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A call to Britain: get real and move to the Pacific

16 Feb

The momentous events of last December have permanently changed the UK’s relationship with Europe. To the average Europhile, this is something to be lamented and mourned, the moment Britain became a so-called pygmy on the world stage.

To others, David Cameron’s stand will have benefits far greater than appeasing his own Eurosceptic MPs. It will allow the UK to open its eyes to the rest of the world, and the enormous trading opportunities there.

Here is a question. If you had a business, would you rather sell to the penny-pinching customer with the uncertain future, or the flash kids with money to burn?

Britain finds itself in such a quandary right now. We have been members of the European project for nearly forty years, and our economy has merged with the Continent’s to such extent that our largest trading partners are across the Channel.

The issue though is that the European economy is crumbling. The rest of the world is leaving Europe far behind, a situation that is highly likely to worsen given the EU’s inability to sort out its financial problems.

The EU’s economic growth in 2010 was 1.8%. In contrast, the developing countries of East Asia – excluding Japan – are expected to have grown by a huge 8.2% in 2011, according to the World Bank. India’s growth has slowed, but to a respectable 7%, well above France’s forecasted 1.6% for last year.

By focusing mainly on Europe, the UK’s economy is ignoring the far bigger picture.

When will Britain see the Asian lights? (Photo from here)

The Asia Pacific (APAC) region in particular represents an enormous opportunity for anyone that is willing to work there. This is not new: a nineteenth century British trade delegation to China once mused that if the Chinese added one inch to their shirt-sleeves, ‘the textile mills of Lancashire would be busy for the next 100 years’.

China is an economic sensation. It has quadrupled in size over the last few decades to be the world’s second largest economy, and is projected by many to overtake the US into number one spot sometime over the next ten years. There are untold opportunities for British trade with the country, especially given Beijing’s current push to develop its internal markets: the country is expected to import over $8 trillion worth of goods in the next 5 years alone.

Yet APAC is far more than just China. Indonesia, the Philippines, and Thailand are just some of the countries that are developing fast and ripe to do business with.

The UK needs to start taking APAC far more seriously. There is huge admiration for the UK in Asia. Union Jacks adorn the latest fashions; British music and films are everywhere; English is the lingua franca for many. But we are just not capitalising on it: trade with APAC remains far smaller than with Europe or North America.

Where are the small Manchester companies roaming the Jakarta trade shows? Where are the Birmingham businesspeople looking for deals in Taiwan? Why don’t we see Shoreditch software entrepreneurs selling in Malaysia?

The British pavilion at the recent Shanghai expo is a telling reflection in the UK’s commercial relationship with Asia. A mesmerizing cube composed of 60,000 perspex rods, it was widely praised as the main architectural marvel of the six-month event. But there was nothing in it: a triumph of style over substance.

To be fair to David Cameron, he understands the need for more global trade. He has proudly pointed out that since his high-profile visits, British UK’s bilateral trade with India is up by 20% in the last year and exports to China are up 40%. In addition, embassies and high commissions are being made to provide more commercial support to UK enterprises.

Yet it is not enough. The US is taking an active lead in Asia, as it understand that the 21st century will belong to Asia. President Obama has recently announced that America will be signing up to the Trans-Pacific Partnership (TPP), a group of liberal-minded countries in the region which has the potential to be the world’s largest trade block.

(Although this grouping does not include China, this is not necessarily a bad thing: it does, after all, cement liberal trade as the dominant economic model for most of the region.)

One possible way for the UK to tap into the APAC growth story outside of China is by following the US lead and joining the TPP. The organisation’s agreement makes provision for its expansion to include any state that meets its liberal economic criteria, which the UK plainly does.

With the TPP having core British allies within its actual or provisional members – the US, Australia, New Zealand, Singapore and Brunei – and strong relations with others – like Malaysia and Japan – there is no obvious impediment to the UK joining, no Charles de Gaulle waiting to block our accession.

The only real barriers are the legal limits imposed by the EU, and our emotional ties to our nearest neighbours. The Europhile fear of Britain being blockaded by Europe if we looked elsewhere for trade has no foundation given the amount they export to us.

