Thursday, June 30, 2016

The (Quiet) Business of China

I SEE myself as a deeply-perusing observer. Meantime, my reflex usually veers away from taking sides—and opts for reason and wisdom even beyond my own convenience. I'd like to say that as backdrop to my (continuing) observation of China—a consuming thesis that dates back to my childhood. The Chinese has always perplexed and mystified, intrigued me. From the Tiananmen Square protests of 1989 and Deng Xiao Ping's ushering of Beijing's economic open-door policy to the hubbub that it sent to World Trade Organization at Bill Clinton's administration (remember the Battle of Seattle?) to Foxconn's clout to the South China Sea tempest etc etcetera.

          The Chinese are a kind of humanity that don't talk much. They just work and deliver what you want. Reject it, they'd complain less—and quietly leave. After sometime, they'd show up with a new prototype or alternative until you are convinced. When they fall into silence or sleep, don't settle—they are actually (re)planning things out.
          For years since the huge nation's WTO entry in 2001, the Chinese economy's expansion has been relentlessly breakneck. As provincial entrepreneurs enjoyed Beijing's subsidy, rapid development has turned fishing villages into factory towns and factory towns into financial hubs. But that's not all heaven. “Heavy investment has crowded out consumption, and heavy industry has muscled out services, as if making stuff mattered more than serving people,” The Economist writes. China's socialism/communism's interface with Western-styled capitalism has somehow shook the gains of the Cultural Revolution's populist wisdom. But then, wait. Is that all bad? Not really.
China opts to slow down a bit to restudy variables, just like the traditional Chinese trader. New figures showed the economy expanding by 7.7 percent in the year to the first quarter, marginally slower than the previous quarter’s pace and notably slower than expected. The loss of momentum confounds, given the spectacular surge in credit in January and March. However, that is not entirely weird. China's growth, buffered by its manufacturing/services industry, also obscured two encouraging trends that may matter hugely for China’s future. Consumption, although still low, made a bigger contribution than investment to China’s growth in the first quarter. Even more notable, services have trumped industry’s contribution to GDP in the past three quarters.
          In other words, China is sliding to a new phase of its march to modern times, Western-style. From manufacturing, Beijing sets its gears at consumers and services, two promising trends that work around each other. Because services are more labor intensive than industry, their growth boosts wages and household income. Money on the hand of the consumers. Heftier take-home pay jacks up consumption, and consumer spending, in turn, favors services.
          But then you think China will slow down its giant manufacturing machine? No. They are just setting sight on other options. In other words, China is pretty much aware not to follow the mistake/s of America. As The Economist puts it, “As China’s economy matures, its pace will slow. Fighting this economic law will only invite inflation, excess and harder reckonings. Growing fast is a poor alternative to growing up.”

LET's look beyond the mainland and check what the Chinese are up to. I am leaving the South China Sea maneuverings on this discussion and instead focus across continents.

          Since 2008 China has agreed some $500 billion in currency swaps with nearly 30 countries, from Canada to Pakistan, which gives the counterparties access to yuan when trouble is suspect. A currency swap is a foreign exchange derivative between two institutions to exchange the principal and/or interest payments of a loan in one currency for equivalent amounts, in net present value terms, in another currency. Currency swaps are motivated by comparative advantage, an economic theory about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress.
          Meanwhile, Chinese banks have lent $50 billion to Venezuela since 2007. Argentina is the second-biggest recipient of Chinese loans in South America. Then there is Russia, who may have the largest deposit of crude oil in the world, but its economy isn't enough to develop the natural. Again, Chinese banks have lent more than $30 billion to Russian oil companies.
          What does that infer? That is a loud testament to China’s remarkable growth. And more significantly, China it seems or it appears is setting up development banks intended to challenge the dominance of the World Bank and the International Monetary Fund (IMF). Analysts have always sounded that China is on track to surpass America as the world’s biggest economy within a decade. These are nagging hints. Chinese banks have been making its move continent to continent.

          Let me touch Brexit for a bit and look sideways. This is all about the world's major banks, of course! No surprise why UK's HSBC Holdings, top European bank, wanted out of European Union. It's not really the country that's bolting out per se. It's the bank. Hence, if BNP Paribas and Credit Agricole Group rebel, then expect France to withdraw from EU as well. And join the Chinese? Not far-fetched.
          I repeat, the Chinese are a kind of humanity that don't talk much. They just work and deliver what we want. They'll give `em to us. But we gotta admit it. The Chinese have indeed gone a long way from lo meins and dumpling soups. They have evolved into slick dudes on Brooks Brothers suits sipping Dom Perignons in stretch limos, Ivy League-educated assistants clutching iPads and iPhones on their beck and call. As The Economist puts it, “The anachronistic state of global economic governance is growing ever more glaring.” It has gone eastward. 

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