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Fortune Telling of the Chinese Year of the Fire Monkey

 

"China’s Economic Growth the Slowest in Decades", Wall Street Journal; “You don't need Soros to tell you that China is the big short", MarketWatch; “You should fear a China hard landing”, CNBC

These days, depressing headlines like these about China catch our eyes whenever we open a newspaper or turn on the TV.  Luck seems to have turned its back on the world’s growth engine.  Bad news and fiascos follow one after another; the slowest GDP growth in 25 years, turbulent stock and currency markets, unprecedented capital flight due to loss of investors’ confidence, etc., etc.  What can we expect of China in 2016, better or worse?  

To answer this question, I will take an unconventional approach and disregard all the data and analysis released by economists and media.

First, I looked into Chinese AstrologyA long time tradition, Chinese people, usually in the beginning of the year, set out to consult astrologists for their reading to understand the trajectory of their profession and personal life throughout the year.  February 8, 2016 will be the beginning of the Chinese Year of the Fire Monkey.  Among the 12 Chinese zodiac animal signs, Monkey is the 9th.                                     

I found the following on Astrology Club's website:   

"The positive and negative quality of the Monkey Year 2016 culminates in a year that anything can happen.  There is little point in storing up goods or planning one’s life.  The influence of the Monkey puts everything into flux.  Things will get accomplished, but largely through personal efforts.  ... This cheeky animal bursts with exuberance, bringing a lightening fast pace and fantastical motivation.  ... The Monkey’s gift is the ability to find unconventional solutions to old problems.  Daring to be different can lead to success."

The second thing I did was to reach out to people living and working full-time in China.  I do not have a crystal ball to look into, but people “in the trenches” may see things differently than those from outside.  I wanted to know what they thought of the future of China --- optimistic or pessimistic and their reasons.

I randomly picked seven people I know well and emailed them for help.  They are either former co-workers, alumni or business contacts.   Among them are multinational expatriates living and working in China for more than two decades, returnees educated in the U.S. or Europe and local Chinese.   To my delight, six of them responded within a day or two and all except one with detailed answers.  I am sharing excerpts of their responses with minor editing and credit them with permission.  The priority is not for me to validate what they say, but more to understand their perspectives.

“Pessimistic. Huge debt burden in private enterprises will show this year.  No bright spot.  Great pity.”  My heart sank when the first response came in from one of my former co-workers, an expatriate living and working in China for an extensive period of time.

The second response was from Simon Littlewood, CEO of China New Finance. I would not be surprised if he said something similar to the first response.  I still recall our conversations when we were sitting in the lounge of Westin Bund Hotel in Shanghai right before Xi Jinping took office.  Simon was concerned and worried.  However, his comments surprised me:

“The restructuring of the economy and changes in economic policy have been hard on energy & capital intensive, low margin traditional industries.  The government is likely to continue to target these industries to free up capital and human resources from them for use in more productive, higher margin and less environmentally damaging industries.  So there’s likely to be continued consolidation and contraction in these sectors, with production shifting to lower cost areas within China, overseas, or scaled back to a level where output is more in line with demand and profit margins become more sustainable.

This will likely mean continued slower headline GDP growth in the short term, as it will take time for newer industries and consumption to replace the declining share of GDP from infrastructure and low margin manufacturing.

Whilst pessimistic about the outlook for traditional industries, I am optimistic about the opportunities for service industries, high tech, clean technology, financial services, e-commerce, logistics and healthcare, which will benefit from the changes to the economy and technology developments. "

An expatriate leading an international corporation contributed the third response as follows.  He prefers to remain anonymous.  He points out that changes are absolutely happening in China.

Having been in China near 22 years, in me there is a major portion of optimism.  Yes, the stock market and real estate market are in some turmoil.  However, most investment is not in foreign currency, therefore, any bursting of the bubble could be largely contained in China.  The service sector grows at a healthy 11%.  This shift from manufacturing cheap crap to higher-tech and more value added products and services will take time and cannot be accomplished within a year or two, a somewhat painful process.  But it is absolutely happening.

Media talks about the outflow of foreign currency.  Yes, 2015 China saw its foreign currency holdings reduced by $500 billion.  But almost $200 billion of it was currency exchange loss from the Yen and Euro holdings.  The money did not simply flow out; to a large extent it was invested by Chinese companies abroad.  ChemChina acquired KraussMaffei in Germany for about a billion Euro recently.

