Sharing some thoughts on China's rise.

Did not have time to write anything this week because of a previous engagement to speak at a China related forum over the weekend. So decided to share with you some excerpts from my speech.

China's rise, promise or peril

China without a doubt is the economic miracle of the last 30 years. Is it rising in every aspect? I cannot say every aspect but all I can say is that it is progressing. Economically, it has grown into a giant and is currently the second largest economy in the world. Achieving this in a matter of 30 years is pretty impressive in my view and the central government has to be given credit when credit is due.

The rise of China has come under the scrutiny of the world over the past few years. This should not come as a surprise because of the self defense mechanism within human nature to question whether the rise of a new power will be a threat or not. Worries over China creating a new world order can be expected especially considering how China's rise has been structured in a manner that is not in line with the model of open market, capitalism and democracy. This of course is an issue which the US and its largest advocates will worry about because it differs from the prescriptive model of capitalism they subscribe to.

Will the next generation of leaders look upon China and think to themselves, is this the correct model? Can this model be replicated? Remember, replication is the ultimate compliment. Success will always attract replication. This is exactly what the champions of democracy fear most. All I can say is, there is no way to say who has the right model and who has the wrong one. Different strokes for different folks. I believe eventually some sort of hybrid model will be arrived as the optimal one because both models have shown throughout history that the growth achieved are not sustainable.

Will China overtake the US as the sole superpower of the world? I would not jump to that conclusion so quickly because the world is evolving very quickly and it will be fool's gold to think that you will be able to forecast growth numbers past a 2-3 year period. No one in this room can even be sure about what will happen to them tomorrow, what makes you so sure that the things will happen as per you forecasted. You can only use history, knowledge and past experiences to try to chart a path of progress and hope for the best that you come close to it when its time to judge.

I do however believe that China is on the right track to become a major influence in this world but sole super power will be pushing it. Right now, the US still commands the largest influence on the world because of their strong military, reserve currency and superb marketing skills. The US itself is an economic miracle to say the least and probably one of the greatest empires ever built. But one thing I know for sure is, no one remains at the top forever. There is no player in any sport that can remain on top forever. This is no different for the US. Without a doubt, the US will try their best to remain where they are for as long as they can but it will fall down the ranks eventually.

Romans have come and gone. China had their time in the past too. Everything moves in cycles and I believe the changing of the guard will come.

Competition or cooperation with Asean?

As I mentioned before earlier, it is very normal, in fact it is very natural for us to question whether our neighbor rising in power is beneficial or threatening to us. Self defense mechanisms are always in place. Don't mention China. If our class mates start showing better results, you will always wonder whether he or she will exceed you. Human nature at play.

If I said that China's rise poses no threat to Asean, I would be lying. There is no doubt that China's rise has forced many of its neighbors to move up the value chain in manufacturing. We used to be a manufacturing hub for many daily necessities but now it is just no longer viable because labour costs are just too high and uncompetitive compared to China. What did we do? We moved up the value chain by doing more research and development work, higher value added products which require better technological know how etc. Of course, one day we will move so high up in the value chain that we will have no other place to go. China will also move up the value chain as their population gets more literate and technological transfers take place.

I am not insinuating that competition is negative in every way, in fact with competition; we will better ourselves even faster. In terms of exports, since the FTA was signed between China and Asean, trade volume has surged to close to 300 billion in 2010 and this year we are headed for another record breaking year. Bear in mind we started off with 39 billion in 2000. Amongst ASEAN’s top exports to China include electrical equipment, computer/machinery, lubricants/fuels/oil, organic chemicals, plastics, fats & oils and rubber. Notably these products are mostly intermediate goods to China’s exports to Third Countries. Thus, it can be expected that in the process of China’s economic expansion and with the ACFTA in place, it will import more from ASEAN countries for its required inputs in its production processes and for its needs as its income and standard of living improves.

As I said before, what we are looking here is a static picture of the world. Currently, China is in its early phases of growth. Using the export model to build up its base before moving to more advance stages of growth which means newer growth engines like domestic consumption.

It is no secret that the developed economies like the US, Europe and Japan are experiencing sustained periods of slow down in growth. These are the largest export markets for emerging economies like China, India, emerging Asia etc. With sluggish growth, consumption is expected to fall. Thus the export models do not look like the best model for sustainable growth for China and Asean. The China-Asean FTA has given both parties an extra channel for export trade but the need to move to a self sustaining model is getting imperative. Debt problems in the US and Europe makes it an even more urgent priority. The years of vendor financing by China to its trade partners are going to end soon as the credit worthiness of their partners diminish. As China transitions into a consumption driven economy, this will be an opportunity to Asean as they will become even more important customers of ours. Currently, private consumption makes up about 34% of China’s GDP which is still far off from the US.

The formation of an ASEAN-China Investment Area should also aid in generating more investments for ASEAN. Not only will more ASEAN and Chinese companies be willing to investment within the integrated market, since market risk and uncertainty are lowered, but US, European and Japanese companies, which are interested in making inroads into the Asian market, will also be attracted to invest in the integrated market.

On its own, China has been successful in luring investors into its growing economy for it has the essential investment determinants in place. China’s market potential is already well established and its performance in relation to some indicators of institutional quality and macroeconomic and political stability is better than other members of ASEAN. And despite the perceived inadequate legal framework, high inflation and the pervasiveness of bureaucratic red tape and corruption, foreign investors are looking at the long-term benefits of investing in China more than its short problems.

As such, the integration of ASEAN with China can entice more foreign corporations, which each market alone cannot otherwise attract. With a larger market, more intense competition, increased investment and economies of scale, investors will be more inclined to locate in the integrated region.

Impact on Singapore

Singapore’s trade with China is pretty robust. As of 2010, we were exporting 24 billion worth of goods to China while importing 45 billion from them. Singapore's principal exports are petroleum products, food/beverages, chemicals, textile/garments, electronic components, telecommunication apparatus, and transport equipment. Singapore's main imports are aircraft, crude oil and petroleum products, electronic components, radio and television receivers/parts, motor vehicles, chemicals, food/beverages, iron/steel, and textile yarns/fabrics. Over time, we can expect this relationship to continue to grow but one is tempted to ask whether things will get more lopsided over time. I believe our government also understands that Singapore will move towards to deindustrialization to move into a consumption model. Consumption stands at 115 billion, making up 38% of GDP. This figure will probably move up to around 50% or more. This should not come as a surprise and it is the natural move for our little red dot.

Loose immigration policy has been the talk of the town during the general elections. Concerns over Chinese workers coming over to here to compete with every day Singaporeans for jobs were pointed out as possible election issues. There is no way to deny that this is a strong possibility, however China themselves will undergo a huge demographic shift over the next few years. The share of population above 60 will rise from 12.5% in 2010 to 20% in 2020. Put it in another way, the availability of lots of young workers which helped fuel its growth will soon begin to disappear. That may mean that the labor situation may not go on like this forever. So let us not get carried away with the xenophobic comments because over time things may change.

Overall, China is an intriguing topic for everyone and when it comes to investments, it is definitely an area which no one can overlook. Currently, this juggernaut of a country is one of the few bright spots in the global economy. Imagine all of us on a plane with 4 engines. Three of which are on fire (US, Europe and Japan), we are left with only one engine running. Let us pray that the remaining engine (China) continues to run well till we land safely on the runway. Otherwise, we could be in for a crash landing that will lead to a widespread panic and casualties. I am not here to monger fear, but this is a fact and we should all bear in mind the importance of China in the global economy, more so now than ever.

Have a good week ahead!

Best,

SVI