Lessons from China: How it's turning a bear market into a bull run
While its debt growth has been astonishingly rapid, Trump’s trade war risks a stand-off between an emerging East and a defensive West
Little noticed in the West, China has entered a bear market. Down more than a fifth so far this year, stocks are languishing amid a sea of worries about Fed tightening, trade wars, a slowing economy and a growing debt mountain.
Is the Chinese development story finally beginning to stumble? I’ve been taking the temperature at the World Economic Forum’s “summer Davos” in Tianjin this past week, and the message is both reassuring and concerning.
Start with the reassuring stuff.
First, China is no longer the export-dependent economy it once was. Internal demand has become the overwhelming driver of growth, with net trade now a relatively insignificant component. If the reimposition of national borders is the future, then this may ironically even accelerate the process of internalisation and technological take-up, further reducing China’s exposure to the rest of the world.
Second, the debt problem may not be quite as bad as it has been made out. Despite the worrying pace of credit growth, overall debt is still no higher than it is in much of Europe, and quite a bit lower than large parts of the rest of Asia. As the trade war bites, China is determined that this time around it will not use fiscal and monetary stimulus to compensate. I guess we’ll see on that front.
Now for the more concerning message.
Whatever Chinese officials say, the debt growth has been astonishingly rapid, and though it may have slowed a bit, China is most certainly not deleveraging.
What is more, Trump’s trade war threatens seriously to upset Chinese plans to internationalise its financial markets and thereby achieve the same unlimited global borrowing power enjoyed by the US via the mighty dollar.
Trump will not find it easy to halt Chinese progress. When riding a tiger, it is hard to dismount. But he can slow its progress. By doing so, he risks a much more serious stand-off between an emerging East and a defensive West. Stock markets are beginning to recognise these deeper concerns. China’s bear market may be just the canary in the coal mine.
We live at the beginnings of what Klaus Schwab, founder of the World Economic Forum, has called the fourth industrial revolution, an extraordinary confluence of rapid technological progress across multiple industries and human activities. For a developing country such as China, it provides a god-given opportunity to leapfrog becalmed Western economies, compromised as they are by legacy infrastructure and costly welfare systems.
Nowhere is this more obvious than in electric cars.
China has seen the future, and it lies with electric vehicles. Still only about 16% of global GDP, China already accounts for a half of all electric vehicle sales worldwide. As in most things Chinese, the growth is phenomenal. About 780,000 were sold in China last year, and a further 600,000 in the first half of this year, bringing the total stock of such vehicles to more than two million.
For China, the new technology serves a five-fold purpose: it reduces the country’s carbon footprint, it helps tackle chronic urban pollution, it enhances industrial capacity, it promotes innovation and, because electric vehicles are theoretically so much easier to build, their production can be easily automated.
China doesn’t do things by halves. The full weight of the state has been put behind its so-called 30/30 target – 30% of all new car sales to be electric by 2030. Incentives include subsidies, free parking and partial urban bans on carbon-emitting vehicles. The difference between China and Europe is that China has a unified policy approach to the promotion of electric vehicle technology and sales, while in Europe policy is still highly fragmented between nations.
China has also significantly reduced the still at present significant cost differences with conventional internal combustion engine vehicles through subsidy.
And last but not least, it has seen a huge number of start-ups in electric vehicle technology, whereas in Europe, electric vehicle rollout is dominated by the traditional incumbents. For them, the approach is entirely defensive; the new technology is just an unwelcome tax on their existing business models.
Brexit? What’s that?
As regards Brexit, an admittedly not very scientific survey of opinion among Chinese business leaders while in Tianjin runs something like this.
Most expressed bewilderment, and wondered why Britain would want to leave the world’s largest free trade zone. When I explained that it was about reclaiming sovereignty, they just shrugged, as if concessions on sovereignty were but a small price to pay for international trade. In China, it would seem, it’s business first.
But perhaps the most telling response came from an artificial intelligence entrepreneur, a clever and well-educated man of some wealth, who had never even heard of Brexit. As best I could, I told him what it was and outlined its various pros and cons.
These he considered for a while before casting judgment: it’s completely irrelevant, he said finally. Technology is what will determine the future, not governmental arrangements.
I’m not sure who should draw most comfort from this remark, Leavers or Remainers. But it certainly gives a sense of perspective. Despite the passions Brexit incites back home, to the rest of the world it is but a little turbulence in a faraway place.
– © The Sunday Telegraph