We’re told that we judge personal success relative to our peers; it doesn’t really matter how successful we are – as long as we are doing better than those around us.
The concept is simple enough and there’s a lot of truth in it. So much so, that I reckon the same goes for nations. North Koreans probably wouldn’t feel half as poor if they didn’t have the successful South Koreans over the border lording it over them. It’s all relative. And it’s an important concept that I think is missed when it comes to China. As Westerners, we’re happy to think of China ‘catching up’ with us.
But what if they don’t want to catch up? What if Beijing’s plans for China include becoming more successful than the West? That’s what I think is going on. And we need to make sure that our investments are set up to benefit, not get trampled on.
The analysts with rose-tinted spectacles
A report out last week from HSBC painted a pretty rosy picture on how the rise of China will drag the West up with it. “A rising tide lifts all ships”, they say. But I’m not so sure. For starters, if your ship is moored in too tightly, a rising tide can cause some nasty damage.
We’re already seeing how consumption in China is helping to push up raw material prices. Together with higher local currencies, it’s causing grief for UK retailers as costs rise, but prices stay stubbornly low.
And this weekend, you might have caught this story: Nicolas Sarkozy is launching an investigation into whether the Chinese have been stealing trade secrets on the design of electric vehicles from Renault. A lot of Western wealth relies on intellectual property rights. And this sort of wealth is easy to copy.
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Here’s what could happen…
I run a business which creates and sells beauty products. A few years back I got a hot new client – a large online retailer. Within months he became our biggest wholesale customer for retail products. I was delighted. I even sent him a Christmas hamper from Fortnum’s. But then I never heard from him again.
He was a shrewd operator. It turns out that he was scoping out opportunities in our niche of the market. So he started retailing the top brand, which happened to be ours.
In the meantime, he developed a copy-cat brand, ready to launch if sales went well. So when he’d developed enough customers to make it worthwhile putting his own brand into production, that’s exactly what he did.
And there are parallels with what’s going on with China. At first they manufacture for us; then, as China reaches a critical mass, it moves onto the next stage of the plan. And that means they can cut us out of the picture.
Beijing’s five-year plan
China has pulled off something of a coup with their mix of ‘planned economy’ and capitalism. They plan for the future in five-year blocks and the next plan comes out in March.
From what I read, Beijing plans to edge away from manufacturing cheap stuff for global consumption and into manufacturing for domestic consumption. They’re also planning ever more investment into transport systems, electric cars and all manner of new technology.
China is busy building new universities, high-tech industrial outfits and just look at how they’re cracking on in the space race if you want to see what they’re already capable of.
How long will China want to manufacture all this stuff for us as well as sending all the royalty payments back to Western companies? Not too long. It looks increasingly like they want to cut the West out of things.
And that has a number of serious implications for your investments.
Three ways this plan could change your portfolio
Life isn’t going to be as rosy as many analysts think. Analysts who reckon that all ships float up on a rising tide are glossing over half the story. And that starts with more expensive prices for all the things we’re used to importing cheaply from China.
If you think commodity prices are over-heated today, for example, just imagine what will happen as China really does start to play its own game. It’s already managed to corner the market in a number of key metals – including the rare earths. As China dictates the price of these metals, it will suddenly become a lot more expensive for the West to produce everything from computers to electric vehicles and wind turbines.
But China’s secret plan will create opportunities too. As the Chinese move away from manufacturing, keep a look out for opportunities as Western manufacturing starts to become competitive again.
Finally, make sure you’ve got some exposure to the mining and energy industry – China can’t do without it.
This is a long-term story. I’ll be keeping a close eye on how it pans out – and will report back with the best opportunities I find as we go.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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