Be under no doubt, in the world of technology some pretty radical stuff is going on. We have already seen some major breakthroughs of late.  During this summer’s Olympics, much attention will be focused on Oscar Pistorius, one of the world’s top 400 metre runners, who has no legs. Tonight, many older couples may be able to enjoy each other’s company in a way that was once impossible, thanks to a certain product from a company called Pfizer, but which can’t be mentioned here (because if it was this email would get stuck in a spam filter).

The truth is that from 3D printing, to advances in genetics that will spawn incredible new medicines, and perhaps new forms of energy; from nanotechnology to prosthetics, thanks to Moore’s Law and the Internet we are on the verge of a new industrial/technological revolution every bit as important as the one the Victorians enjoyed. So that’s pretty good.

In such a scenario, who cares about debt. Does the debt crisis in Europe, Japan, the US and maybe China really matter, if we are going to get richer thanks to technology?

But here is a thought to leave you with. When technology advances at a great pace, is it not essential for demand to rise too? Where will this demand come from? If companies plan to produce more stuff than ever before, does that not mean that consumers must be planning to spend more than they are currently earning? And does that not mean they need debt? It has been said before that one of the key catalysts for the industrial revolution mark 1 was the discovery of gold in the New World, creating a growth in the money supply, which facilitated all that extra demand that the revolution drew from.  And maybe, just maybe, the world-wide obsession with imposing austerity is the real danger – the reason why hope may turn to despair, and the bears’ picnic may feed upon itself.

Articles in this series

China, another Lehman moment and the new industrial revolution

China’s bubble 

The dangers of unrest in China 

Time to celebrate, and welcome debt 

It is clear that China’s economy cannot rely on exports and investment and government spending much longer. A higher proportion of China’s GDP has to trickle down into wages, creating a consumer led growth trajectory. China’s Premier Wen Jiabao understands this and bangs the drum of higher wages and more consumption pretty much as often as he can. The Premier, who is a fan of Adam Smith by the way, wants to see more capitalism and even some reforms leading to more democracy, is the kind of leader that the West wants to see in China. And for that matter, may well be the kind of leader that is just right for China too.

Alas he is stepping down later this year, as are all his colleagues in the higher echelons of Chinese politics, and no one knows how the transfer of power will go.

The recent case involving Bo Xilai, his wife Gu Kailai, and the British businessman Neil Haywood may give us a clue.

The tale is not very pleasant. Was Gu Kailai really responsible for the death of Mr Haywood? It does feel too convenient. But then again, Mr Bo’s opponents are the very people the West wants to be in the ascendance.

In many ways Bo Xilai was a western style politician – charismatic, camera friendly, a man of the people – but his views and tactics were quite different. Basking in the glory of Mao, he recalled memories of the Cultural Revolution. No wonder China’s reformists were so worried and delighted to be shot of him. It may represent a victory for the reformers, a sign they are winning. And by the way, somewhat paradoxically, they do say that China’s leaders are at the zenith of their power during the last few months of their time in office. Right now, is when Premier Wen is most likely to implement reforms, although it is not clear what the views of President Hu Jintao are on this matter.

Changing an economy from investment and export-led to consumer-led is not easy. And although China’s leadership is clever, it is not omnipotent; indeed it is possible that we overstate its power and influence in the West. The danger is that during this transitory period, China may lurch into some kind of recession  – not recession in the Western sense of contracting GDP, but recession in the sense of much slower growth. And the danger is that during this period, the reformers may find their resolve tested, or their influence questioned.

Articles in this series

China, another Lehman moment and the new industrial revolution

China’s bubble 

The dangers of unrest in China 

Time to celebrate, and welcome debt 

According to Shanghai Securities News, the price of newly built residential property in Shanghai, measured per square metre, fell 20.7 per cent year on year in the first quarter. According to China’s National Bureau of Statistics, the price of new builds fell in two thirds of China’s largest 70 cities last month.

