Why China's trade surplus is a strategic opportunity

The economic growth in China over the last 20 years has been one of the biggest forces for reducing global poverty, as tens of millions of people have gone from subsistence farming to industrialised production jobs. The wealth that has been created from this trend has transformed China, and now cities such as Shanghai and Beijing are catching up with Hong Kong and Singapore in their level of development. The growth in China looks set to continue, with the economy forecast to surpass the USA’s in size within the decade, according to a new interactive tool published by The Economist.

During its period of growth, China has benefitted from being a low cost economy by exporting manufactured products to the rest of the world. Now, its low levels of domestic consumption have been brought into the spotlight by the sovereign debt crisis. “How can developed countries deal with their trade deficits while China runs such a large surplus?” is the question Western politicians and economists are asking. China’s ability to export is propped up by its cheap currency, which results from the Chinese government selling Yuan and buying US-dollar denominated Treasury Bonds.

Some American economists decry this as manipulation of the Chinese currency, at odds with a free-market philosophy of world trade (this is a view I see as rather hypocritical: as long as the Chinese government is buying Treasury bonds on the free market it is up to them how to spend their Yuan). However it is clear that a lot of tension is building up in the system. If the Chinese government stops buying Treasuries, the Renminbi will appreciate against the dollar, which devalues all the bonds the Chinese government already holds. Furthermore, Chinese exports would become less competitive in the global marketplace, potentially damaging its economic growth. And the US will find it harder to finance its budget deficit, likely to cause serious problems for its domestic economy.

The only thing that will sustain China’s growth is a rebalancing of China’s economy toward domestic consumption. This will cause a large shift in the nature of the goods and services most in demand. It presents both local and foreign companies with a great opportunity for growth. Capitalising on this shift in consumption from developed to developing countries should be high on the list of strategic priorities of any multinational corporation.

A few more words on Tuition Fees before I get back to writing about the rest of the World

The passing of the motion to raise the cap on tuition fees came as a massive disappointment today. I was impressed by Labour MP Sharon Hodgson, who made the best speech in the commons on the actual sums involved. She emphasised the fact that graduates on typical salaries will not even be paying the interest on their loans, which will lead to a large proportion of the debt being written off. (as I have discussed here).

I also admire the students who came to London to peacefully engage in a protest on this important issue, and I wished I could have joined them. I heard a number of comments today critical of the protesters, grouping them all together as violent aggressors, but really this label only applies to a small minority of them. The vast majority were only interested in peacefully expressing their discontent at the cuts to education funding. The tactics of the police, in particular the thuggish ‘Territorial Support Group’ were heavy handed, and were responsible for inciting and perpetuating violence rather than stemming it. The latest figures – 9 police officers* injured compared to 15 protesters – underlines which group was the more violent.

I am sure we have not heard the last word on the tuition fees debate, and as the details are ironed out in a white paper next year I am hopeful that more politicians will see sense and will make amendments to the current proposals. I expect that I will have more to write on the matter later. But the tuition fees debate has distracted me from my intention to write more about China, following my visit there in October. The aim of this blog is to take a ‘worldview’ and I have become wrapped up in the problems of the UK, which significant though they are, pale in comparison to the challenges faced by most countries in the developing world.

As an example, one of the most memorable features of my trip to China was living with the air pollution. I am not especially prone to respiratory problems, but even so my lungs felt weak and I had frequent bouts of coughing due to the air pollution, and I was only there for two weeks. The pollution in China is something that hundreds of millions of people have to live with daily. In time it is bound to cause serious chronic health problems.

The pollution is directly related to China’s rapid economic growth, which has spurred the building of a large number of coal-fired power plants. It is an example of the ‘tragedy of the commons’ where a common resource – in this case clean air – is depleted through over-use. The only solution to this kind of market failure is government intervention, which has been slow as the government prizes economic growth so highly.

Reminding myself of the scale of problems like this helps me to feel a little less angry about the UK’s University funding debate.

*At least one police officer was injured when he was ‘forced off his horse.’ Perhaps the use of horses in crowd control is a little outdated nowadays?

J.K Rowling, JJ Abrams and Claudio Sanchez: Epic visions, brilliantly realised

I caught Harry Potter and the Deathly Hallows Part One this weekend, which brought back to me how much I enjoyed reading J.K.Rowling’s novels.

J.K Rowling clearly has a fantastic imagination, and a gift with words. This was clear from the first novel, The Philosopher’s Stone, which was enough by itself to get many people (adults and children alike) hooked on the Harry Potter series. However I think it was only when the whole series was released that her greatest achievement became clear: the creation of a narrative that spans seven books, while each book is in itself a compelling self-contained story. Few authors, even the amongst world’s most celebrated, have attempted such a feat.

The process of producing an uber-narrative that is told in multiple parts has many challenges, but has in recent years lead to some brilliant creations. In television, the first series of 24 was ground-breaking not just in its real-time photography, but in the way the 24 consecutive episodes fitted together to tell a seamless story. JJ Abrams’ Lost has taken the epic-television-series even further, with six series (121 episodes) interweaving one major story arc with emotive details from each character’s back-story. The blend of genres - fantasy / sci-fi in the major arc and drama / tragedy in the back-stories - creates a powerful and suspenseful masterpiece.

In music, one of my favourite bands, Coheed and Cambria, have used the multi-part narrative to great effect. The multi-talented Claudio Sanchez used Coheed and Cambria the band to tell the story of “The Amory Wars” a science-fiction story that he originally conceived as a comic book. Each chapter of the Amory Wars corresponds to a Coheed and Cambria album, creating a five-album rock epic. Furthermore, after four albums were released the band famously played a four-day concert series, performing one album each day, an event called The Neverender.

I have gained much enjoyment from these works, but by their nature they have all come to an end. I look forward to discovering new epic sagas in the future, ones that are perhaps being written as I write these words now...