Getting China’s economy right

Bloomberg reporter William Pesek has a great column in BusinessTimes warning of the dangers of getting sucked into the euphoria over China’s booming economy. His comparison with the Internet bubble is perfect:

There’s no denying China’s potential – an economy growing by 8 per cent and powered by 1.3 billion people hungry for capitalism. Multinational companies are seeing dollar signs when looking at maps of China, and big ones at that. So are Asian governments as economies ship more and more goods there.

The emphasis in all of this has to be on the word ‘potential’. Though China could indeed be the biggest economic success story in modern history, much could go wrong with its move from socialism to capitalism, not least of which are tens of millions of job losses as the economy is opened. There’s no guarantee.

Investors should keep that in mind. So should US President George Bush, who this week meets Chinese Premier Wen Jiabao in Washington. While China is an important economy, its true influence is far more about tomorrow than today.

China is the economic equivalent of Internet companies during the late 1990s. Investors and corporate executives have no time to discuss the risks. Such a ‘’ is run by geniuses and it’s all good. It’s Asia’s New Economy and anyone who doesn’t see that is a fool.

Do you remember when we were told by the analysts on CNBC that there was a “new economy,” an age of perpetual low inflation and near-zero unemployment, when stocks would always be high and kids in t-shirts would chart the couse as venture capitalists dumped staggering amounts of cash down the toilet?

Then think about China. There is a perception of a booming China that will provide the world’s engine of growth for generation after generation. It is unstoppable. It is a juggernaut. It’s The Next Big Thing. It’s the sure bet, just like eToys was.

It really is booming, at least relatively, but for now, so much is about the future. So much of it is investment money being spent by companies that want to be there when the floodgates open. And I really hope they do; I want the people there whom I love to succeed and be happy.

But when I see all of the businesses rushing in as though it’s a sure thing, when I see people speculating, people neglecting to do research into the fate of most foreign traders who’ve tried throughout history to tap The World’s Biggest Market — when I see the irrational exuberance, I can’t help but wonder about the foundation on which all these hopes are based. Just like the dot-coms.

We’re all smart people, we know what profits are and basic business plans. Yet a lot of us got sucked in. And a lot of us are getting sucked in again, failing to consider that China just might not be quite the miracle it appears.

I wrote about this topic on Living in China [note: I think the link may be dead – sorry] a few weeks ago and will soon do a follow-up. I want to believe otherwise, but this just may be a story of mass hypnosis on an almost unimaginable scale — just like the dot-coms. Like tulips in Amsterdam. We humans are certainly capable of falling for this sort of thing, and it almost inevitably disappoints us.

The Discussion: One Comment

We are getting sucked in because at moment China is the only viable alternative for cheap costs [and not just labor].

It would be much better if places like India could undergo similar reforms, as the literacy and communication skills are much higher.

However the never ending political circus there disheartens many.

Exploitation of resources [all] at cheaper costs is inevitable but no other place seems equally favorable [at moment].

Nonetheless, agree with you that all that glitters may not be gold.

But given the alternative of doing nothing, one hopes that the calculated gamble may just pay off.


December 12, 2003 @ 1:59 pm | Comment

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