Then there are skyscrapers. The Empire State Building was opened in 1931; the Petronas Twin Towers in Malaysia were completed in 1998. Dubai’s Burj Khalifa was opened in January 2010. You might say: so what? But look at those dates.  In 1997 we had the Asian crisis; in 2010 Dubai joined Greece and Portugal on a very ugly list. 1929 wasn’t a very good year, either. In fact, if you Google ‘skyscrapers and economic crisis’ you will see there are many more examples.

This is what Skyscraper index report stated recently: “China will complete 53 per cent of the 124 skyscrapers under construction over the next six years, expanding the number of skyscrapers in Chinese cities by a staggering 87 per cent. China’s skyscrapers are not only increasing in number – it now has 75 completed skyscrapers above 240m in height – but the average height of the skyscrapers that it is building is also increasing as past liquidity fuels the construction boom.”

Then there are all those beautiful shopping centres, sparkling in their state of the ‘artness’, and bereft of shoppers. Or roads of stunning boldness, empty of traffic.

Writing in the Telegraph the other day, Ambrose Evans-Pritchard said: “Residential investment typically peaks at 8 per cent to 9 per cent of GDP for emerging nations during their catch-up growth spurts. It is already 12 per cent in China… Japan’s ratio peaked in 1973, long before the property price bubble burst. China has almost certainly peaked too on this crucial measure.” See China’s property boom has peaked, forever

Mr Evans-Pritchard also cited some recent speculation from Nobel laureate, and all round very clever economist, Edmund Phelps who has forecast that China’s productivity growth will be no greater than in the US within ten years, but at a much lower level of GDP per head.

So put all this together. Just as is the case in Spain, construction is a very important part of China’s economy. If we are set to see a crash in this sector, the impact on China’s economy will be… well, it will be catastrophic. Time was when they said if the US sneezed the rest of the world caught a cold. These days China is almost as important. The global economy is fragile enough, what with Spain, and Portugal, and Greece and Ireland and Italy, and Hungary, and err, Belgium, in dire straits. Holland is grappling with a potential crash in its house prices, not to mention a collapse in its government. France seems set to lurch towards the far left (or perhaps towards the far right). This is not ideal timing for a crash in China’s property market.

Take into account how expensive oil is, and oh dear, you can see why the bear’s picnic is so popular.

It is just that last week Capital Economics took a look at China, and was altogether more bullish. It said: “There were glimmers of a turnaround towards the end of the quarter. Electricity output growth stabilised in March, industrial production growth picked up and, most significantly, bank lending far exceeded expectations.” Then it honed in on property, and, by the way, Capital Economics is usually a property bear. It said: “Both the statistics bureau’s survey of 70 cities and our estimates based on published sales data from developers suggest that prices are now lower than a year ago. But the rate of price declines is not alarming. With average nominal incomes rising at more than 10 per cent y/y, housing affordability is improving at the national level.”

Also bear this in mind. Sure oil seems pretty unaffordable right now, and the combination of a crash in China, a collapse of the euro and oil rising even further in price may constitute the makings of a perfect economic storm. But then again, it doesn’t seem very likely. For one thing, if China and the euro suffered a major crisis, demand for oil would fall, and its price may well half. Sometimes it feels as if picnicking bears want their cake and to eat it too.

Actually, when you look at the forecast from Edmund Phelps, who really is a very clever and insightful man, then actually there is reason for hope. If China’s productivity growth slows to US levels within ten years, does that not mean over the next ten years its miracle growth period will continue?  And as this growth occurs, incomes levels will rise, all that expensive property will start looking cheap, shopping centres will be filled, and roads will become busy.

Perhaps we should liken the Chinese bubble to the dotcom bubble of the late 1990s. Sure dotcoms burst, and things were unpleasant for a while, but 12 years on the Internet is still transforming the world.

Articles in this series

China, another Lehman moment and the new industrial revolution

China’s bubble 

The dangers of unrest in China 

Time to celebrate, and welcome debt 

If they are right, the effect upon the global economy will be every bit as nasty as when Lehman went bust, maybe a lot worse. But before you panic, cheer up, help yourself to another jam sandwich, for there are good reasons to think it won’t happen.