It will take great political courage to move Britain into the unknown and realign itself to be more world-focused. The Prime Minister though should remember that many companies have successfully reinvented themselves to take advantage of exciting and prosperous new markets. Nintendo – one of the world’s largest video game companies – used to make playing cards. Nokia, the Finnish mobile phone maker, started life as a paper manufacturer. It can be done.

The UK should move further onto the world stage. But the country needs room to manoeuvre, to focus its interests on the parts of the world that are growing, and not stagnating.

The only way we can do that is if we take the plunge and realise that Europe is the past, and Asia the future.

China house prices continue to slide

10 Jan

Analysts of China’s economic health will be reading the latest news on the country’s house prices with interest. A new report issued this weekend by the Beijing-based Renmin University of China predicts that the nation’s high housing prices will meet a downward inflection point in the third quarter of the year, but the sector is not expected to suffer a “hard landing”.

The report noted that more Chinese cities saw lower price growth for commercial homes during the first six months of the year amid strict measures aimed at tightening the property market and lowering housing prices.

“Some cities experienced a downward trend in property prices in the January-June period, though without a significant drop,” the report said.

 

Empty Chinese flats: crashing down soon?

In May, month-on-month price growth for new commercial homes was reported in 50 out of 70 major cities, according to the latest statistics from the National Bureau of Statistics (NBS). That compared to 56 cities reporting month-on-month growth in April.

New home prices declined from a month earlier in nine cities and stood unchanged in 11, while 27 cities posted smaller monthly price gains, the NBS said.

China has introduced a series of measures to curb rising property prices, including restricting residents in 35 major cities from buying second homes, requiring higher down payments and charging property taxes in Chongqing and Shanghai. Policies have also raised developers’ borrowing costs.

The country’s property market now has an oversupply of homes, according to Wang Jinbin, a leading economist at Renmin University of China.

“The total stock of commercial homes in the first three months among the 136 listed property companies will perhaps require two years or even more to digest,” he said, citing statistics in the report.

In Beijing, for instance, the total stock of commercial homes stood at 101,912 available properties as of June 7, local official housing figures showed.

And for many home developers, fund shortages are becoming more of an issue, Wang added.

Some analysts and organizations are also starting to forecast declines in home prices, with a growing expectation that the government will not relax its policy stance before the end of the year.

According to a report by the National Institute of Property Finance and Beijing Beta Consulting Center, China’s first-tier cities will probably see a 30-percent fall in property prices. Second-tier cities could see drops of 10 to 20 percent.

“An obvious price drop in the property market is expected to appear in the second quarter of next year when a large amount of government-subsidized houses will pour onto the market,” said Li Chang’an, a public policy professor at the Beijing-based University of International Business and Economics.

According to the government’s plan, construction of 10 million government-subsidized homes will start before the end of October.

Meanwhile, demand for homes will remain high because the country will see accelerated urbanization during the next 15 years, the report said.

“In addition to the current strict measures to cool down the property market, the government should also strive to increase the incomes of local residents, which is the best way to bring down the current rather high ratio of housing price to income,” Wang Jinbin said.

China states the obvious

16 Dec

It appears that not all economic bureaucrats are mad fantasists (Christian Noyer, take note). For the message from China’s Central Economic Work Conference this week was that maintaining stable growth will be China’s macro-economic policy for the coming year. 

The China Daily opines that “this is a sensible choice given the international and domestic situations”. On the other hand, it is probably the only option open to them these days.

The CD continues:

Internationally, the eurozone sovereign debt crisis has worsened and the US economic recovery remains weak, while domestically rising production costs are compromising the traditional competitive advantages of Chinese exports. It is thus unrealistic for China to continue relying on exports, whose growth has become much slower and will further weaken in the coming year. 

Unusually for the paper, there then comes a bordering-on critical assessment of the state of the Chinese economy, and gives some tips for the Government to follow.

Shanghai: hoping for steady growth

Meanwhile, the Shanghai Composite Index, the main gauge of China’s stock market, has dropped to a 10-year low. Quite a number of small and medium-sized enterprises in coastal regions are struggling amid broken capital chains and the high-flying consumer price index continues to dampen public confidence in the health of our economy. 

