The Chinese bubble

What happens when the. Chinese economy collides with reality? lobalisation means dif- Small countries often don’t have na, the Chinese weren’t silly enough ferent things to different much say in the matter; the World to simply allow them to simply set up Gpeople. For optimists, it Bank is essentially the salesman for the shop. As far as China is concerned, means a friendly worldwide sharing same multinationals. When a country if Chinese workers, resources and of goods, services, ideas and cultures. goes to the World Bank for help, the environment are going to be used and To America, it means the globalisa- prescription is always the same: “Let abused, then they are going to be used tion of American culture. To the the multinationals buy up your key and abused by Chinese businesses, not multinational corporations, it means assets and operate within your country Western ones. a chance to make a quick buck in new without restriction, and you can have markets. the crumbs that fall from their table.” The Buddha said that desire clouds the mind, and the desire for expan- To the multinationals that have Oddly enough, countries like sion into rich new markets seems to roamed the planet for the last two China and Russia don’t quite share be particularly mind-numbing. Over decades, a free market is one where the World Bank’s enthusiastic view the last few years, Western & Japanese they are free to buy up local key en- of foreign investments; they see the carmakers have poured billions into terprises at bargain basement prices, Japanese and Western multinationals the Chinese car industry. This invest- operate without obeying environmen- as greedy invaders, keen to bleed China ment is partly to manufacture cars and tal, business or labour laws and then and Russia dry. parts for the greater Asian market, but suck most of the profits back to their mostly to tap into the fastest growing own country. It’s not that China or Russia have car market in the world. any better morals than America, Eu- The amazing thing about this rope or Japan; it’s just that China or As the Chinese economy grew, process is that these same multination- Russia are big enough not to have to so did the demand for cars. Wildly als present themselves as the kind and take crap from the multinationals. optimistic sales targets were projected generous friends of the developing Thus, when the multinational car for the Chinese markets as Chinese world. companies wanted to expand into Chi- consumers experienced the glorious

All content © The Dog & Lemon Guide 2010. All rights reserved The Chinese sense of freedom and status that the they want to block the Chinese cars private car offers. bubble in Europe, but BMW is also trying to sell cars in China, and now the Chinese There are 1.3 billion people in people are beginning to think, what China but comparatively few own can we do in China also? I think it is cars. Thus, on paper at least, the not good for BMW and it’s not good potential Chinese car market is huge. for the competitive market.” However, China is one of the most carmakers: BYD, Changfeng, Geely, densely populated countries on the Chery, Great Wall & Hafei Motor. At this point, many Western car- planet and no one seems to have makers probably got their first real worked out exactly how these millions It didn’t take long for China’s true understanding of how little intention of extra cars are going to fit down the intentions to become clear: Chrysler- the Chinese have of playing ‘fair’ by already-overcrowded Chinese roads, Daimler, for example, set up a Jeep Western standards. As long as Western let alone park. manufacturing plant in China, only to carmakers are operating within China, discover a short time later that the lo- the Chinese will set their own rules. Strange bedfellows cals had set up a copycat plant around The message from China that came There are three concepts that are the corner making – you guessed through that incident was: “Don’t try almost totally missing from the Chi- it – exact copies of the original at a and stop us selling our copies of your nese language: Intellectual Property, substantially reduced price. cars in the West, or we’ll stop you Human Rights & Value for Money. selling your legal ones in China.” The If the multinational carmakers had The plant was closed after Chrys- threat wasn’t quite that blatant, but the contemplated these three omissions, lerDaimler protested, but you can be underlying warning was pretty clear. they might have saved themselves a sure that another one quietly eased lot of grief. into production somewhere nearby. Other Western carmakers have And that incident was just the tip of already tried appealing to China’s When the Western carmakers the iceberg. hopelessly corrupt legal system, and wanted to set up shop, the Chinese lost. No matter how blatant the copy, government insisted that these foreign At a German car show recently, Chinese courts, by and large, don’t en- carmakers went into ‘partnerships’ rumour had it that some Chinese car force copyright lawsuits from Western with local manufacturers. Most of companies would be barred because carmakers. these partnerships were with China’s the models they were offering were bla- ‘big three’ car companies, which tant copies of Western vehicles. When The bottom line is that the Chi- between them make over 50% of the show opened, most of the Chinese nese, culturally, don’t share the West’s China’s cars: copy cars were still there. A spokesman concepts on either human rights or for the manufacturer said: “Maybe intellectual property. The Chinese see • Shanghai Automotive Industry Corporation (SAIC), partnered with Volkswagen & General Motors,