First, here is a caveat. If you were to line-up every lady or gentleman of the press who has ever made some kind of prediction of doom, you would form a wall big enough to see from outer-space – or at least it feels that way. And most of these predictions are proven wrong. The forces of randomness mean that from time to time one’s forecast will get it pretty much spot on, but that does not necessarily mean you have to take all the words from this latter day Nostradamus as if they are gospel, and believe everything they state.

Before we drill down into this China question, here is a reason to swap the cakes and sandwiches that make up the picnic to fillet steak washed down with bolly. For while the legions of bears are indeed formidable, there is one very good reason why we should be gushing with optimism.

Articles in this series

China, another Lehman moment and the new industrial revolution

China’s bubble 

The dangers of unrest in China 

Time to celebrate, and welcome debt 

Apparently, Mr Ferguson puts the West’s current supremacy over the rest down to six factors: greater competition in the economy than in, say, China; science – or is that Western scientists?; property – or the emergence of property ownership and rights in the West; modern science (not sure how that differs from the second factor, presumably the TV series will tell us); consumption; and the work ethic.

Well, the author of this article has not read Ferguson’s books yet, but he has read ‘Why the West rules for now’ by Ian Morris, and ‘Why the West has lost’ by Dambisa Moyo.

Morris is an archaeologist, Moyo an economist, so their perspectives are quite different.

Morris reckons the West’s supremacy lies with geography.

Before we go further, it is important to point out that until the Industrial Revolution, China had been the richest country in the world for a thousand years. But before that, says Morris, the West was more developed.

Now Morris has a curious definition of the West, although it is one yours truly agrees with. Morris defines the West as all civilizations that trace their legacy back to that area we call the Fertile Crescent in North Iraq, southern Turkey and the Levant. That, by the way, means Arab counties are defined as Western by Morris.

He says the West led China for thousands of years because of geography. He says agriculture started in the Fertile Crescent because there was more naturally growing plant matter there that could be farmed, for example wheat and grain, and because there were more large animals that could be tamed and used for their meat. If you are interested, his theory builds on the ideas of Jarod Diamond, in his book ‘Guns, Germs and Steel’; see this link to see a TV documentary based on this book .

Returning to Morris, he says the Mediterranean was more conducive to trade than China’s land-locked region, but that the West lost its lead with the fall of the Roman Empire.

Apparently the West peaked in the first century AD, and China one thousand years later under the Song dynasty. Neither East nor West passed that level again until the Industrial Revolution.

Morris says the key to the industrial revolution was the discovery of the New World, and the West discovered the New World for the simple fact she was closer to it. The sheer size of the Pacific versus the Atlantic meant it was inevitable that the West would be the first to tap the riches that the New World brought.

Morris also suggested that over history, power tends to move to periphery regions. It moved south to the area where farming was first used, to Sumeria. Greece, Rome, Britain and the US were all periphery regions. And today, so is China.

Morris’s book is a fascinating read, but not sure his theory completely aids us. Towards the end he even started to quote Isaac Asimov and his Foundation books which came up with the idea of predicting the future using a mathematical formula created by looking at the past. At that point the book got a tad silly.

Moyo’s book is more disturbing. She took a far more recent look at the history of the West. She looked at the obsession with house prices, suggesting that the housing boom detracted from investment into more productive areas – an idea this column has often advanced. She suggested that declining education standards relative to the rest of the world would hamper the West’s long-term prospects, and cited short-sighted Western politics which has created huge resentment. (This is illustrated perfectly well right now in North Africa as Gadafi turned Western-supplied arms on his people.)

She turned to demographics, and the cost of providing pension and health care for the baby boomers, and suggested that by 2065, the US healthcare budget will be 100 per cent of US GDP unless Uncle Sam starts making some painful decisions. She also looked at how the changing demographics in the US means that while the US will not see her population fall like it will in Europe, the US population that is growing is the bit that is badly educated, gets a small share of Uncle Sam’s cake and contributes little to GDP. In other words, to carry on growing the US has got to learn how to give more opportunities to the economically-deprived.

Ms Moyo predicted that the US will be a social country within half a century.
So there it is. The rise and fall of the West. It will be interesting to see what Mr Ferguson’s TV documentary has to say.