Given this, it would be unsustainable and risky for the country’s economy to follow its old growth pattern and rely on investment as the major economic driver. 

On the one hand, there is the urge to squeeze the bubble in the real estate market and keep commodity prices at a reasonable level. On the other hand, to keep unemployment low, there has to be reasonably high growth. 

The country needs not worry about so-called new growth points. Given that we still have a long way to go to achieve industrialization and urbanization, opportunities abound. 

Community management, for instance, if well planned, will be able to create jobs and considerably improve the quality of life for residents. For example, the non-hazardous treatment of garbage has not been realized for most cities. If garbage classification can be well implemented, jobs will be created and the urban environment will be improved. 

So investment should be tilted in favor of the areas, which will bring direct benefits to the life of residents. At the same time, efforts will have to be made to increase the ranks of the middle class and raise the income of those low-income residents. People’s consumption capacity will have a bearing on the country’s economic growth momentum in the near future. 

It is absolutely right for central authorities to realize that development focus must be placed on the real economy, given the lesson from the financial meltdown on Wall Street and the eurozone debt crisis. Policy support including tax reforms will hopefully help small and medium-sized enterprises with their financial difficulties and with their technological upgrading as well. The increased consumption capacity will lay the foundation in turn for the development of the real economy. 

This virtuous circle will be the key to maintaining stable economic growth. 

Western politicians reading this will spot several familiar themes, not least the need to spread the benefits of wealth-creation to as many people as possible.

The question is though, will the economy remain stable and with enough growth to make any of these adjustments? If the hard landing hypothesis is true, then the aspiration of stable growth may compete well with Europe for outlandishness.

A tale of two countries

16 Dec

No junk here

Just as France is staring into the ratings abyss, Indonesia is looking up in the world after Fitch lifted Indonesia’s sovereign credit rating to investment grade for the first time in more than a decade. The move is expected to trigger more investment in Southeast Asia’s largest economy, just as a downgrade will scare off investment in France – whatever Noyer and Sarkozy say. 

In a further boom for Indonesia. Fitch said it expects the country’s economic growth to average more than 6% a year through 2013, despite the deteriorating global economic backdrop.

The divergence of the world into a two tier system becomes clearer each week: the UK really should think carefully about which lane it wants to travel in. After his Trans-Pacific Partnership announcement earlier this month, it is clear where the US prefers to be.

Hong Kong markets suffer – difficult times ahead?

15 Dec

Fears in the economic health of Hong Kong have resurfaced following news that shares in two of the SAR’s biggest stock market flotations this year have fallen in their first day of trading.

Underwhelming

Despite high hopes, the 80-year-old Chow Tai Fook Jewellery Group – the world’s largest listed jewellery chain – failed to live up to expectations, dropping nearly 9%. Shares in New China Life Insurance – the country’s third biggest life insurer – also fell, by as much as 9.1% following their $1.9 billion IPO.

The performances reflect a slump in demand for new equity as China’s growth slows and Europe’s debt crisis continues.

The companies are poised for the worst debuts among Hong Kong IPOs of at least $1 billion since June, according to Bloomberg. Other companies selling stock for the first time have canceled or reduced offerings in the past week as the economic turmoil sapped demand for equity.

“Investors are holding on to their cash, doubtful about not only new stock, but also shares in the secondary market,” said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co., which oversees about $1.5 billion. “Worries about Europe will keep investors cautious in months to come.”

Hong Kong’s benchmark Hang Seng index is down 21% this year, amidst concerns around both the global economic crisis and fears that the SAR and China economies are heading for difficult times in 2012.

Celebrating 10 years of China’s WTO membership – ?

9 Dec

This year sees the ten-year anniversary of China’s 2001 re-entry to the World Trade Organisation.

Economically, as an article from this week’s Economist notes, China has done very well out of its WTO membership. Its economy has quadrupled, and its exports nearly quintupled. 

Foreigners have prospered too. “American foreign direct investment reaps returns of 13.5% in China, compared with 9.7% worldwide, according to K.C. Fung of the University of California, Santa Cruz. China imposes lower tariffs on average than Brazil or India” notes the article.

