The China Vortex

Seeking Alpha has an interesting article The Power of the Market: 600 Million People Lifted Out of Poverty Since 1981. The article comes with two graphs, one of which is above.

This shows that there has been a gradual fall in numbers of poor since 1981, but there was a bump in the years from about 1988 to 1994, when the numbers of poor stubbornly resisted to fall. This was a time of high inflation in China.

Do I need to tell you what happened in China in 1989?

This graph gives a rough indication that as long as the Chinese government is able to show a descending line that poverty numbers are going down in absolute terms, then the government’s position is safe. If inflation should pick up and the number of poor goes up, then they have something to worry about.

So far, developments on the economic front have been going well in China, with the noted exception of high inflation in China, much of which is due to higher commodity costs (food and energy costs) and capital inflows. Much of the capital inflow into China is due to investors who want to get out of the US dollar, and see China as the most attractive growth market for their money.

Rising inflation is usually an early indicator of other economic and social problems to come.

A few years ago, investment money coming into China was welcomed with open arms, but now times have changed, and the government doesn’t see them nearly as favorably as they did just one year ago. Capital inflows which are liquid can come into China, and also leave it very quickly, leaving the country’s economy and society in a lurch, just as it did during the Asian financial crisis of 1997 for the countries of Southeast Asia.

With the US economy heading for the dumpster, and Europe showing signs of weakness due to rising energy prices, that is not something the Chinese government wants. It is more than likely that the Chinese government will do anything to keep those poverty numbers going down in China, regardless of what it means for the rest of the global economy.

The need for social stability in China trumps everything else. Including commitments to globalization and the WTO.

Fasten your seat belts.

Technorati Tags: 1997, asia, China, crisis, economy, financial, indicator, inflation, poverty, US

George Soros spoke today in a talk and interview about the current financial crisis which started with the subprime mortgage crisis and has now become a global credit cresis. The event was hosted by the Steve Clemons of the New America Foundation, and which hosts a blog called The Washington Note. If you are interested in an intelligent perspective from Washington DC which goes beyond the political polemics, it’s definitely worth adding to your subscription list.

The New America Foundation has made an MP3 recording of the interview with George Soros available. If you are interested in the current financial crisis and where it may eventually go, it is definitely worth listening to.

George Soros has just written and published a new book called The New Paradigm for Financial Markets: The Credit Crisis of 2008 And What It Means. Because of the rapid unfolding of the crisis, he has chosen to make the book available in digital format so that readers can get it more quickly.

Technorati Tags: credit, crisis, economy, georgesoros, globalization, subprimemortgage, US

Over the past few years, one subject has dominated Chinese thinking on the government and enterprise levels: how to take Chinese brands global. During the runup to the Beijing Olympics in 2008, and then the Shanghai Expo in 2010, this subject will become even more popular, as China’s economic power grows and the US’s economic dominance gradually recedes.

So far, the thinking is that Chinese companies, with some degree of Chinese government assistance, should buy leading US brands and manage them. This was the thinking, for example, behind Lenovo’s purchase of IBM’s money-losing PC division and the Thinkpad brand in 2004. It was also the thinking behind the aborted CNOOC purchase of Unocal, an offer which had to be withdrawn because of heavy US congressional pressure over security.

Outright purchases of foreign companies, in the form of hostile takeovers and mergers rarely go well, even when the cultures of the two companies are close. When they are as far apart as Chinese and western companies, the odds are overwhelmingly stacked against success.

Now there is renewed interest in buying western companies for yet another reason: the Chinese government is sitting on US$1.3 trillion in foreign exchange reserves, and with the dollar falling against the euro and other major currencies, there is strong pressure to invest this money in something else besides US dollars, which will continue to depreciate. In order to slow down this depreciation, the Chinese government has announced that it will establish a Chinese sovereign wealth fund to invest about US$200-300B in higher-yield investments. Within the past year, sovereign wealth funds have proliferated as foreign governments seek to diversify their foreign-exchange reserves out of US dollars, especially as the US subprime mortgage lending crisis has spread overseas.

For the Chinese government, which likes to do great projects which it can then use in PR to the Chinese people, there is a fundamental bottleneck: there are not enough Chinese who have international experience managing global companies. And those who do have the skills usually decide to spend their time and effort in the private sector where their skills are more needed. In one article some time ago, Business Week claimed that China needed about 75,000 international executives while there are only 5,000 available.

There is another problem with creating global brands: in most sectors, it takes an awful long time to create them. If you look at Toyota in the automobile sector, it has taken the company mostly since the period from 1945 to become established as a leading quality maker. When it comes to manufacturing, global brands are not made, they are earned on the basis of quality products.

