willingly took on Western conduct to become industrialized while preserving the national core) – Mao Zedong’s regime and its successive hard-core communist administrations set the base for China’s industrial explosion, despite the grave communist-type economic errors (central government dictated 5-year-plan growth, etc.).  I.e. when China entered the global community, it had the base of an economic infrastructure in place, ready to look outward for markets and investments.

China has never been another nation’s colony nor fully occupied by any other country, as Japan was during WWII ^… It suffered invasions, rare defeats and shifts in dynasties but always retained its language and sense of cultural superiority. If anything, intruders over time became more Chinese. In other words ‘China remains China’.

It developed major advances in mathematics and science, literacy, paper and printing amongst other innovations. China called itself “the Middle Kingdom” – the center of the world. ⁽¹
It built and maintained the world’s foremost civil service class whose subordination ensured that the ruling dynasties retained ultimate power. A centralized, contained, policy- and law-making authority with unlimited domestic power has always ruled. ⁽¹

In the past and even more today the “Chinese Model” necessitates the ability of the state to deliver continued economic growth to uphold the country’s stability.

When dealing with China its wise to remember: 6 crucial factors (in summary) make China different to Western-type modus operandi:

1. The state has priority over individualism – from its earliest dynasties central authority (all other entities were/are subordinated), embodies Chinese identity and culture. “The Confucian ethos furthers the idea that state authority is responsible to non one and to no idea but to its won preservation.” The state is expected, and expects itself, to build the economy and raise the standard of living thus fulfilling its role as ‘parent’ in a Confucian context”.⁽¹ – Government shows little interest in offering democracy-type responsibility and historically never has. And “the Chinese state has” during the last 3 decades proven to be “remarkably adaptable and capable of self-regeneration.”  ⁽¹ 
   The Nasbitts would qualify these statements. For them, Deng Xiaoping recognized the hazards of dogma and the harm done by brutal restrictions on ideas – Following the chaos of the Cultural Revolution – its population forced into passivity by decades of formulaic communism resulting in discourage about innovation and risk….. Today, “China strides from revolutionary indoctrination to intellectual emancipation”. In fact, Hu Jintao promised “Citizens will have more extensive democratic rights”. For the Nasbitts, “neither progress nor economic growth requires Western-style democracy.” ⁽²
2. China has always remained Chinese (Neither languages, cultures nor attributes of intruders have ever been taken on) – driven by a mutual belief in the superiority of Chinese culture. Other cultures’ sense of race and ethnicity is not shared by the Chinese, non-Han are regarded as different nationalities not different races. The Chinese uniqueness has long been believed as “not simply cultural but also biological”.⁽¹ Its inborn sense of superiority marks its international interactions!
3. China had been the dominant power in East Asia for centuries and will take that role back. In economic terms maybe even extending that region to include Central Asia, Africa and Australia/New Zealand.
4. China means a different scale and scope; it is a nation and a continent encompassing minority areas and people in an enormous land and population – making it an unlikely candidate for Western-style democracy.  (Note: The US, although slightly smaller than China, has only some 25% of the latter’s population.)
5. The speed of the transformation to ‘modernity’ is unequalled – China’s “traditional belief” of being “the world’s superior culture allows its citizens to live with broad-based, immediate industrialization and modernization. They can handle the new and futuristic better than its Western rivals. The Chinese people’s believe in their own strengths allows them to accept changes that might traumatize nations that modernized along more traditional baths.” ⁽¹
6. “A developing and developed nation – China’s ‘modernity’ is tempered by and interacting with relative rural backwardness. This split personality, played out across the immense continent will generate never-before-seen problems of development, political stability and monetary policy.” ⁽¹ Converting a developing population into a developed nation might take decades, meanwhile government will give priority to the already developed segments.

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