China opens up

China opens up!
Summary: China is now opening up its financial markets; just a little bit. Foreigners can buy Chinese stocks and Chinese can buy other than Chinese stocks. The trading route is through the Hongkong and Shanghai axis. A reason to invest heavily in China? Several reasons indicate that it might be a good idea to be a little bit careful. China has a number of area’s which are issues; the planned economy ; the housing bubble, the two-tier banking system, environmental issues, the questionable reliability of economic numbers, the fact that numerous companies have only recently gained their independence from government control, the human rights issue and the ambition to aggressively grow inland demand in order to be less dependent upon the rest of the world.

China opens up!
China recently opened up the trading route between Shanghai and Hongkong, liberating trade in stocks between China and the rest of the world. Trading volume is limited to a maximum, both from and into China.

Potential issues:

  • China is still a centrally planned economy. Success has mainly been built upon the relentless effort of the rest of the world to transfer production functions to China, later followed by shared service centres and R and D facilities based on confidence that inland demand would grow. The growth platform was so strong that growth could be facilitated through a planned economical effort. The only aspect which is not entirely under control is the growth level initiated by the world economy, which is disappointing now.
  • The housing bubble in China ties in with the two-tier banking system in China. Lots of Chinese people apparently own a number of houses out of speculative purposes. Facilitated by an official (and regulated) banking system and a “shadow” banking circuit. Amazing, but the end result indicates that in the end this could very well mean that the further urbanization could be stopped by the impossibility to buy those houses against the current prices. An issue like this weakens an economy as it did in the Western World, and it certainly endangers a more dynamic economy like the Chinese.
  • The “shadow” banking system itself apparently grew out of the fact that the official banking circuit is government controlled. Shadow banks found ways around rules and regulations. Every effort to further tighten control, is countered by the shadow banks finding ways around it. (In some ways this sounds familiar… ) . “Credit equals gold” still has a lot of Chinese followers. Wonder how long that is going to last.
  • Tourists visiting China regularly come back with stories about the environmental issues in China. Apparently the impression you get when travelling in China is that things are certainly not under control and seem worse than we ever experienced even in the middle of the ‘Ruhr Gebiet” (Germany) development in Germany in the sixties and seventies. China’s immense effort in Clean Tech might be able to solve the issues, but they will not go away without a substantial and expensive effort.
  • The questionable reliability of economic numbers. Even a country as the Netherlands, with a limited number of people, a highly efficient statistical system, and a pretty transparent economy has occasional troubles in getting the numbers right. And; forecasts are never right. China has a hell of a lot more people, tremendous complex mega clusters (where cities are a part of) and still their numbers seem to be very accurate and their forecasts are always accurate in decimal numbers. That is a tremendous performance, or it might indicate some questions on their reliability….
  • Numerous companies are only recently being transferred to private ownership, and the planned economy still seems to extend its reach towards those companies. There is a lot of rules and regulations; and we might be in for a few surprises if we think those companies can operate under their own rules. The same applies to Western companies operating in China.
  • The human rights issue has driven complicated situations in the past and the desire to control the Human factor now complicates things in a visible area as Hongkong. In the end a potential leading country will have to solve those issues in order to play a leading role in the world, and be able to fully exploit its domestic potential.
  • Inland demand still has to grow in order to reduce dependency upon the Western demand for China’s production potential. As income per capita grows and a higher income per capita spreads over the entire population we might see further growth of income driven inland demand, but it will only further drive spending on (more) luxury products if levels of income are rising and spread evenly over the population.

Conclusion; most of these issues are familiar and a continuous area of attention, also in the Western World. Solving them seems to be a challenge, lets see whether a centrally planned economy with a strong growth platform can really tackle these issues. To make progress  is certainly going to help to further increase International support, and to be successful in attracting  International funding, a key factor in driving further growth.

Drs. Robert J. (Bob) Fetter, Intersumma, December 2014. Information from public sources is used.