Don’t you hate it when people put you on the spot. Yours truly got put on the spot the other day. If you had to name one British company which is most likely to see its share price go up, which stock would you select? A moment of panic set in. The heart rate sped up. What to say? And then five letters descended upon the brain, like manna from heaven. The first of those letters was a ‘T’.

Anyway, changing the mood slightly, fears of an impending crash in China’s economy are growing. George Magnus is a clever bloke. He is an economist at UBS, a regular on BBC2 Newsnight and author of the book ‘Uprising’. Our George reckons that the combination of an investment bubble (illustrated by shopping centres bereft of people, and roads that go nowhere) and Chinese demographics (why she is still enforcing one child per family is a puzzle) will see China’s extraordinary growth go into sharp decline.
He is not alone. Some say China will go like Japan and is set to enter a lost decade that, just as has been the case in Japan, may last for several decades. Others say it will be worse than that, that China’s economy is set to crash.

Well, what we do know is that China’s export model is not sustainable indefinitely. For China to carry on exporting more and more the rest of the world must, by definition, import more and more. And the rest of the world can’t afford to do this.

And don’t fall into the trap of saying “but China’s trade surplus has been shrinking of late”. While that is true, the reason for its decline is because of the rise in the price of goods she must import in order to be able to export, for example oil. Beneath it all, China is still relying on other indebted consumers to buy her wares.

The second letter of this UK company is an ‘E’, by the way, in case you are wondering.
But there are plenty of reasons to think China will get over this problem. First of all, and this is the key point, she still has massive potential to catch up. Capital density in China is a fraction of levels in the West. Labour productivity is a fraction of Western levels, so the potential to improve is vast. That’s the difference with Japan. Surely one of the main reason why Japan’s economy hit the buffers was simply because she caught up with the West. Once an economy matures, she relies on innovation for growth. China is not at that stage yet, not by a long chalk.
Some people say all China does is copy the West’s ideas. But this argument ignores the lesson of history. Two of the important innovations to change the West were copied from China. That’s gunpowder and the printing press. Even the wheelbarrow was invented in China. Those who say China is just copying the West are making the mistake of viewing history through the prism of the last few decades. Churchill once said: “The further back you look, the further forward you see,” and if you were to apply his dictum to China today, you would say China will become an innovator again, just like Japan went from copier to innovator a few decades ago.

Another major problem in China is the massive levels of savings. Just as in the Anglo-Saxon West our economies are out of kilter, and we spend too much and don’t save enough, in China it’s the other way round. Many say the solution is for China to have a stronger welfare state so that the Chinese won’t feel the need to save so much for that rainy day.

But look at this chart:

You can see that while Chinese consumers are saving huge amounts, the trend suggests that actually the problem lies with Chinese government and corporate saving. This means that if China’s wages rose at the expense of corporate and state profits, overall savings would fall and China’s economy will become more balanced.
But this is exactly what is happening. China’s wages are indeed rising, and as this happens, Chinese consumption will rise.

Which is why the third letter in that British company yours truly tipped was an ‘S’.
But there is another point here. It was told here at the end of last year that China is running out of workers to migrate from the countryside to the towns. See: The world’s most populous country is running out of workers – what are the implications?

. And as this happens, China will reach what’s called the Lewis Turning Point, China’s wages will rise, her companies and government will have less money to hoard, and consumption will rise.

Incidentally, this will have implications in the West too, and by the end of this decade we may start seeing wages rise across the world, creating a new era of higher inflation and interest rates.

But as China’s wages rise, China’s consumption will go up.

And that brings us on to a recent report from IGD, which forecast that by 2015, of the world’s five largest grocery markets, four will pertain to the BRICs – Brazil, Russia, India and China.
Which is why the fourth letter of our mystery word is a ‘C’.
But now consider this chart produced by IGD.

Top four global grocery retailers. Turnover in euro (€)m

So, will China’s economy crash? We suspect it will slow next year, and maybe by quite a bit, possibly creating a problem for the global economy. But we doubt it will crash. Rather, we see a gradual switch from investment and saving leading to more consumption. And as this happens, Western grocers will pick up the yuan.

And the retailer that will do especially well is made of five letters, the first four being TESC.

