Wednesday 21 February 2018

Rising Chinese multinationals look to expand internationally

Protest: A man stands in front of a line of tanks heading east on Beijing's Cangan Boulevard, Tiananmen Square, on June 5, 1989. Photo: Jeff Widener
Protest: A man stands in front of a line of tanks heading east on Beijing's Cangan Boulevard, Tiananmen Square, on June 5, 1989. Photo: Jeff Widener
Dan O'Brien

Dan O'Brien

LAST week marked the 25th anniversary of the crushing of political protests in Beijing. At the time of the killing of a still-unknown number of demonstrators, China was a very different place from how it is today. No aspect of the country has changed more than its economy.

Back then it was only a decade on from ending its experiment with state socialism which had, among other things, reduced the people of the most populous country in the world to among the poorest on the planet. China's economy in 1989 was still in the early stages of recovering from the traumas of Maoism, and with few trade and investment links to the rest of the world, it remained a backwater.

Although the opening up in the late Seventies had begun paying dividends in the Eighties, the outlook by decade's end was bleak. As growth slowed and authoritarian communism became increasingly discredited everywhere, the Tiananmen protests looked to herald the end of the 40-year-old regime and the beginning of a great upheaval. And with China's history of revolutions and wars as bloody as any part of the world, the chances that the country would descend into chaos appeared considerably greater than the probability that it would, over the following quarter of a century, maintain political and social stability while becoming a hub of the global economy.

But betting against China since it embraced capitalism in the Seventies has not proved rewarding, and developments since the repression of 1989 have allowed Beijing's autocrats to say that the price paid in human life and liberty 25 years ago was worth it, or, at any rate, the least bad option for the country.

Now, as one of the largest economies in the world (see box) and well on its way to becoming a global superpower, what future direction China takes is of enormous significance because what happens there now affects everyone on the planet to a greater or lesser extent.

Clearly, China's transformation has meant most to the one in six people in the world who are Chinese. As is frequently observed, never in history have so many people been lifted out of poverty in such a short period of time. While per capita incomes remain far below the rich world, China is now among the middle-income economies of the world and still growing fast.

But the transformation of East Asia's giant has affected the rest of the world too. Among the most obvious manifestations has been the growth of Made-in-China goods. Ultra-competitive Chinese producers have certainly made life harder for established manufacturers in the developed world and have hastened the fall in the number of factory jobs in the west, but cheap manufactured goods have added to the purchasing power of the entire planet. The collapse in clothing prices over the past couple of decades, for instance, has benefited everyone, and less well off in particular, who spend a bigger share of their incomes on clothes.

An unambiguous upside of China's rise for the rest of the world are the opportunities presented by an enormous, fast-growing market. Its rapidly increasing demand for imported goods and services has helped sustain growth in the developed world, especially over the past half decade of Great Recession, euro crisis and slow recovery.

For Europe as a whole, the value of goods exports to China is rapidly catching up with that of the US, and, on the current trajectory, the Middle Kingdom is set to become the largest non-European market within a few years.

While the value of Europe's services exports to China is much lower than tangible goods, it has grown as fast and services probably offer even more potential for growth in the future.

Ireland has benefited from China's transformation too. In 2012 the value of exports of goods and services combined stood at just under €4bn, a six-fold increase on a decade earlier (although at just over 2 per cent of total goods and services exports, it remains tiny by comparison with markets closer to home).

But perhaps the development of greatest potential for Ireland is the emergence of Chinese multinationals. The value of outward foreign direct investment (not including Hong Kong's) stood at more than $500bn in 2012, a 14-fold increase over 10 years. Although still low compared to developed world economies and much of it has been focused on securing natural resources, change is afoot. The country's tech companies, such as Huawei and Lenovo, and the soon-to-be-listed internet giant, Alibaba, are expanding their footprint internationally. As more and more Chinese companies reach critical mass and start internationalising, some will inevitably look at the European market which, by one measure (see box) is still twice the size of China. Luring them to Ireland to service the EU market would underpin prosperity here for decades to come.

Could it all go wrong for China and is it possible that once again blood will be spilt in Beijing? The country faces almost every conceivable challenge as it evolves – demographic, environmental, social and political.

Among the most immediate risk is a credit expansion of the kind that causes Irish eyes to widen with trepidation after our own recent experiences with rapid increases in debt.

But calling a Chinese bubble is hard given the inherent difficulties in identifying bubbles (before they burst) and the patchy data. This is reflected in the raging debate on the issue in the economics community.

But even if there is a bubble and that bubble bursts, the impact is likely be more similar to the short, sharp crashes many other Asian economies experienced in the late Nineties rather than a Japan-style period of extended stagnation owing to still much smaller household and corporate balance sheets in China (to suffer a balance sheet recession requires having big balance sheets in the first place).

Short of a political collapse in the wake of a recession and a descent into chaos, its seems as if the rise of (authoritarian) China will continue apace.

Just how big is China's economy?

In April, the International Comparison Program, a global statistical initiative, grabbed headlines when it found that China would overtake the US this year to become the world's national biggest economy.

The ICP claim is based on a measure of GDP economists call "purchasing power parity", which accounts for different price levels in different countries. While it is the best comparative measure of how much economies produce, it is not so good at measuring a country's clout in the world.

That is because price levels matter for anything that has a global price, such as oil, which Chinese companies have to pay the same for as companies in other parts of the world.

When GDP numbers are compared using the current exchange rates for countries' currencies, rather the purchasing power parity, the gap between China and the US (and the EU for that matter) becomes a chasm.

According to the IMF, as of last year China's GDP was still just 54 per cent of that of the US and less than half of that of the EU. By this most important measure, it will be some time before the middle kingdom is the world's top dog economically.

Sunday Indo Business

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