It is three years since Goldman Sachs published a seminal piece about the likely growth of the BRICs: Brazil, Russia, India and China. Few macro themes have been as quickly adopted by investors. But as James Kynge, former China Bureau Chief for the FT, writes, the last of the BRICs may be the most difficult to define.
Since reforms began in 1978, 400 million people have been lifted above the poverty line of $1 a day. Private telephone use has grown from virtually nil to a population of 350 million people with mobile phones. Every day, 24 million chickens are eaten. The state has to care for 20 million children in kindergarten and 12 million people aged 80. This suggests the impact on commodities markets is likely to be longer-lasting than the bears believe. There are currently roughly 400 million people living in China’s towns and cities. By 2050, there will probably be one billion. “The investment required to settle so many people in an urban environment is impossible to calculate with any accuracy, but it is clear that worldwide demand for… basic metals and resources may remain strong for as long as urbanisation unfolds,” says Kynge.
But none of this guarantees wealth for foreign businesses: piracy exists on a colossal scale, even legitimate Chinese businesses operate on margins that are wafer-thin or negative, and the banking system barely works. With no functioning bankruptcy law, the liquidation of insolvent firms is difficult. As Kynge points out, in an efficient market, oversupply normally results in output contraction. Not in China. Faced with shrinking margins, Galanz, the world’s largest microwave marker, has expanded into air conditioners; Midea, one of the world’s largest air-conditioner makers, has decided to move into microwaves.
Then there is corruption. Kynge concludes with the story of 10,000 private investors who had 6,000 small oil wells confiscated by the authorities in 15 counties in Shaanxi. They still await redress. Ominously, Kynge suggests that “the sharp increase in localised protests shows that material enrichment alone does not guarantee greater public contentment”. The book owes its title to a quote attributed to Napoleon: “Let China sleep, for when she awakes she will shake the world.” The impact of this waking giant is already being felt, but will it end up enriching investors in the West? As the first premier of the People’s Republic is rumoured to have quipped when asked about the impact of the French Revolution: “It’s too early to tell.”
Tim Price is chief investment officer of Global Strategies at Union Bancaire Privée, London.
China Shakes the World: The Rise of a Hungry Nation, published by Weidenfeld & Nicolson, is available through the MoneyWeek bookshop