China — the road ahead

The inexorable capitalism forces, which made China world’s factory, are looking for the next super-cheap destination

An earlier article charted China’s rise to superpower status, describing the rapid industrialisation, economic boom, and the breakneck construction on new cities and infrastructure. The year 2015 will be remembered as China’s breakout year with the BRICS alliance advancing, the highly successful launch of the Asian Infrastructure Investment Bank, and the inauguration of ambitious development projects in Brazil, Peru and Pakistan. And the year is only half done. Here we briefly look at major fireworks expected in the year ahead, flashpoints where China is expected to challenge the status quo, and what the next few years might have in store.

The most pivotal theme is, undoubtedly, China’s challenge to the US dollar, the world’s dominant reserve currency. The vast majority of international trade is conducted in dollars, resulting in a constant demand for the currency, and essentially, the counterintuitive situation, where the US can simply ‘print’ wealth out of thin air. This “exorbitant privilege” as dubbed by French statesman Valery Giscard d’Estaing has recently played havoc with world markets. Some commentators compare it to “exporting inflation”, fomenting misery and civil unrest in under-developed countries.

China has a three-pronged strategy to take on the dollar: first, China is pressing the IMF to include the yuan in the Special Drawing Rights basket. This fund, set up to enhance nations’ official foreign exchange reserves, is an elite club currently comprising the dollar, euro, yen and the British pound. If China gets in, it will be a major step towards internationalising the yuan. The US has, predictably, sounded a discouraging note, claiming the yuan needs “further liberalisation and reform”. However, countries including Britain, Germany, France and Italy strongly support the Chinese position.

The second step is the launch of a new payment network which China has already built, is currently testing and may initiate as soon as September. Currently, there are only a handful of yuan clearing houses internationally and processing cross-border yuan transactions is very cumbersome. A new payment network, an alternative to the SWIFT payments network, dedicated to the yuan will dramatically slash the operational headaches, delays, and costs of processing yuan transactions, and significantly expand its global reach. Standard Chartered Bank has dubbed it a “game changer”.

The third step — and arguably the most important — is via gold pricing. For the last few years, China has been not only the world’s largest producer of gold but also the world’s largest importer. No one knows for sure the size of China’s current gold reserves. Gold prices are not particularly high at the moment so this may not seem worrisome. However, as banking scandals have demonstrated in detail over the last couple of years, gold prices are being systematically rigged by big Western banks. A cable revealed by WikiLeaks in 2009 indicates that China is well aware of this and considers it a Western conspiracy to maintain dollar dominance. It has, therefore, taken matters into its own hands and sought a greater role in gold pricing.

The Bank of China will very soon directly participate in the twice daily electronic auctions which set the LBMA (London Bullion Market Association) Gold Price benchmark. The “London Gold Fix” has been the reference gold pricing mechanism for almost a century now, and China will be the first Asian lender to participate. More importantly, by the end of the year — in direct competition with London and New York — China intends to bypass Western gold pricing mechanisms entirely, by launching its own yuan-denominated “Shanghai Gold index”.

So, overall, we can expect seismic shifts in the current economic order in the next six months.

Other trends are underway as well. For one, China's infrastructure development companies have started expanding into the international market. Four of the world’s five largest construction and engineering companies are Chinese, so this is not surprising. One project recently announced is the construction of an ambitious energy plant in the UK, the world’s first to generate electricity from the tide. A second major project is a new nuclear power station.

In the next couple of years, we will also see a lot more Chinese culture specially targeted at international markets. A few years ago, China launched the Xinhua cable news channel modelled on the Al Jazeera formula. Now it is in cinema that China’s soft power export is set to expand, big time. Earlier in the year, a Chinese state-backed TV firm signed a $1.5 billion deal to fund movies made by US studio Lionsgate. According to industry insiders, a flood of Chinese investment is pouring into Hollywood, with the intent to produce movies which work within Chinese as well as US markets, and sell Chinese culture to the world. Upcoming projects include The Great Wall, a science fiction epic set in China, starring Matt Damon and Willem Dafoe, and The Bombing, a Second World War period piece, starring Bruce Willis, about an American teaching Chinese pilots to combat the Japanese.

So, to repeat an earlier question, has the Chinese century begun? The trend is certainly obvious.

But there are surprises in store. The world economy is extremely fragile at the moment and, in China particularly, signs of economic trouble can be discerned in the shadows. Indeed, while the Greek financial crisis dominated the news, the Chinese stock market crashed in spectacular fashion, losing a whopping $3 trillion in a mere few days, leading some experts to call it the country’s Lehman moment. And it is still unclear whether the damage has been suitably contained.

Overall, China’s public debt has quadrupled from $7 trillion in 2007 to $28 trillion in 2014, a 282 per cent increase in GDP. This stunningly accounts for nearly a third of all global borrowing. And growth in GDP has slowed down to its lowest point in six years as per official figures (amid observers’ concerns that these figures are massively fudged). China is now barely able to meet official growth targets which are necessary for stable employment. And even as it builds megacities with rows upon rows of sparkling new apartment blocks, the boom is artificial. The buildings are largely too expensive for average folk. Commentators fret that building ‘too much too soon’ has already triggered a dangerous housing bubble in some cities. The real estate sector is in dire straits and high-profile defaults have started.

And there are structural concerns: the economic advantage of running a factory in China is slowly dissipating as wages rise and income disparity drops. The same inexorable forces of capitalism, which made China the world’s factory over the last two decades, are now relentlessly seeking out the next super-cheap destination to set up shop. Factories are likely to shift to other Asean countries, particularly India. Narendra Modi’s current economic reforms are a step in the direction of replicating the Chinese miracle-growth formula. The IMF has predicted that India’s growth rate will outpace China’s this year. As per Christina Lagarde, if one accounts for purchasing power, by the end of the decade, India’s GDP may actually be greater than that of Japan and Germany combined, and an output exceeding that of Russia, Brazil and Indonesia put together!

And India has a clear vision about its role in the emerging order: as Prime Minister Modi recently told a room of China’s top CEOs in Shanghai, while signing business agreements estimated at $22 billion, "You are the 'factory of the world'. Whereas, we are the 'back office of the world' … Let us work together in mutual interest and for progress and prosperity of our great countries."

Perhaps, we should be talking about the ‘Indian century’?

Published in The Express Tribune, August 23^rd, 2015.

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