since there has been lots of China talk this recently, I would also like to take a swing at it. There have been several articles produced by The Economist that I think deserve putting together, because the big picture we get is quite interesting.
For some time already our Chinese big brother has been slowing down and that is a hard sale for the Chinese propaganda. If you are over 40 years constantly told how awesome your leaders are and how fabulous the economy is and slapped every year with the huge growth it is probably hard to believe that a slower growth will be just as good. China has hopped onto the emotional roller coaster that we call free markets quite recently and so they are utterly unfamiliar with its ups and downs. So when they found out it is not always going to be just easy peasy lemon squeezy they started to panic, which made us panic too, which made them panic even more. You catch my drift. Then the government ran in with the magical anti-depressant-like regulation that as we all know are only a temporary fix since, just as with regular anti-depressants, if you want them to work you need to raise the dose.
So what’s the girl (i.e. China) got to do. Uncle Xi (yes that is what they call him) has a plan. Of course. Just like every proper Communist autocrat he is China’s fix-it-all guy. President Xi is also called the chairmen of everything, because he seems to have under his control all key resorts and committees. I mean that wouldn’t have to be so bad if Xi actually knew something about free market economy. Which he doesn’t. None of his policies were particularly successful. As The Economist probably correctly pointed out Papa Xi is a tremendous politician, the most powerful since Mao in fact, but tedious in coming up with some real solutions. It seems like the Chinese businesses have picked up on that.
This year has seen a massive increase in Chinese takeovers of foreign companies. It has amounted up to $100 billion which is a huge number even by international standards. Now, let us think about why would they do that so suddenly. The first explanation at hand is to make profit and destroy the competition. I do not think that that is their only motive. As shown by The Economist these Chinese companies are making huge debts in China in order to take over foreign companies. The cash flows in from Chinese banks backed by the government which in turn makes it look like a safe deal so the companies do not have an issue with debts as high as 70% of their equity. That is particularly high in western terms, but it doesn’t seem to scare off western banks like Credit Suisse or HSBC either. Having the Chinese government footing the bill in case something goes wrong is probably very enticing.
Let me draw an analogy here with the 2008 crisis in the USA. The USA at the time had and still has banks that are simply too big to fail. Therefore if trouble comes up the government has no choice, but to bail them out. That is what happened in 2008. Doesn’t that sound like a familiar scenario ? China certainly would never copy any product of the US, right ? What if this sudden expansion by Chinese businesses abroad is basically nothing else than transfer of capital out of hands of the government and safeguarding it against the collapse of the Chinese economy ? I am not claiming that the economy will fail, but with tightening restrictions, regulation and erratic moves of ever-powerful Uncle Xi one should not be surprised that the Chinese businesses are giving themselves a way out. In case their domestic market fails the money will be safely out of the system and in western businesses and the Chinese government will be kicked to the curb. One must ask who is then going to pay for the massive debts that Chinese banks and the government have ? Wouldn’t HSBC and the rest of the gang be affected too ?
In my humble opinion the collapse of China (which is a real possibility considering how the government steers the economy) would mean a forced visit to the good old 2008 train. I am just not convinced that we have enough to pay for the ticket this time round. I have no doubt the US will suddenly be too busy to pick up the phone.