You may have heard this one before, but apparently some countries in the Eurozone are struggling to raise the necessary monies they need. Keep this one quiet, we certainly don’t want to create a panic, but it appears that when Portugal went to the bond markets this week in an attempt to raise some more readies, some feared it wouldn’t be successful.

Then yesterday, Spain and Italy were busy selling bonds, and once again (shhh) one or two investors had their doubts.

But fear not. Just as some feared Spain was on the verge of holding out the begging bowl and asking the IMF/EU/ECB to put their hands in their pockets and lend it money that they couldn’t comfortably afford, along came China and asked: “Can we help?”

Good old China. Out of the kindness of its politicians’ hearts it offered to save Spain from the abyss.

But now an EU politician has only come along and said China may have an ulterior motive.

The cynical politician was Herman Van Rompuy, no less; Europe’s president. He said: “When they buy euros, the euro becomes stronger and their currency a little bit weaker. That is not neutral in regard to their competitive position. But I go no further in this topic. It could be too delicate.”

Shock, scandal! China has a selfish reason for trying to help Spain. And there was silly old us thinking China was just a country of philanthropists.

Anyway, some are now suggesting the offer to Spain is just another attempt by China to prop up the yuan. You see, if the euro collapses, the yuan will look expensive.

Well, call us naive if you wish, but is it not the case that a collapse in the euro, leading to a possible European-wide debt default, will be bad news for a lot more countries besides China? In the long term such a collapse could be a good thing, but in the short term, well, just thinking about the ramifications brings back memories of the collapse of Lehman Brothers.

We kind of thought that China’s rationale for offering to assist Spain was precisely because she felt it was in her interests to avoid a new economic meltdown in what is perhaps her most important export market. Or are we being a tad indelicate? 

PwC reckons that by 2050, what it calls the E7, that’s Brazil, Russia, India, China, Indonesia, Mexico and Turkey, will be 50 per cent larger than the current G7 – US, Japan, Germany, UK, France, Italy and Canada. China is expected to become the world’s largest economy by 2025, and India, says PwC, has the potential to nearly catch up with the US by 2050.

The projected list of fastest growing economies to 2050 is headed by Vietnam, and the top 10 includes Nigeria, Philippines, Egypt and Bangladesh.

As for Blighty, in the league of the world’s largest economies, by 2050 the UK is expected to be in ninth spot, behind China, US, India, Brazil, Japan, Russia, Mexico and Indonesia (Russia, Mexico and Indonesia are all expected to be around the same size). Intriguingly, PwC expects the German, French and British economies to be roughly the same size in 2050.

John Hawksworth, PwC’s chief economist said that: “As far as the destination of UK exports goes, there hasn’t been much of a change in the last 10 years even though there has been a big shift in the global economy. UK growth was based on property speculation and financial speculation, and now that those bubbles have burst, the question is what our areas of competitive advantage are going to be. It is going to be quite a challenge and it is not going to happen overnight. There has been a shift in government thinking towards the need for a more positive industrial strategy, but that is a complete reversal of the way we have been going for the past 30 years.”

But if you think the PWC report paints a worrisome picture, you had better take a deep breath. Dambisa Moyo, a former Goldman Sachs economist, who was born in Zambia but now lives in London, has penned a new book entitled: How the West Was Lost: Fifty Years of Economic Folly – And the Stark Choices Ahead. And it’s strong stuff.

Ms Moyo’s previous book, Dead Aid, argued that aid to Africa was ineffective and was responsible for keeping the continent poor. It was a massively influential and controversial book, and now she has done it again.
The book states: “If nothing else changes it from its current path it is almost certain that America will move from a fully-fledged capitalist society of entrepreneurs to a socialist nation in just a few decades… The trouble is, it won’t be just any socialist welfare state… the US is on a path to creating the worst and most venal form of welfare state – one born of desperation from many years of flawed economic policies and a society that rapaciously feeds on itself.”