The China Daily also praises the benefits of the country’s WTO membership for non-Chinese firms. “The huge capacity of the Chinese market and impeccable infrastructure, and stable and fair market environment have attracted more and more MNCs to invest in China. So far, over 480 companies of the Fortune Global 500 have their investment in China. Foreign investment grew 9.5 percent annually during the past 10 years.”

Global WTO membership. China is not alone in Asia

Yet it is not all good news. For the Chinese, there is lingering discontent at some of the economic changes that admission to the club has brought. State Owned Enterprises (SOEs) have been shaken up and millions of workers laid off. As most of these were in unproductive roles – a legacy of the communist “jobs for everyone” policy – their redistribution to the wealth-creating private sector is no bad thing – so long as they do not linger too long on the unemployed list.

Foreigners have suffered too. China has become adept at sucking companies in, then squeezing them for their intellectual property and taxes, then spitting them out. The Economist gives the example of Mastercard, which issued China’s first ever payment card in 1986. Nowadays the Government has made sure that China UnionPay, a domestic competitor, has a de facto monopoly on local currency payments between merchants and banks – a $1.6 trillion market which Mastercard and other foreigners are realistically not allowed to compete in.

China is also becoming more adept at playing the WTO rules, and is more aggressive than it used to be in defending itself. Yet at the same time, it deems it fine to flout the rules when it wants. Long Yongtu, who helped China win admission to the WTO, recently said that China is now moving further away from the organisation’s principles. To modernise its economy, it has remained wedded to industrial policies, state-owned enterprises, and a “techno-nationalism” that protects and promotes home-grown technologies.

Yet overall, it would be foolish to deny that WTO admission has not been of benefit to the world. By integrating itself into the global economy, China has stimulated trade which in turn has brought broad economic and developmental advantages for itself and its trading partners.

It must be hoped though that Beijing will not take this for granted and bite the hand that feeds it. Many Western companies are becoming more and more disillusioned with the difficulty of doing business there, and if the WTO rules are bent or flouted even further, then investment – both in and out of the country – could be harmed. There are, after all, plenty of other WTO members in Asia to work with, and many of them are substantially cheaper than China.

Chinese manufacturing slows

1 Dec

 

Even adherents to the belief that China is about to burst will take no cheer from the news that Chinese manufacturing activity has contracted for the first time in almost three years, adding to fears about the health of the global economy.

The purchasing managers index (PMI) fell to 49 last month, down 1.4 points from October, marking the first contraction since March 2009, it is reported. A reading of 50 indicates the line between expansion and contraction.

Another survey, the HSBC manufacturing activity index, also fell to a 32-month low of 47.7 in November from 51 in October.

The data was released hours after the China eased monetary policy for the first time in three years, with the central bank cutting the amount of money banks need to hold in reserve to boost lending and counter the slowdown.

The FT notes that in a surprise move that was clearly timed to offset the negative impact of the PMI number, China’s central bank on Wednesday kicked off a new round of monetary easing by announcing a cut in the reserve ratio for banks for the first time in three years.

Chinese factories are slowing

“The markets have been handed a powerful one-two combo, in the form of a shocking PMI print and an aggressive RRR cut,” said Alistair Thornton, China analyst at IHS Global Insight. “The message is clear: the economy is slowing much faster than expected and the government has stepped into the ring.”

Most analysts did not expect monetary easing to begin until the first quarter of next year at the earliest, but Beijing is facing the prospect of a stall in its two biggest growth engines – exports and real estate. Policymakers are now more concerned about supporting growth than tackling inflation and are expected to announce more monetary loosening measures in the coming months.

That reverses two years of gradual monetary tightening in which the government has been trying to cool growth and rein in persistently high price increases in a campaign that appears to have been largely successful.

It is certain that the Government will now be taking an even closer eye on Europe, its main trading partner. Not intervening in the sovereign crisis may not be an option if Chinese manufacturing is damaged further.

Investing in UK infrastructure – some important lessons from China

30 Nov

In George Osborne‘s autumn statement yesterday he promised £30bn for infrastructure building, and a National Infrastructure Plan identifying over 500 projects for the next decade. Tens of thousands of jobs are expected to be created, and a long-term boost to the British economy established. All good news, perhaps, but there are two very important lessons from China that he needs to heed if this plan is to end in success.

