China – Perspectives

This post takes a quick look at how the downward global economy is accelerating a process that was already under way before the USA’s triggered the current economic recession. The process or realigning it’s trade partners is how China is shifting it’s focus from inter-dependency to North America and Europe to a new and different one in South America, Africa and Australia.

Chinese people embrace consumerism.

The topic of “China needs the USA” is a very hot topic these days both in North America as well as in China and while there are clearly politicized and nationalistic threads to it, there is also a cold reality in play. Even if China was to overreact and “close their doors” as they have done in the past, they will still need raw materials and food from other regions in the world due to the continued growth in population and large cash reserves. The demand for raw materials and some food grains will remain and grow, unless China’s tight controlling central government is willing to stop the momentum in growth of it’s middle class, which at this stage of the game will likely cause a national uprising or even a civil war.

There is absolutely no question that the new affluent Chinese population likes that materialistic consumerism that bring comforts and more importantly “face” to their life’s. As I have posted before, the Chinese culture values “face” a lot more than they value wealth it self; “face” being the representation of social standing in the community, how a Chinese person is perceived by family and friends. Much like in any other culture materialistic assets are a great way of representing your status in society, this is not any different in China. Driving a Mercedes Benz or a BMW have become quickly the symbol of success, even far more than the home you live in.

The Chinese dream... an automobile.

Add to this the fact that “face” also comes from being able to invite many friends and family to eat foot and you have a demand beyond comprehension for raw food grains and consumable item’s raw minerals. This is why today if you ask Chinese people their opinion on the global economic crisis and their dependency on the USA for their income, they are quick to respond with confidence; “we don’t really need the USA, … we need Peru! Yes, your reaction may be the same as mine… what? did you say Peru?

You may recall last year after the Bush administration held the G20 Economic Summit in  Washington DC, Mr. Hu Jintao (China’s President) boarded his 747 jet and headed for South America, with an open checkbook and 600 Chinese business men, bearing gifts and a clear message: “We are here to buy!”. Why? you may ask, after all November was the official sounding of the “we are in trouble” bell for the world. By November 2008 the world knew that an economic recession was inevitable and China was certainly feeling the effects, so why the shopping spree?

China’s central government returned from the South American trip and announced that they would implement an internal Economic Stimulus Package equivalent to $US 586 billion. This commitment was accompanied by the internal publicly stated goal of retaining an 8% GDP for 2009. The clear implication of these commitments is that China will continue to draw on the world’s resource production to be able to sustain this growth, even at a slowed rate.

China is committed to development of infrastructure in 2009.

Translated in numbers this would mean that the 2007 projection of growth of 9 million automobiles per year will change to only 5.9 million cars if we apply the GDP in a none scientific manner.  For comparison sake, the USA auto industry has forecast a slow down to 10 million automobiles sold in 2009 in it’s domestic market. However it is likely that Chinese will drive this number higher as the attitude of the newly affluent is to spend the money not to save it. These figures may seem fairly unimportant for China, until you factor in the fact that China does not have the infrastructure to handle even a 5.9 million auto increase in it’s roads or cities. In fact a slow down to 5.9 million maybe just what China needed in order to allow the time that it will take to develop highways, roads, tunnels, bridges, fuel distribution and yes… parking for all these cars.

Opposite to the American population’s reaction to hard times, which is to become conservative in spending and to save for rainy days, China does not have a savings culture because it’s population has never really had the extra income to put away and in the pass banking systems did not offer this option. Add to this the communist-socialist approach and the result is a population that has relied heavily on government subsidies in order to live when there is no income. The emerging middle class struggles between parents that grew up in the communist era in China when money had little value as housing and food distribution was government controlled and the new western-lifestyle hungry youth. Chinese want to spent money and they want to spend it quick, most of them hold a car at the top of the list of things to buy now!

Consumerism continues to grow at breakneck pace in China and the message from the central government; which is now commonly shared is that China will be OK no matter what. It is public opinion that China is now focused on it’s internal customer and many companies are now retooling the products and their approach to fuel internal consumption.

Peru's Mountains contains large, high quality mineral deposits.

This is why even at the ground level, you find that Chinese have learned a relatively new word for most peoples vocabulary; this word is: “Meeru” (Peru). Peru has entered the Chinese economic panorama at the same level that Brazil and Australia already enjoyed; a primary supplier of raw materials for China. The country will continue to need suppliers of affordable raw materials if it is to sustain their economy even if the growth was reduced to 50%. At the moment China has the cash to secure it’s future and taking advantage of the economic crisis is cashing in on opportunities to seal long term inexpensive contracts for supplies of Iron Ore, Copper, Aluminum and some grains from South America and Africa.

The timing of the change in focus for China couldn’t have come at a better time, when US popularity in South America is at the lowest point it has been in decades. Many South American countries welcome the Chinese approach to Trade Agreements at a time when many of their own developing economies find them selves in a very fragile situation due to old dependencies of the US economy. Future will tell how well South American laborer population accepts new Chinese bosses. There is certainly a long list of disasters that have come out of the foreign investment funded development in South America. But, suffice to say that raw materials are a lot more than just a foreign profit center for China, quite the opposite internal growth will be closely tied to China’s ability to negotiate affordable large supplies of raw materials with South America and Africa, replacing or devaluing current agreements with Australia, Canada and other developed countries.

I will close this post with a data chart which was compiled by the Earth Policy Institute, which greatly depicts why China is executing it’s plan to secure sources for raw materials to ensure a successful future. Many Chinese investors listen closely to Jim Rogers (of Quantum Fund) on financial advice, Mr. Rogers advised last summer in an interview that this would be the time to buy and stock pile raw material investments, he added that when the world economy begins to recover the first item to experience demand will be raw materials. Through out Asia, many people have taken Mr. Rogers advice to heart adding fuels to the already evident plan from Beijing to assert it’s position in South America and Africa raw materials production.

Projection of China's voracious need for raw materials.

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