What we find quite interesting is this comment. Ms Moyo said: “I hope the book will be picked up by people who are saying: ‘I don’t want to hear all this noise. I just want a clean perspective on what the heck is going on around the world and how is it that we have got to this point.’ ”

She makes a good point. There are so many books out there on the economy at the moment, but many of them are making little more than noise. They get hung up on economic theory, arguing that such and such a theory is dead, and then they launch into a detailed blow-by-blow description of banking folly.
But economists give themselves a heightened sense of importance. The underlying trends – trends such as demographics, technology and the shakeup in global power – are what really count, and what are really shaping the global economy, and economic theory is completely inadequate in describing what’s going on.

However, the switch away from Western dominance doesn’t have to be bad news. The challenge for the West is embracing the change and turning it to our advantage rather than fretting about an uncertain future.

See: The World in 2050, by John Hawksworth and Gordon Cookson And, How the West Was Lost: Fifty Years of Economic Folly – And the Stark Choices Ahead

Back in September, Chinese Premier Wen Jiabao said: “China is committed to creating an open and fair environment for foreign-invested enterprises.” As you know, one of the gripes Western companies have is that China’s rules seem to be skewed against outsiders. China responds by saying that they need to make bigger efforts to understand China’s ways. But Mr Wen seemed to suggest Westerners had a point, saying: “It is not all due to misunderstanding by foreign companies. It’s also because our policies were not clear enough,” and finally the key bit: “I wish to reiterate here that all enterprises registered in China according to Chinese laws are Chinese enterprises. Their products are ‘made in China’ products.”

The truth is, China is an enormously complicated country, and even its premier has less power than is commonly thought. But at least Wen Jiabao is making the right noises.

And yet while it may be hard for Western companies to set up in China, Ford seems to be rather good at it.

Sales of Ford cars in China rose 40 per cent last year, taking total sales to 582,467 vehicles.

Mind you, of the big auto companies operating in China, it is still number three.

Last year, GM sold 2.35 million – up 29 per cent on the year before, and Toyota clinched 846,000 sales, up 19 per cent.

The Guardian quoted Abdolreza Abbassian, an economist at the UN’s food and agriculture organisation, as saying: “We are entering a danger territory.” He warned: 2There is still room for prices to go up much higher, if for example the dry conditions in Argentina tend to become a drought, and if we start having problems with winterkill in the northern hemisphere for the wheat crops.”

The Independent said: “As more Chinese enter the middle classes they tend to consume more poultry and meat, just as Westerners did at a similar stage in their economic progress. However, meat and poultry husbandry consumes at least three times the resources that grains do, while the drift towards the cities in China is reducing the yields of its farms.”

Yet, conversely, Capital Economics has argued meat consumption per head in China is already close to the levels seen in the West, and much higher than in Japan. People who warn that the rise in China will lead to a rise in meat consumption overlook this. Okay, as China develops we may see consumption of different meats – at the moment, pork accounts for the majority of China’s meat consumption. But it is hard to see how the development of China will lead to much more meat consumption overall.

As for the argument that the drift from the countryside to the cities is reducing yield from China’s farms, that’s a tricky one. It is true to say that China is running out of workers. As a consequence, we are likely to see wages rise in China over the next few years. But is that a good or a bad thing? If food is going up in price in China because Chinese workers are earning more, then isn’t that the very trend economists have been crying out for?

Some argue that higher food prices in China will lead to social unrest. Well, they might, but just bear in mind that a high proportion of China’s population produces food, so if the prices they receive go up, then they will be better off. Rising food prices in China may actually benefit a huge number of its populace. And for that matter, if food prices across the world are being driven up by demand as some countries get richer, then actually this may be a good thing, because the result will be improved income in countries that rely on farming, and quite often (although not always) these happen to be the world’s poorest countries. In other words, rising food costs could lead to redistribution of income from rich to poor.

It all depends on what’s causing the price rises. Rising demand may be one factor, but there are supply problems, too.

The worry relates to the possibility that there are deeper forces at work here.

You could say food prices have partially been pushed up by bad luck, a series of natural disasters ranging from drought to floods across the world. Bad luck won’t last for ever, so if this explanation is right, food supply should improve, helping to alleviate food inflation. Of course, if it isn’t bad luck, and we are seeing fundamental change in the global weather pattern, then that’s another matter entirely – and far more serious – but it is probably too soon to tell if that is what’s really happening.