• Dongfeng, partnered with Hon- da, Nissan-Renault, PSA Peugeot Citroën, and Kia,

• First Automobile Works (FAW) partnered with Mazda, Volkswagen & Toyota.

However, there are lots of minnows as well: there are a total of 150 licensed carmakers in China, but just 20 of them account for 95% of sales.

A number of other Chinese indus- trial companies have started building Great Wall Motors shows off its fleet cars independently of the Western (police escort not included with vehicle)

All content © The Dog & Lemon Guide 2010. All rights reserved The Chinese no shame in copying a Rolls-Royce; nomic statistics as gospel, then they quite the opposite, they see it as an bubble arrive starry-eyed in Shanghai and get accomplishment. “See! We copied a a guided tour of a few select businesses Rolls-Royce, therefore we have ac- and believe that these businesses repre- quired the status of a Rolls-Royce.” sent the strength of new China.”

Not quite, at least not yet. Chinese Shanghai–based Andy Xie, one of car makers also don’t understand the the few economists who accurately Western concepts of quality or value The great Chinese bubble predicted the economic bubbles that for money, but they certainly under- here’s always a time in an eco- triggered both the 1987 Southeast stand the importance of price. This Tnomic boom when it seems Asian financial crisis and US sub- probably means that all or most of natural and inevitable that it will go prime financial crisis of 2008, de- China’s Western car partnerships are on forever. People with easy money scribed China’s economic policy as a going to end in tears for the Western in their pockets assume the boom will ‘giant Ponzi scheme’. partner. be permanent, because they’d like it to be so. Historically, it’s always around For those that don’t know it, a China’s car market is close to be- this time, when the economic bubble Ponzi scheme is a fraudulent invest- coming the largest in the world, and seems to be an unstoppable force, that ment operation that offers high returns Chinese car companies have begun it suddenly bursts, taking the dreams to investors. The first wave of investors exporting their models to the West. of its investors with it. are given high interest rates, which At present many Chinese cars are are paid for with the money invested something of an automotive joke, After the bubble bursts, the same by the next wave. As the news gets but there was a time when cars from economists who hailed the bubble a around, more and more investors Toyota were something of an automo- few months earlier, now duck for cover, pile their money into this miraculous tive joke, too. unwilling or unable to take responsibil- money-making scheme. Each new ity for the chaos they helped create. wave of investors pays the interest In five years time China will have on the previous waves. In the end, of no need for the Western carmakers The modern China that West- course, the whole scheme collapses. at all. Whether the Chinese throw erners see on television is a world of them out gradually or suddenly, the bustling, prosperous cities and Chinese In 2007, the sub-prime mortgage end result will be much the same. millionaires in Rolls-Royces. These tv bubble burst in America, triggering an The Chinese probably won’t have to programmes somehow miss that fact economic crisis and a sudden plunge throw out the Western carmakers at that the Chinese economic boom exists in imports from China. This, in turn, all: the Western carmakers will simply only in the cities, and even then only triggered a rash of bankruptcies in Chi- withdraw voluntarily because they can for the minority that have benefited na, but these were mostly among inde- no longer compete with their Chinese from it. The Chinese boom has largely pendent entrepreneurs. As in America, rivals who are selling copies of Western passed over the majority of the Chinese the rogues who caused the crisis largely models for two thirds of the price. population who live in rural areas. escaped the consequences of it. Most large companies in China are run by Even in the cities, most Chinese the government or by businessmen still live in poverty and most private with strong links to the government. cars in China are sold as semi-luxury Thanks to government bailouts, these items – proof of economic success in businesses were largely protected from a country where the average factory China’s economic difficulties. wage is US$225 a month. If that figure seems low, the average rural wage is Thus, flush with government FIAT PANDA about $100 a month. money and under heavy pressure to keep the economy rolling, Chinese We talked to an accountant who steel mills kept pumping out steel and has extensive dealings with China. Chinese car factories kept pumping These were his words of caution: out cars, whether they had customers for these products or not. “It frightens me that Westerners are so gullible where China is concerned. During 2009, China’s state-con- They take Chinese government eco- GREAT WALL PERI trolled banks loaned out over US$1.27

