(A short note written for and published by the Asymmetric Threats Contingency Alliance (ATCA) dated 14 June, 2007. Included in the restricted ATCA distinguished list comprising 5,000 Executive Decision Makers in over 120 countries. Also added to "Open ATCA" at the "IntentBlog" based in Los Angeles,California, as well as Mumbai, India.)
As the summer 'silly season' is about to start, world markets are gripped by an underlying fear of a new and increasingly uncertain round of sell-offs in the US and European bond markets as the US Treasury yields breached their technical benchmark of 5.25%. World interest rates are rising. Is the era of cheap capital and stock market bonanza coming to an end? Is investor confidence again beginning to fray in how long the global imbalance will last between too much indebted consumption in the US and too much saving in China? [ATCA: 'China: Watch this Space', March, 2007]. Above all, with rising Western protectionism and a host of geopolitical, social, and environmental challenges, is China, a key driver of the global cheap capital, poised to unwind, if not unravel?
It is no wonder that the world markets are in such a nervous mood. There is a mounting flight from risk to safety. But where is safety in this new Age of Globalisation?
First, although oil prices are showing some signs of restraint, there remains a great deal of concern that in the medium term, higher oil prices are going to be the name of the game as an unprecedented proportion of humankind, including China, India, and other Asian, African, and South American countries, are industrialising and urbanising at the same time.
Second, apart from the relatively 'Known Knowns' of Climate Chaos such as melting glaciers, rising Polar trend temperatures and drying rivers worldwide (When the Rivers Run Dry, Fred Pearce, 2006), there are now alarming reports of Colony Collapse Disorders (CCD) - sudden, massive, and yet scientifically unexplained die-offs of birds, bees and amphibians in the US, Canada, Germany, Poland, Switzerland, and a string of Mediterranean countries [ATCA: June, 2007].
Third, apart from its impact on Climate Chaos, oil has now translated into bolder nationalism of some of the major energy exporting producers such as Russia and Iran. Energy security in terms of supply, transportation, and prices, has become a top national agenda for more and more countries.
Fourth, the global uncertainty is compounded by changing or changed leadership in the West (including the US, UK and France) as well as some fresh blood expected in the line-up of the Chinese Communist Party at its 17th Congress in the autumn.
As I was penning this ATCA submission, a call from CNBC Singapore asked me to give my views on China in the light of all the market volatility at its Worldwide Exchange program on 12 June. I gave the following pointers for the live TV interview:
(a) China's Producer Price Index (PPI) remains subject to some import price inflation eg steel and minerals, high-end components and local skilled personnel shortage. But any such increases are likely to be moderate, offset by remaining overcapacity, gradual RMB appreciation, and strong market fundamentals as more and more second to third-tier cities and townships are revving up [The Value of China's Emerging Middle Class - the McKinsey Quarterly, 2006].
(b) Pending more maturity in China's market system, corporate lending and market capitalisation as % of GDP remain extremely low by international standards. So any isolated relaxation (eg in the 'A' Shares market) inevitably attracts unwelcome speculation and volatility. So the Chinese government remains vigilant on the need for policy tightening.
(c) In addition to pork, even milk prices are rising globally due to drought. How much this may be attributable to Climate Chaos remains to be seen. But water shortage (along with energy efficiency and pollution) remains a top policy agenda.
(d) Moderate inflation is not all that bad as it may add some dynamism to the economy. But China remains anxious about its impact on the poorer masses pending the building of a more wide-spread social safety net.
(e) In spite of rising protectionism and continued China-bashing on Capitol Hill, China's economy is set to continue to grow rather impressively as the country is driven by the need to build a stronger economic foundation faster: China will grow old in several decades before she gets rich. She needs to generate some 24 million jobs every year to stay even.
The medium-term outlook is largely shaped by the following:
(a) The impact of energy constraints and Climate Chaos are spawning a new breed of global investments in clean and renewable energies and related technologies including energy efficiency. This marries political agendas in Western governments with China's own national imperatives.
(b) This shift in global attitudes towards Climate Chaos is poised to impact on businesses and lifestyles worldwide. For example, it is beginning to revolutionise the concept of the cars for the future and set the direction for the growing car industry in China. It is firing creativity in building more environmentally-friendly neighbourhoods, cities and transport systems. As the world's largest and most dynamic canvas for this creativity, China provides a powerful platform for increasing global business and technological partnerships.
(c) Notwithstanding continuing challenges to fight IPR violations, China's absorption and adaptation of cutting-edge technologies and management techniques is breathtaking. She has introduced the world's first 3C technological standards (for combined Computers, Communications, and Consumer Electronics). Huawei and Lenovo are redoubling their efforts in building their global brands by marketing their proprietary savvy internationally. 'Just-in-Time' techniques are spawning a new generation of sleek and branded Chinese-style fast food chains nation-wide, likely to give the likes of McDonald's, KFC and Pizza Hut a run for their money in China.
(d) With openness and liberalisation unimaginable in China's history, her society has changed dramatically. There are some 250,000 locally-born NGOs in a variety of social causes including the environment, working China-style broadly in line with the central government's policies. Counting her unofficial denominations, China is also home to one of the world's largest and fast-rising Christian communities (Jesus in Beijing, David Aikman, 2003).
(e) Although the Beijing Consensus is not without its value-blind problems, its implied Soft Power appears to be gaining ground internationally. This is translating into a whole new horizon of regional alliances with ASEAN, Central Asia, Africa, and South America. This is happening at the same time as China continues to embrace globalisation.
Nevertheless, we must remain hugely concerned about China's progress in her battle against corruption, inefficient allocation of capital, IPR violations, inadequate social provision for the masses of peasants and migrant workers, and perceived deficit of transparency and freedom of expression.
There may of course be Black Swans or Unknown Unknowns. Indeed, Mother Nature and human nature are full of imponderables. In any case, if all that remain were Known Knowns, life would be less colourful, not least for the world's commentariat!
Andrew K.P.Leung, SBS, FRSA
www.andrewleunginternationalconsultants.com
