Those who watch China carefully should already be aware that there has been tremendous development in the Chinese economy over the last few decades. As such, I’m not going to expound on the numbers or the well known accomplishments, but instead I will start this analysis from the point that the reader is already aware that China is developing rapidly and has made some incredible achievements.
The general consensus among our group is that China will go on to take a leadership role on the world stage. While China has already developed very quickly in the last few decades, there is still a lot of work to be done and as such there are some risk factors which could compromise its recent success. While many of these risk factors are already receiving attention from the Chinese government in terms of protective policies, a few worth mentioning are “hot money,” the real estate bubble, and banking practices.
Hot money was discussed as an issue during our visit to Citibank and it describes the practice of investors finding ways to transfer liquid assets into the country to enjoy currency appreciation. The risk involved with hot money is that investors are notorious for pulling the money out quickly which can destabilize an economy if the amount is significant enough. While the government has put safeguards into place, the issue still persists in that many investors establish holding companies for the purposes of transferring assets and avoiding financial controls. It was noted that customs officials even sometimes need to participate in investigations to ensure that goods are in fact being traded by some companies at all. Thus the financial controls employed by the Chinese government sometimes seem restrictive, but in reality they are needed to control certain practices like hot money.
The next point deals with the rising real estate costs which has both financial risk implications as well as societal implications. This topic was discussed at several visits and generally people believe that while pricing will eventually need to come back down, the effect won’t be as severe as a typical bubble bust in the US for example because consumers aren’t nearly as leveraged in their properties. The importance of real estate in Chinese society shouldn’t be overlooked though because in many cases a young couple needs to own a house before getting married as a societal practice. Thus, there is likely to be stable demand as long as speculation doesn’t get out of control.
The topic of banking policy was discussed briefly during our visit with David Yu. This comprises two major issues including the point about bad debt for loans at the banks and also the Chinese currency. David basically stated that while there used to be a lot of bad debt at Chinese banks that gave out loans for start-ups in China, the government has already bought the bad debt to eliminate the risk in the banking sector. In terms of currency, it would be nice to see the currency take on a role as another one of the world’s major currencies and there is already evidence of this taking shape.
Thus while there are some challenges facing China domestically, there is immense opportunity for the country and it indeed has the capability to take on a leadership role in the future. In order to take the lead though, there are still many things that need to be done. Some of the main elements that need to be addressed include the internationalization of Chinese companies and Chinese culture.
Chinese companies will need to begin expanding overseas more rapidly if China is going to take a stronger leadership role on the world stage. During our visit to Hisense, our speaker mentioned that Chinese companies currently tend to be cautious when expanding overseas. This is consistent with my experience as well in that management is often uncomfortable involving too many outsiders in the operation. This general attitude, while sometimes justified, may mean that the expansion of Chinese companies will occur more slowly overall. On the other hand, our visit to the UPS government affairs office was somewhat encouraging in this regard. Our speaker mentioned that with the recent financial crisis in 2008, the Chinese government attitude has generally shifted towards creating its own industry champions domestically. As a result, the Chinese domestic market may be more restricted for foreign competitors for a time, but the result will be that more Chinese companies will emerge after gaining market share in the growing Chinese market. (Just as many strong US companies were first established by winning the domestic market.)
The next point that will be critical is exporting Chinese culture. China has already initiated several activities to export both the language and the culture. For example, several Confucius institutes are springing up in different locations around the world. I also remember one of my old Chinese teachers mentioning programs that send Chinese teachers overseas to various countries, so that type of activity will help as well. Additionally, our speaker at Yuanfen Flow mentioned the need to foster more creativity within Chinese culture, but I think that the cultural exportation process will help to lead to more of that as well. For example, Hollywood creates movies that export US culture, but the creativity is funded by such an operation.
Thus China has made a lot of progress and while there is still a lot of work left to do, it definitely has strong potential to take on a leadership role in the international arena.