China means “central country” and it has certainly been living up to its name.
Although the spotlight has been on the United States, China, in many ways, has been far more central to recent global upheavals. It was Beijing’s entry into the world trading system that kept inflation in check, providing the world with manufactured goods at low prices for many years, thus allowing monetary policy to stay looser than it otherwise would.
However, not only has the mainland helped fuel the mortgage security bubble that has now burst, the strong growth in emerging economies such as the mainland, combined with demand from investment funds, has caused commodities prices, notably oil, to rise sharply.
The upshot is further strain on the credit-battered financial system and an unravelling of consumer confidence around the world.
While serious, these problems should not deflect from another issue: how to share the world’s limited, and in some cases dwindling, resources as the developing world grows richer.
Australian-listed international mining company Rio Tinto said demand for resources such as iron ore, copper and aluminium rose significantly once gross domestic product (GDP) per capita reached about US$5,000. China is at this point and India is not far behind.
How can the world find a way to share the Earth’s resources among an estimated industrialised population of 9 billion in 2050 compared with 1 billion today?
My guess is that extraordinary technologies will emerge - and this does not include the obvious such as solar cells and wind turbines - and we will be smart enough to encourage their development into commercial use. Enough sunlight hits Earth every 40 minutes to supply the world’s energy needs. Might harnessing an extra couple of hour’s worth allow us to synthesise all our mineral needs? Why has it taken so long for China’s growth, which has averaged 9 per cent since 1970, to feed through to rising commodities prices? Partly, supply was able to keep up with rising demand, as capacity at mines and wells could be made more efficient.
But the main reason is that mainland growth has largely been based on its workers making consumer goods for the west rather than, at least until now, for themselves. When developed economies moved production to the mainland, there was little impact on final demand. Ironically, labour that was freed up in the US as a result of this shift may have ended up in services such as real estate, helping to fuel that mortgage bubble.
The extent to which Chinese workers have deferred spending is apparent in the numbers. Private consumption accounts for just 38 per cent of GDP, compared with 56 per cent in India and 71 per cent in the US. But having now built up manufacturing expertise and reached a certain level of wealth, the mainland is starting to focus on its own wants.
Labour laws introduced earlier this year have resulted in wage rises. Furthermore, workers in coastal export zones are starting to move back to their hometowns having built up a decent nest egg. Russell Napier, a consultant with CLSA, notes that billboards that once advertised state goods now display the names of consumer brands. He also points out that mainland car ownership per capita is comparable to that of the US in 1914.
Certainly, China’s transformation from an export-driven economy to consumer society is going to play havoc with commodities prices for years to come. Now that the demand for energy, minerals and food has reached a critical (tipping) point, it’s anyone’s guess as to how high prices can go. What do these changes in the way the world’s wealth is produced and distributed mean for investors?
First, we have to find a way to tolerate the gale-force winds the world economy is facing, and the stock-market volatility. This means looking at the big picture and realising that whatever happens, there will always be areas of activity; activity that means growth and opportunity.
Second, we must identify where this activity is likely to be, even if we are unsure exactly when or how it’s going to happen. If China’s workers stop making goods for westerners and the costs of shipping them around the world continue to rise, western manufacturers will become more competitive. If the cost of travel by air and private car keeps rising, rail businesses will be more viable.
Once the dust has settled, the importance of investment banks will diminish - regulators will see to that - providing opportunities for commercial banks, particularly those with better capital in emerging markets. If China is to become more consumption-driven, household debt will rise, creating opportunities for credit card and other finance companies. If food is to stay expensive, the fertile plains of Kazakhstan and Ukraine will look enticing.
Third, having determined who the beneficiaries of this activity are likely to be, one has to be firm on price. This is the hard part. As James Montier of Societe Generale has shown empirically, high economic growth does not necessarily mean high returns. Yet investors habitually overpay for growth. The mainland stock market has not been nearly as rewarding as economic activity would suggest. But the contrarian always knows money is best made when others are fearful.
In conclusion, I wouldn’t play down the anxiety over the global economy, nor would I deprecate China’s achievements. Its hosting of the Olympics is symbolic and apt, and should be celebrated. Most of all I wouldn’t play down the opportunities that will come. We just have to find a way to profit from them.
Hugh Young is managing director of Aberdeen Asset Management Asia
2 comments:
How China’s consumers will change the world
Society of spenders will create new opportunities
Hugh Young Published: Jul 27, 2008
China means “central country” and it has certainly been living up to its name.