All content © The Dog & Lemon Guide 2010. All rights reserved The Chinese trillion in order to stimulate the halt overnight. The massive Chinese economy. Many analysts warned that bubble car industry, which currently relies too much of that money was going to on local sales for its survival, will fall people who might not be able to pay into crisis. So will the steel mills that it back and was ending up in stocks supply these car companies. So will the and real estate, but these analysts were Australian mines that supply the iron largely ignored. ore to China. So will small countries like New Zealand, which rely heavily To those with eyes to see it, the on both the Chinese and Australian 2009 Chinese bubble was exactly economies. the same scenario as the sub-prime mortgage crisis that crashed the US Since the end of World War II, the economy a couple of years earlier. For There’s always world’s economy has enjoyed an un- precedented period of sustained eco- example, in 2009, mainland Chinese a time in an property values soared by a staggering nomic growth. Most people, including 73%. Was this sustainable? Of course economic boom most economists, now regard this style not. Even the Chinese government when it seems of economic activity as normal and was scared, but it was more scared of natural and correct. History suggests otherwise: what would happen if it didn’t spin the inevitable that it economic growth in the last sixty years economy into bubble mode. will go on forever. has been the happy exception to a very grim economic rule. People with easy Chinese Premier Wen Jiabao, doesn’t seem to believe Chinese official money in their Most people don’t want to consider statistics, either. In early September of pockets assume what will happen when – as has always 2009, the day before the official sta- the boom will happened throughout history – this tistics showed that Chinese retail sales be permanent, endless growth goes into reverse. had surged 15.4% in August, the Pre- because they’d If any nation can survive economic mier described the Chinese economy like it to be so. as “ unstable, unbalanced and not yet downturn, it’s China. The Chinese solid ... we cannot and will not change Historically, it’s may crave economic growth, but they the direction of our policies when the always around this are a nation of hardworking survivors conditions aren’t appropriate”. time, when the and pragmatists. If times go bad they economic bubble will simply revert to more conven- News of a recent rush of new car seems to be an tional forms of commerce, transport and farming. It’s difficult to imagine sales in China should be treated with unstoppable force, suspicion, because it’s not uncommon large numbers of Americans swap- for Chinese businessmen and bureau- that it suddenly ping their cars for bicycles anytime crats to heavily exaggerate sales, while bursts, taking soon, yet many Chinese still own the unsold vehicles gather dust in some the dreams of its bicycles they grew up with. It would Shanghai warehouse. Also, every car investors with it... not take much of an economic shock sold this year is one less car to sell to switch Chinese car owners back to next year, and the easy loans that made two wheels. this year’s sales possible have yet to be repaid. Then China will slowly and pain- fully continue on its path to the top. China’s two top banks recently China’s second economic boom is started to rein in credit in an effort to likely to be far slower and more sus- halt excessive speculation, but their ef- tainable, with less of an emphasis on forts may be too little, too late: China’s vodka bars and Mercedes Benzes. bubble may deflate or burst; in the end, the outcome will be much the same. If China can avoid disintegrating internally after an economic crash, As soon as the everyday Chinese it will eventually recover, but the realise their economy is in trouble, Chinese people, once burned, will be private car sales will grind to a near twice shy •

All content © The Dog & Lemon Guide 2010. All rights reserved