The place where brands have sprouted relatively quickly are in the computing and hi-tech sectors. Apple has been around since the 70s and has undergone a dramatic rebirth under the tutelage of its founder, Steve Jobs, who returned in 1997 after Apple’s acquisition of NeXT. Since his return, he has launched the iMac, iPod and now iPhone lines, all of which have won critical acclaim from users worldwide. Steve Jobs has shown that he is that rare type of executive, someone who learns from his mistakes and is passionate about creating excellent products. Now, even for dedicated Windows computer users, Apple’s products are something worth thinking seriously about. When it comes to evoking pure passion among users, there is no company like Apple. The way Apple has launched the iPhone globally has shown that it fully understands how to use the power of the Internet and the media to create global attraction for its new products at very little cost. On October 26, the company will launch its latest version of the OS X operating system, Leopard.

The company’s success has been rewarded on Wall Street; the company now has a market cap of more than 148.2B and its shares are trading at $172.

Another company which has succeeded in creating a global brand in a relatively short time is Google, which was founded on September 27, 1998. Google started as a technology company, and has morphed into a company which understands, and is now revolutionizing the media business. Coming from a very strong technology core base, they like to constantly talk about their technology, even though that is relatively unimportant backend stuff to most people. Very early on, Google figured out that as computing, and now mobile computing grew, more and more data would be accessed from online. The question was: “What was the economic/business models which would support it?” The answer is first search, and then other formats of online advertising. Google strived to make advertising more relevant and less disruptive, and strived to do this all with its Adwords solution.

It has also been a success on Wall Street. Even though expectations were high, it blew past the estimates with its recent earnings announcement , growing the company at twice the growth rate of the growing online ad market.

While Google has continued to have a hard time succeeding in China because of strong competition from Baidu, it is performing exceptionally well in other markets. Compared to their smaller local competitors, US companies continue to have a hard time succeeding in China. Nevertheless, Google continues to make inroads in China.

When talking about large investment amounts, it is easy to forget that the most important part of the equation in brand-building is always people, not marketing dollars or yuan. Buying into Apple and Google would get an inside view into how these leading companies are run.

So what is the best, the smartest way to buy into these companies?

My guess is that the smartest way is to buy Apple and Google shares on the open market and gradually build up enough to get a board seat, where the sovereign wealth fund’s proxies could quietly learn how these companies perform, and find out who are the people who really make contributions to the company. Steve Jobs likes to create the persona that he is Apple and Apple is Steve Jobs, but the truth is not that simple.

Be a smart passive investor, not a dumb active investor. Learn to walk before you run. While it may seem a longer, slower process in the beginning, this is actually the faster, smarter and more economical way to go. Can you think of another way where you earn money while you learn instead spending big chunks?

So to sum up, the benefits of buying into Apple and Google are:

• Great place to park those extra depreciating dollars and get some appreciation
• Great way to learn how digital online products and brands are made
• Great way to find out who the smart movers and shakers are
• Great way to learn how to become a smart passive investor

If the sovereign wealth fund is doing what they were set up to do, they are already buying Apple and Google shares.

Now that would be real smart…

Technorati Tags: Apple, brand-building, brands, business, China, crisis, dollar, economic, funds, global, google, investment, media, mortgage, sovereign, subprime, US, wealth

An article in today’s Telegraph suggests that foreign central banks have sold US48B in US treasuries, with US32B in the past two weeks alone, according to figures released by the New York Federal Reserve. China currently holds US1,340B in reserves into other higher-yielding investments. Foremost among these newer investment vehicles is a sovereign-wealth fund.

China has bought US treasuries in order to secure its largest single export market. Effectively, China is lending money to its largest single buyer, since the American people have maxed out their credit. China is buying US treasuries so that Americans continue to have the capability to buy Chinese imports. Since the US dollar has been steadily falling in international markets, especially against the euro, this option is becoming less attractive.

In addition, China bought a large amount of US agency and corporate debt, some of which was backed by, you guessed it, subprime mortgages. For a detailed guesstimate (because it is not public information), take a look at this article by Brad Setser.

There is a good chance that there are some very senior people in Beijing taking a deep gulp as they look at their portfolio of dollar-denominated securities.

If so, that would explain the recent sell-off of US treasuries. And if they start selling, people in Washington are going to start worrying about how to handle US debt. Ultimately, Americans will have to recognize that they have lived beyond their means, and the US standard of living will have to make a downward adjustment, as is beginning to happen now.

So who wants to be president of the US in 2008?

Technorati Tags: China, crisis, debt, dollar, euro, mortgage, subprime, treasuries, US