China’s coming adjustment/mayhem

Many of us look at the activities of ultra-wealthy Mainland Chinese at home, here in Hong Kong and abroad… 

…and, after wondering at their tastes, ask ourselves where, exactly, the money came from. What underlying economic activity produced it, and through which routes did the fortunes ultimately flow into these particular hands? In most cases, it is totally impossible to say. Scale such enigmas up many millions-fold, and you have the Chinese economy itself. Even in developed, open societies, figures for gross domestic product can only ever be approximate and even if technically accurate are still notional in practical terms of people’s welfare and happiness. In China, where officials at every layer of government can simply make numbers up, we’re all clueless.

Thus we are told one minute that the whole place is a pyramid of debt about to collapse, and the next minute that it has a few bumps ahead but will move on to its next, consumption-led stage of growth with few problems. Even the government in Beijing probably has no idea. And that’s before you try to factor in potential demographic disaster left by the one-child policy or the difficulties of reconciling the economic and other interests of the Communist Party and the nation.

Economist Andy Xie’s crystal ball is no better than anyone else’s, but he is at least pretty blunt. He thinks China’s massive property and land bubble will deflate – gradually, like Japan’s. Lower property prices will leave more money in people’s pockets, focus investors on real wealth-creation and may even boost export competitiveness a bit. Some rich folk are going to get seriously hurt, but provided Beijing lets that happen, the country will adjust and be in line to hit US$20,000 per capita GDP by 2030.

The big ‘if’ here is whether China’s leaders would let their own families and friends go bankrupt; this article was originally in Caixin and presumably potentially subject to Mainland authorities’ censorship, which may be why Xie doesn’t mention it. Beijing has to end a system that forces the general population to subsidize well-connected businesses. Transitions from feudalism, aristocracy and robber barons in the West show it can be done, but it could get, let’s say, interesting. (As an aside, note amusing parallels with Hong Kong: a) the benefits of lower land and property prices; b) the system by which we all have to subsidize a few tycoons via cartelization.)

Even if everyone eventually lives happily ever after, China is still in for some near-term upheavals. Craig Stephens thinks Beijing could help wean the country off increasingly pointless investment but keep growth going from the overall populace’s point of view by devaluing the Yuan. In terms of impact, this would be a speeded-up, partial version of Xie’s decline in land and property prices, with the added bonus of probably being harder for vested interests to resist.

The US and Europe would not like it. They must be starting to notice that Chinese protectionism is getting, if anything, more systematic and nationalistic, whether it’s keeping Despicable Me 2 out, shaking down foreign companies like GlaxoSmithKline, or buying up overseas resources-based assets for what look like blatantly strategic reasons. Would China risk a global trade war? If it’s the only way of avoiding choosing between the Party and the nation, would it have an alternative?

Now, getting back into our cozy little safe Hong Kong home: what would devaluation of the Yuan mean for us? My own crystal ball sees some positives. Hong Kong groceries like Yakult would rise in price in Renminbi terms, so cross-border trading/smuggling would be less lucrative. Similarly, local hotel rates and luxury goods prices would rise in RMB terms, possibly further reducing visitor numbers and giving us a badly needed break from the tourism menace. And Hong Kong property would be revalued in Yuan, reducing any remaining incentives for Mainlanders to buy local apartments, and giving past buyers a bigger RMB payback if they sell. There’s even a bit of icing on the cake: a weakening of the Yuan could have the psychological effect of making it look less suited as an eventual global reserve currency/trading medium/etc, and we’ll hear less of the tedious blather about Hong Kong being a Renminbi business blah-blah hub, which will be a tremendous relief to us all.

Out there in the big wide world, of course, as China goes through its coming rocky patch, all hell could be breaking loose, in which case it’s hard to imagine any Hong Kong company, investor, employee or retiree coming out of it unscathed. Maybe we’ll all end up eating grass. Or maybe not. As I say, we’re clueless.