China: Please Don’t Waste More Time

China, Company Strategy, Economics

By John Richardson

SO much time has already been wasted. Remember that as early as November 2013, you should have started drawing up plans to deal with the new China. That was ChinaDemographics8Nov2013the point at which I first flagged up the critical turning point.

The danger now is that you will waste further time by listening to  more false arguments about why China is quickly rebalancing towards a consumer spending-led society. In the third section of our new Study – 5 critical questions to answer to survive in today’s chaotic petrochemical markets – we statistically demolish this argument. We then tell you what to next – how to make money in the new China.

In brief, here is why it is wrong to believe that China is quickly becoming a consumer-led society:

  • China’s central government isn’t in a comfortable financial position. It has poor tax collection and its collection is set to fall as the downturn intensifies. Critically, also, its much-touted foreign currency reserves are a.) Less than its liabilities today, and b.) Illiquid – i.e. difficult to sell in a crisis.
  • Local governments, too, are in a perilous financial position because their revenue-raising depends on the old failed, and so now permanently abandoned, growth model: Acquiring land at knock-down prices to sell on to real estate and manufacturing developers. Real estate and manufacturing is so oversupplied that it is simply impossible for local governments to continue down this path. And so a whole new way of financing local governments needs to be devised. This is still work in progress.

Why does this matter for the transition to consumer spending-driven growth? Because neither the central nor local governments can afford to “pump prime” the economy in a big way to boost consumer spending. Major consumer “give-aways”, such as a big new volume of cheap consumer credit or tax cuts, are fiscally impossible.

Governments in China need more, and not less, revenues in the future because of the One Child Policy – and, of course, the general public knows this. The extra money is needed to build far more widespread, and deeper, pension and healthcare systems. Even though personal savings rates are high in China, too few people are going to spend their savings because they know it will be them, rather than the government, who will have to carry most of the financial burden of caring for a rising number of retirees.

There is another reason why I believe that the transition to a consumer-led economic growth model is going to take longer than many people think: Capital flight. If you are rich enough, you will want to at least move some your cash overseas or even emigrate.

Lack of confidence in China’s long term economic trajectory is one reason for capital flight. A second reason is China’s environmental crisis, which is of course a legacy of its investment-led growth model. If too many of your middle class people leave because they are worried about the health of their children, how can you effectively transition to a consumer-led society?

I remain confident that China will make it, as it has a visionary set of political leaders, who, unlike in the West, have identified the problems and laid out the solutions.

But you simply cannot afford to continue to listen to the complacent talk that got you into this mess in the first place. The transition to a consumer-led society is going to be a long and difficult process. Wake up and smell the coffee.

If you still don’t believe me, then listen to Xi Jinping, who I believe will end being recorded in history as a great president of China. He said, at the opening of the critical 3rd Plenum Meeting in November 2013:

The good meat is all gone; all that is left are hard bones to chew.

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