The Chinese Saga

Now this is pretty old, chewed and screwed topic. But still I saw my favorite writers James Chanos and Thomas Friedman fighting over the same, I thought of digging into more details and came up with this.....

China as everyone knows is a manufacturing giant. When I say Giant, I really mean a giant. A huge mythological creature that cares for none and wants to be on top of everyone. That is precisely what Chinese agenda looks like as on today. China has mastered the art of manufacturing. They can produce anything and everything at lowest costs ever imagined. But how do they do it and will they survive is the question everybody is asking.....

In China, communism is the way of life. Almost every company is state owned or state controlled which ensures that the profits go to the government which acts as an agent circulating it to the needy ones. This also explains the 200 trillion dollar forex china is holding. Keeping the companies state owned has its added benefits. The companies do not need to pay for land, water, electricity and many more taxes which makes the cost of final product come down significantly. Add to it the ever reducing value of renminbi, this makes a china an invincible competitor in the manufacturing domain. The huge and skilled labour pool helps china it staying afloat despite the low costs. The Chinese have achieved double digit growth year on year for more than a decade now.

The other area where china is excelling is the Green Corridor. The whole world is behind the greenest of the technologies and china is leading the producers list. Hu Jintao has realised that this is where the future is. So his country are going in full force towards the century which is better known as the century that will belong to Asia. So china does not need to worry about its survival in the future. It looks safe from this aspect.

The last point which in history had made many countries go down is the population or the educated population as I may say. The rebellions and riots have marred the growth of many countries in the past. China has done a beautiful job in this regard. They did not give a damn to Google and GoDaddy. They implemented their Internet framework beautifully and have controlled what Chinese people can see and listen to. Nowhere in the world we can see manipulation of ones thought process on a humongous scale. This has eliminated the possibility of a rebellion or a riot that can cross its roads with growth story of China. Apart from some clashes between Uighur Muslims, its going good.

The factors that worry USA, India like terrorism, terror attacks etc do not worry China. Reason is simple. They have a close bonding with countries like Pakistan which are the epicentres of Terrorism. So this diplomatic move has virtually made china invisible to terrorists. Does this mean that China growth story is not going to stop at all???? Well I don't think so. Lets see the other side of the Chinese coin.

China has the domestic consumption to export ratio of 30:70 which means that whatever is produced in China, 70% of it has to be exported for the country to survive. This is a very large quantity when the Chinese manufacturing is considered. When the world leaders like Barack Obama and Angela Merkel are going with their agenda of strong national spirit, there is every possibility that the markets doors may be shut for china for a smaller duration at least by means like anti dumping duty, declaring china as currency manipulator. This will be a disaster for china as it will have to tackle the problem of huge unemployment.

Folks say that Chinese forex can come handy in these situations. But that will add to Chinese worries. The moment china starts selling dollars, dollar availability increases. The increase in supply will outrun the demand and the dollar value will come down. What this does is, it will make the US companies more competitive now that the currency gap has vanished. So the markets for use and throw Chinese products will once again go back to US pockets. China growth story might come to a full stop.

Second thing is a close market policy of China. China has been traditionally a market behind the Great wall. Companies made severe attempts to jump across but have failed due to the restrictions even on basic human rights. This makes china a not so global economy. Closing doors for imports is bound to strain the bilateral relationships with USA, Germany and many more. The severe state of this is a ban on business with China, something of a similar sort which was imposed on India when they did nuclear tests. This can spell the dusk for Chinese empire.

One more point here is the Chinese domestic situation. Continuous depreciation of renminbi has exerted pressure on Chinese countrymen. The same 10 Yuan gets converted to 6 Yuan in 3 months. This has pushed a noticeable portion of Chinese population into hardships and is like a time bomb waiting to explode. China can do nothing for this as appreciating yuan means stopping the exports which again is a disaster. So it tries to control the banking rates and temporarily control the effects. This makes people take out the money from banks and invest the same in market in hope of better returns. But it is not a long time solution. China has nowhere to go once the interest rates reach zero.

So where does China go from here. I think the Hu Jintao government has realised that export is going to stop one day. So they are taking smart decisions. They are purchasing fertile lands in Africa and other parts of continent. They are investing their money of research there to yield better returns. In the world where hungry folks are getting added every second, investment of agriculture is bound to yield good returns.

One more thing which they are investing on is the area of Defence. This is something which is an evergreen market. Countries don't mind paying high price for better equipments. So a higher and better renminbi can survive in this market. This is something which USA has been doing for ages. The investment in Green Technology also promises to do wonders for Chinese economy.

So all in all, what I feel is that even though the Chinese export story might end in near future, the Chinese dominance will continue. It will depend upon countries to purchase its latest technology. The only threat that still remains is the loss of competitive cost advantage once the renminbi appreciates. If Chinese can find a way to control this situation, I feel there is no country which can stop China!!!!!!!!!!!!!!