China is not so much an emerging market as a sleeping giant — one that is rapidly waking up and needs to feed a voracious appetite.
The recent Portfolio Construction Forum in Sydney saw some 200 delegates, as well as speakers from around the world, converge to work through the challenges and opportunities that China and other emerging markets present for Australian investors.
Global strategist Keith Suter’s keynote presentation to the forum focused on the rise of China and concluded that the process of globalisation will result in the erosion of the power of national governments and the rise of national corporations — in short, we will be seeing more democracies in the future.
There are more democracies in the world than ever before, Suter explained, because as countries become middle class, so too do they want to have a say in how their country is governed.
Importantly, however, the democracy is not imposed from the outside but grows from within the country. Suter said that like Taiwan, a former dictatorship which is now a democracy, other countries that are becoming true democracies include South Korea, Thailand and even Indonesia and the Philippines.
The reason? “The pace of consumerism and the pace of economic change creates a middle-class society, and you can’t have the military running a dictatorship over a middle-class society,” he told the forum.
“When the belly is full, the brain starts to think, and once people are no longer worried about where their next meal is going to come from, they want to have a say in how the country is being governed. And so therefore, we get this rise of democracy around the world.”
The end result is people who want greater freedom of choice, and consumers who have increasingly higher expectations. The implications of this process for China, for example, are enormous.
So what does this move into a period of rapid change mean?
“I think if you’ve got the right sort of mentality, you can always be making money,” Suter said.
“There are new opportunities opening up and of course, China itself represents a new market of 1.2 billion potential consumers.”
But don’t put all your investment eggs in the China basket.
Suter said: “I also focus on India and eventually may even need to be focusing more on some parts of Latin America as well.
“Indonesia is another country to look out for. Half the population of Indonesia is under 18. The same goes for Iran. It is countries that have a high Islamic population that often have very young populations as well.”
In his speech to the forum, Jonathon Pain, principal of JP Consulting and executive director of Hedge Funds Australia, said the awakening of China — “the sleeping giant” — is an event that has no precedent in economic history.
“The industrialisation of the west — the industrialisation and modernisation of the United States at the turn of the last century and before, or indeed the reconstruction of Japan — pales into insignificance in a context of the pace and scale of the development that is occurring before our eyes in China today,” he said.
If you had your doubts, Pain had the statistics to prove it. Half of the world’s cement production was consumed by China in calendar year 2003, and China builds a city the size of Brisbane to accommodate the migration of 20 million people from the less developed west to the more developed east each and every month. As well, China’s workforce — 750 million — exceeds the entire workforce of the advanced economic world. There is also the fact that every button and every zip on the clothes that you are wearing is probably made in China.
And technology is catching up with the Chinese as well.
“China now sells three mobile phones per second — that is, three million mobile phones per month. In fact, mobile phone subscribers in China now number 305 million,” Pain said.
He said China has emerged from a multi-century hibernation with an incredibly voracious appetite for raw materials. As an example, 35 per cent of global steel production was consumed by China last year.
The implications? He believes that Australia will be one of the beneficiaries of the “Asian economic miracle”.
“The other beneficiaries of the China phenomenon, of course, are the South-East Asian economic entities. Thailand, Malaysia, South Korea and Taiwan each saw their respective exports grow by 50 per cent in calendar 2003. Clearly, another major beneficiary of the China miracle is, of course, Japan.”
He said many of these economies are exporting goods to China which then assembles them and passes them on as exports to the rest of the world. We should be thinking of China as the world’s new assembly plant in the economic context, Pain said.
Pain also compared the savings rate of eastern nations, with the savings rate of the west. The differences are stark.
“Household debt in the United States is at an absolute all time record. The US consumer has been the locomotive of growth in the United States, if not the world, in the last five to 10 years, and I believe they have reached a level of debt saturation.”
And while many believe, Pain among them, that the US — and indeed other western nations — are about to experience the mother of all debt bubbles, the same cannot be said of the east.
Household savings in the east, in Japan, and other Asian entities are much more comfortable.
Quoting a Japanese statistic, Pain said the country’s household assets are equivalent to US$12,000 billion. And about 57 per cent of this is in savings accounts or bank deposits in the postal or banking system.
“Those savings are in accounts yielding a massive, incredibly large, incredibly attractive 0 per cent,” Pain said.
“If we saw a 1 per cent migration of Japanese household assets from zero yielding bank deposits into the Japanese stock market, that would be a sum greater than the total foreign investment in the Japanese stock market last year.”
He said there is a compelling case to be made for investments in emerging markets such as China.
“The deficits in the west are being offset in a global and lubricated capital flows market mechanism by the surpluses in the east. And that, I believe, will be one of the defining features moving forward.
“There has been much discussion in the last three to six months that Chinese authorities are clearly attempting to engineer a slow-down. But let us not be mistaken in any shape or form. The China miracle will continue. Not for decades, but indeed for centuries. And a slow-down from 9.9 per cent or 9.7 per cent to 5 per cent or 6 per cent is still reasonably robust growth.”
Leeanne Bland is editor of the PortfolioConstruction Forum (www.PortfolioConstruction.com.au). Full conference proceedings can be found at PortfolioConstruction.com.au.