Although the spotlight has been on the United States, China, in many ways, has been far more central to recent global upheavals. It was Beijing’s entry into the world trading system that kept inflation in check, providing the world with manufactured goods at low prices for many years, thus allowing monetary policy to stay looser than it otherwise would.
However, not only has the mainland helped fuel the mortgage security bubble that has now burst, the strong growth in emerging economies such as the mainland, combined with demand from investment funds, has caused commodities prices, notably oil, to rise sharply.
The upshot is further strain on the credit-battered financial system and an unravelling of consumer confidence around the world.
While serious, these problems should not deflect from another issue: how to share the world’s limited, and in some cases dwindling, resources as the developing world grows richer.
Australian-listed international mining company Rio Tinto said demand for resources such as iron ore, copper and aluminium rose significantly once gross domestic product (GDP) per capita reached about US$5,000. China is at this point and India is not far behind.
How can the world find a way to share the Earth’s resources among an estimated industrialised population of 9 billion in 2050 compared with 1 billion today?
My guess is that extraordinary technologies will emerge - and this does not include the obvious such as solar cells and wind turbines - and we will be smart enough to encourage their development into commercial use. Enough sunlight hits Earth every 40 minutes to supply the world’s energy needs. Might harnessing an extra couple of hour’s worth allow us to synthesise all our mineral needs? Why has it taken so long for China’s growth, which has averaged 9 per cent since 1970, to feed through to rising commodities prices? Partly, supply was able to keep up with rising demand, as capacity at mines and wells could be made more efficient.
But the main reason is that mainland growth has largely been based on its workers making consumer goods for the west rather than, at least until now, for themselves. When developed economies moved production to the mainland, there was little impact on final demand. Ironically, labour that was freed up in the US as a result of this shift may have ended up in services such as real estate, helping to fuel that mortgage bubble.
The extent to which Chinese workers have deferred spending is apparent in the numbers. Private consumption accounts for just 38 per cent of GDP, compared with 56 per cent in India and 71 per cent in the US. But having now built up manufacturing expertise and reached a certain level of wealth, the mainland is starting to focus on its own wants.
Labour laws introduced earlier this year have resulted in wage rises. Furthermore, workers in coastal export zones are starting to move back to their hometowns having built up a decent nest egg. Russell Napier, a consultant with CLSA, notes that billboards that once advertised state goods now display the names of consumer brands. He also points out that mainland car ownership per capita is comparable to that of the US in 1914.
Certainly, China’s transformation from an export-driven economy to consumer society is going to play havoc with commodities prices for years to come. Now that the demand for energy, minerals and food has reached a critical (tipping) point, it’s anyone’s guess as to how high prices can go. What do these changes in the way the world’s wealth is produced and distributed mean for investors?
First, we have to find a way to tolerate the gale-force winds the world economy is facing, and the stock-market volatility. This means looking at the big picture and realising that whatever happens, there will always be areas of activity; activity that means growth and opportunity.
Second, we must identify where this activity is likely to be, even if we are unsure exactly when or how it’s going to happen. If China’s workers stop making goods for westerners and the costs of shipping them around the world continue to rise, western manufacturers will become more competitive. If the cost of travel by air and private car keeps rising, rail businesses will be more viable.
Once the dust has settled, the importance of investment banks will diminish - regulators will see to that - providing opportunities for commercial banks, particularly those with better capital in emerging markets. If China is to become more consumption-driven, household debt will rise, creating opportunities for credit card and other finance companies. If food is to stay expensive, the fertile plains of Kazakhstan and Ukraine will look enticing.
Third, having determined who the beneficiaries of this activity are likely to be, one has to be firm on price. This is the hard part. As James Montier of Societe Generale has shown empirically, high economic growth does not necessarily mean high returns. Yet investors habitually overpay for growth. The mainland stock market has not been nearly as rewarding as economic activity would suggest. But the contrarian always knows money is best made when others are fearful.
In conclusion, I wouldn’t play down the anxiety over the global economy, nor would I deprecate China’s achievements. Its hosting of the Olympics is symbolic and apt, and should be celebrated. Most of all I wouldn’t play down the opportunities that will come. We just have to find a way to profit from them.
Hugh Young is managing director of Aberdeen Asset Management Asia
21世纪: “日出东方， 唯我不败。”
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