For months now, any association with the Middle Kingdom has brought with it the Midas touch on the world's capital markets. The Hong Kong-listed H-shares in Mainland companies soared 130% in the second half of 2003 and China Life Insurance's US$3 billion New York initial public offering (IPO) in December – the world's largest last year – was an incredible 30 times oversubscribed.
You can guarantee that just about every Fortune 500 company CEO made at least one visit to China in 2003 as the economy opened further and activity just got too frenetic to ignore. The rest of the world remains about as ignorant of China as it has always been, but that doesn't seem to have dampened spirits. After buying a large chunk of H-shares in Petrochina, investment guru Warren Buffett reportedly said: "I don't know anything about China but I sure know a lot about oil." It's hard to argue with the second richest man in the world.
But how long will the euphoria last and is this just another China bubble waiting to burst? Cast your mind back to May 2003, at the height of the SARS epidemic, and consider how the world viewed China's prospects back then. That episode, in fact, probably spurred the present euphoria, as government stimulus packages came into effect and pent-up commercial energy was unleashed onto the world as SARS faded. But it is a salient reminder of how fragile economies can be, especially developing ones like China.
As the world's economic center of gravity continues to shift towards China, it is important to remember that the country is still very much under construction, both literally and figuratively. On its world fact book website, the CIA says that, when measured on a purchasing power parity basis, China is the world's second largest economy after the US and ahead of Japan. But then the CIA also warns that China could "crash" in the coming years, leading to a desperate attempt by the Chinese Communist Party to unite Taiwan by force.
The single biggest potential threat to China's economic growth miracle is probably the continuing tension across the Taiwan straits, and next month's presidential elections on the island will be a critical juncture in that relationship. The likelihood that China would risk everything it has built up over the last 25 years by resorting to military force seems slim but nationalist fervor amongst China's populace and the resolve of the political elite on this issue cannot be ignored.
Besides the dramatic but unlikely possibilities of China?s economy being destroyed by pestilence or war, there is the more mundane but plausible concern that the current round of hyper-investment could result in a government austerity program, similar to the one instituted by Zhu Rongji in the mid1990s to curb runaway loan growth.
Even as the government injected US$45 billion of the country's foreign reserves into two of the 'Big Four' State-owned commercial banks (see page 10), there were signs that bad-loans-in-the-making were growing exponentially and that the country's money supply, which increased 20% in 2003, was spiraling out of control. China has already announced that the growth target for the economy in 2004 is 7% – down from last year's predicted 8.5%.
The steel, property and automobile manufacturing industries are still the main concerns for government policymakers, as excessive and speculative investment leads to fears of overheating and overproduction.
A slow down in China's growth would affect the rest of the world, and particularly Asia, more than ever before as the magnetic demand for raw materials dried up. But continued hyper-investment in already overheating industries would have potentially more disruptive effects within the country and for the whole world once all that extra capacity comes online.
Explaining the absence of high inflation despite a surge of investment, a Credit Suisse First Boston report used the analogy of a high fever typically being used to indicate illness. "A normal body temperature doesn't guarantee good health," the report said. The government could actually be preempted in its attempts to slow China's rocketing growth as serious power shortages continue to plague more than half the country and election-year protectionism in the US, fueled by a growing trade imbalance, acts to dampen China's export growth.
But after listing all the potential disasters that could befall the Chinese economy, it must be said that at this time of unprecedented excitement and optimism over China's future prospects, it does appear that the current boom could last much longer than previous ones. All economies operate in cycles and right now China appears to be still on the upswing.