The Economist just recently published their annual compilation of predictions for the coming year, The World in 2008. Daniel Franklin, editor of The World, predicts that the two events that will "frame" 2008 are America's presidential election and the Olympics in Beijing. Mr. Franklin writes that America and China will be the prime players for 2008 in three areas: the world economy; global climate change; and geopolitical risk (Taiwan has elections in 2008 and Mr. Franklin thinks this might lead to crisis). With China looming so large in 2008, Mr. Franklin created a special section for China this year. Mr. Franklin does get a little carried away with one of his predictions, though: the summer games belong to the US, China needs more time to leverage its population into an athletic machine.
Charles Lee makes a very reasonable argument about "The global temptation for Chinese companies," in "Chery-Picking". Mr. Lee argues that 2008, and the Olympics will result in even greater exposure to several Chinese corporations: Lenovo, China Mobile, Yanjing Beer, Dayun Motorcycle, Air China, Li-Ning, Geely, Great Wall, and Chery. However, Mr. Lee predicts that none of these companies will join the "global A-list". Rather, these companies "will focus mainly on trying to expand in their booming home market," because they are not yet powerful enough at home to take on the world. Mr. Lee does note that Nine Dragons Paper "may become the world’s largest paper producer in 2008." He writes that Nine Dragons' status as a private firm allows greater innovation in business than is seen in state-owned enterprises and the large public corporations.
A pair of articles frame a debate about China's economy: Steven Sitao Xu in "Smelling a Rat" argues that worries about China's economy are overblown; and Thomas Easton in "Flashing Red" argues that the Shanghai market is on the verge of burning up. Mr. Xu writes that China faces two economic problems that it can easily overcome: inflation and faltering export markets.
Mr. Xu thinks that China can keep inflation down for two reasons. First, productivity in China is rising fast. "[I]n America the import-price index of Chinese goods has risen by only 3-4% in the past year, according to the United States Labour Department, and after stripping out the dollar’s mild depreciation against the renminbi the index has been more or less flat since 2003. Chinese products remain as cheap as ever despite higher input costs. The only logical conclusion is that the economy is undergoing a marked productivity improvement." Second, if the government loosens the labor market by doing away with residential permits, then more people working should curb inflation.
Mr. Xu thinks that any decline in the export market can be shored up by an increase in the domestic market. He thinks that this can be achieved by cutting taxes and increasing state spending on health and education. This would free up more domestic capital for spending on domestic goods.
Mr. Easton criticizes China's stock market for too much regulation, not enough regulation, and limited disclosure. He writes that Beijing's limitations on investing abroad forces Chinese citizens to invest in the stock market because savings account pay less than inflation, and real estate is a questionable investment because of uncertain property rights. This puts more money into the stock market than is reasonable. This is compounded by the problem that the majority of shares are not freely tradable because they are held by the government, or the company itself, which makes the shares price based on the price of the shares that are freely traded. This allows only a few people to change the value of a share by selling or buying those shares. He says that this problem could be cured if China made it legal to short shares. Another problem is rampant insider trading which makes the market unfriendly to outsiders, especially if the market was opened to wider investment by foreigners. Another problem is a lack of transparency in information about listed companies.
In "E-Commerce With Chinese Characteristics", Jack Ma, CEO of Alibaba, makes a familiar prediction: in 2008 "A million internet entrepreneurs will bloom." It seems that someone in Silicon Valley made that same prediction 7 years ago. Mr. Ma's enthusiasm is understandable given that the internet is his playground, and encouraging the entrepreneurial spirit is good for competition and the market. But, surely Mr. Ma remembers that it is the big boys, the Ebay's and the Google's and the Yahoo's and the Amazon's, that survive these internet booms. E-commerce will surely grow in 2008, but let's be reasonable.
These articles make a fun read, and there many more in the China Special Section.
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