“One thing I have learned about China is that there is always something to worry about”by Anthony Bolton / February 20, 2014 / Leave a comment
Published in February 2014 issue of Prospect Magazine
The night skyline in China’s largest city, Shanghai ©XU XIAOLIN/CORBIS
As we move through 2014, views on China, particularly in the world of investment, are unusually polarised. Some argue that China can continue to grow at close to the rapid rate it has achieved for the last couple of decades—a rate that has not just transformed its fortunes and standing in the world but changed profoundly the way that many look at development. Others predict that the economy will collapse in a western-style banking crisis some time soon. Both are unlikely, in my view. My cautious optimism stems from the deep changes in the economy now underway, and on my belief that the new leadership in China realises the need for reform and has the desire and the power to see this through. One thing I have learned about China is that there is always something to worry about. Four years ago, I moved to Hong Kong to run an investment trust that specialises in Chinese companies listed on stock exchanges. Under the country’s licensing regime, because the company I work for is entirely owned by non-Chinese I would not be allowed to do my job in China—so I am based in Hong Kong. During that time, I have met a very broad section of senior Chinese businessmen. I have undertaken over 1,250 company meetings and travelled to China about once a month as well as meeting many China experts. That is the reason that I am neither as alarmed as those predicting collapse nor as sanguine as those expecting that the record of the past few years will simply continue.
The sources of potential worry in the last two or three years have been legion. Some are widely known, such as pollution and corruption. Others include inflation (the official rate of inflation often under reports the true rate); excessive government borrowing (the huge local government infrastructure spend after the global financial crisis was generally financed by a big increase in debt); consumer savings products (called “wealth management” or “trust products,” some funds from which have been invested very riskily when the buyers thought they had minimal risk); and an export squeeze due to rising wages for Chinese workers and a rising currency. My belief is that most of the financial challenges are containable, at least for a few years. Crucially, the authorities are able to move money between the central government, which has huge funds at its disposal, and local governments and the state-owned enterprises, which among other industries dominate banking, energy and telecoms. This allows the government to offset many of the short-term pressures that China is currently experiencing. Some of those predicting a sharp and painful slowdown for China are wrongly projecting onto its economy the constraints of western democracies, which often behave very differently to China. I believe using only western experiences to predict the future in China is dangerous.