As I mentioned above, the strong growth of the service sector including online shopping and the fast adoption of mobile payment solutions really stands out.  For example, at a small farmer's market, people can buy a piece of cake with their WeChat pay, a mobile payment solution provided by Tencent.  In the western world people are talking about what can be done with NFC or cashless payment.  This is already happening in China.

The other positive development is the relaxation of the only-child policy.  I am quite confident sooner or later the 400 to 500 million middle-class Chinese will take advantage of the new policy to have a second child, which will further stimulate the economy."

George Lu, a management consultant based in Shanghai, wants to remind us that China’s economy is hard to understand using a pure western approach given the differences in many aspects.

“Coco,  Shanghai is snowing, a very chilly winter.  I am fairly optimistic about China's economy.  GDP grew by 6.9% last year, the lowest since 1990, but still roughly a $700 billion increase.  The expanding middle class and urbanization will definitely stimulate more domestic consumption in the years to come. For example, China Box Office hit US$ 6.8 billion in 2015 with 48.7% growth rate, on course to exceed that of the U.S. by 2017.

China’s ‘new norm’ growth will be driven more by innovation than purely relying on cranking up industrial output and government investment.  Check out these promising Chinese companies: smartphone manufacturer Xiaomi, OnPlus and their expansion overseas, the manufacturer of commercial drones Da Jiang Innovations (DJI), Beijing Genomics Institute (BGI), a leader in genome sequencing and Dalian Wanda, which has been aggressive in overseas acquisition, is building a $8 billion film studio in Qingdao, Shandong Province, and will be spending over $30 billion on theme parks across China, competing with Disneyland.

There are some areas that we need to be cautious about: China’s stock market, capital outflow, currency depreciation and the sluggish manufacturing productivity in the traditional industrial sectors such as steel, coal, and chemicals.  The next 3 to 5 years will be a relatively tougher time for China.

China’s economy is hard to understand using a western approach given the differences in many aspects.  People living here tend to be more optimistic than those outside since we can see clearer how things have an impact on our life.”

A returnee from the U.S. with a Chinese corporation leading cross-border M&A made the following comments.  He prefers to remain anonymous.

“I think the Chinese economy is full of energy.  Even though traditional sectors are suffering, new sectors are emerging.  The transition is painful for sure.  But I believe we will succeed eventually.  Consumption is contributing more to the growth.  Young people born in 1990’s are no different from their counterparts in the west and their consumption is becoming a driving force for the economy.”

The last response came from Robin Lee, Lawyer of Guangdong Xunjue Law Firm, who works closely with companies in the Pearl River Delta.  The following is translated from his Chinese response.

“I am optimistic about China in general.  Younger generations have a much more active mind and better qualification.  People are the key.  Look at the U.S.  It attracts the smartest to study and work there.  Shenzhen is full of life these days in technology innovation and has created a decent talent pool, becoming a much more dynamic city than Hong Kong.

Things are being rebalanced.  More and more migrant workers in Guangdong and Zhejiang provinces are moving back to their hometowns and looking for opportunities to launch their own businesses.  Soaring costs are forcing factories to relocate to less developed regions or out of China, which is a good thing.  I also notice that more foreigners come to China to start service-oriented businesses, such as bars, restaurants and schools.  Before, foreigners only came to set up factories to manufacture products.

China has problems here and there, for example, the gap between the rich and the poor is expanding.  The fast growth inevitably brings problems and challenges with it.  Despite all the problems nobody wants to live the poor life we had before.”

Coming from different backgrounds and experiences, the respondents share the themes of China – painful but happening transition and rebalance, encouraging innovation and consumption.  Through their eyes, we see beyond GDP, a stock market index or an exchange rate to a country which has been evolving and reinventing itself while battling hard with troubles, pains and clumsiness and a country whose people strive

to have a better life.

Chinese New Year is coming.  It is time to cheer up and wish the Year of Monkey brings good luck to China and the rest of the world. Meanwhile we should also keep Chinese Astrology in mind with regard to China - the Year of the Fire Monkey will be a year full of change and surprises. Things will happen quickly.  We have to be spontaneous and pursue daring and unconventional ways to solve old problems.

Lastly, 恭喜发财 Gong Hey Fat Choy - may prosperity be with you!

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