British roads: spending holes aplenty

Commentators have been forthcoming in their support for Osborne’s announcement. John Cridland, Confederation of British Industry (CBI) Director General, said that “we particularly welcome the new emphasis on capital spending, and the measures to leverage private sector investment on infrastructure for roads and energy”.

UK institutional investors were reportedly enthusiastic about contributing £20bn to the fund. Joanne Segars, chief executive of the National Association of Pension Funds, said earlier this week that savers’ money would be secure, as big infrastructure projects tend to be long-term, inflation-linked investments that pay out a guaranteed return.

Some saw the benefits of Osborne’s plan being more for the present than the future. ‘Certainly in terms of staving off a recession, the increase in expenditure on infrastructure will probably help,’ said Philip Shaw, economist at Investec.

It is not just Britain that recognises the national benefit of infrastructure investment. China is the current champion of large-scale projects designed to support the growth of its economy well into the current century. (See here a list of some of the more impressive Chinese investments, from huge airports to new megacities and the longest bridges in the world.)

There is no doubt that infrastructure investment is seen as a core element in China’s staggering economic growth over the past decades. “Infrastructure spending is an important way to boost consumption, and it also acts as a spur to economic growth. One need only look at China to see what can be achieved” noted Lou Jiwei, head of China’s $410bn sovereign wealth fund, China Investment Corporation (CIC), in a recent article for the FT. 

Lou continues: “In the wake of the 2008 financial crisis, the government introduced a 4tn yuan economic stimulus package, with a large part of the money directed into infrastructure. As a result China’s annual economic growth rose from 6.8% to more than 10% from late 2008 to the end of 2009.”

The problem though is that not all infrastructure projects are the same.

Simon Pilcher, head of fixed income at M&G fund managers, says: “Infrastructure as a class of assets has a massive variety of risk and return. Some are hugely geared to the economy – for example toll roads. Others, such as water and sewerage, should deliver regardless of the economic downturn, but returns should be low.”

Indeed, China has seen much variation in the returns from its national asset spending. There is in fact plenty of concern about the effectiveness and efficiency of China’s recent infrastructure programme. Many of these projects could turn out to be wealth destroyers rather than creators, white elephants that will never repay their massive debts. The new high-speed rail network – scene of a crash earlier this year that killed 40, and was blamed on the constructors cutting corners – could be one such example, as the BBC’s Damian Grammaticus notes.

Chinese infrastructure projects aren't all perfect

So here is the first Chinese lesson for the Chancellor: be careful about which infrastructure is invested in. The UK needs new assets that will add to the economy, not pet projects for vested interests that turn out to be a burden on Britain for years to come.

The second lesson concerns the issue of how to pay for it.

Despite their warm welcome for the plans, many British pension funds, the planned bedrock of this new investment, are not necessarily set up to invest in infrastructure projects. A specific type of expertise is required to fully understand the risks and to manage the investment of projects like these, and many UK funds simply do not have enough experience to be confident investors.

This means that there may be a funding shortfall for the Chancellor’s plans.

Into this breach may step foreign investors. Some of these, like Canadian and Australian pension funds, would be seen as friendly partners.

Other potential funders would not be seen in the same light, for example the Chinese Investment Corporation. On the face of it, CIC investment would be good news for Britain. China has built up good experience in infrastructure investment, and it has plenty of money to spend.

But there are concerns about China owning key UK infrastructure. Are we as a country really happy about a major foreign power owning assets that touch the lives of so many of our fellow citizens? National self-interest is paramount in Chinese politics, so how would their holding of British water structures, power plants or rail networks be affected if Sino-British relations were to sour? Add to this the fact that British and Western firms have great difficulty getting access to large-scale Chinese projects, and the imbalance and potential risks are plain to see.

Despite these risks, investment in British infrastructure should be seen as a good thing for the economy. A sound power, water and transport network will – if managed and funded correctly – provide new jobs in the short and long-term, and ensure Britain remains competitive for international business. And while we are unlikely to be able to afford some of the huge new Chinese assets, we can at least learn their lessons in how to do things correctly, and avoid the damaging pitfalls.

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