Talk of bolstering China’s shop is nothing but bull

There is much talk in the City that China is the next big thing and that investing in its economy is to our mutual benefit. But George Pitcher isn’t convinced

Wherever I go, there is talk of the Chinese solution to flabby world markets. “China, of course, is the next big one for us” is typical of the comments I get from manufacturers of healthcare products to professional services and media moguls.

Some of these enthusiasts don’t seem to know their Beijing from their Basingstoke, but then nor do I. But nor do I pretend to understand the emerging intricacies of Sino-British trade – precisely because they remain, for the time being, both an unknown quantity and, frankly, of an unknown quality.

Yet, from heavy industry to consumer retail, China is the market in which they all want to hang out, sometimes for apparently the most spurious of reasons. You could say there has never been so much bull in the China shop.

The rush from Europe to secure manufacturing bases in China may be less bovine than lemming-like. Hardly a day passes without some Western corporation extolling the virtues of competitive Chinese labour costs or engineering excellence.

Samsung Electronics, which I am surprised to learn is the world’s largest memory-chip manufacturer, is one of the latest to announce a move to China. It is to transfer its manufacturing base from South Korea to China by 2005, in order t

o better meet competition from global rivals such as Hewlett-Packard and Dell.

Hornby, once the publisher of every schoolboy’s favourite pre-pubescent magazine, extols the virtues of Chinese micro-engineering, which has enabled it to produce OO-gauge, steam-driven trains ahead of the Christmas market.

Meanwhile, the manufacturer of babycare products such as Tommee Tippee feeding bottles, Mayborn, has prospered since switching its manufacturing base from Newcastle to China. Suddenly the Chinese nuclear threat doesn’t seem so threatening anymore.

You may have guessed from my tone that I have some reservations about this apparent flight to quality. And that is partly down to my feeling that it is more like a flight to inequality. Most of this economic migration is to do with cost-saving rather than revenue generation. A commercial analogy is the marketing sun that arose in Japan in the Sixties and Seventies, only for it to set into a dark night of stagnation a decade ago, from which it has yet to emerge properly.

It is an imperfect analogy, admittedly. Japan had a very introverted economy and only about one-tenth of the consuming population of China. But the “Made in Japan” mantra of the Sixties has come to illustrate the dangers of a booming economy whose foundations are built on low costs alone.

Fans of China will claim that the economic model there is entirely different. There is the population for a start, conservatively estimated at some 1.25 billion. And then there is the post-economic reform and post-Xiaoping investment in manufacturing excellence.

But, far more telling to my mind is the trend among Chinese financial institutions to dispose of non-performing assets in a kind of fire-sale aimed at cleaning up their balance sheets, in a hurry, ahead of seeking public listings for their shares.

The big four banks in China, including the Bank of China and the China Construction Bank, are immense and critical to the prosperity of the future economy, but they are effectively rendered insolvent by duff industrial assets against which they have bad debts. Some &£3.7bn in such assets are likely to be put up for sale, following a similar auction in 1999, which was said to have been an effective method of improving Chinese institutional balance sheets.

A clue as to why this process makes me uneasy is the simple, declared assumption of those who participate in this process that foreign banks will be able to dispose of what assets they acquire at a huge profit. Presumably these Chinese banks cannot do so. Or, rather, they are preoccupied with tarting up their balance sheets, in preparation for flotations in which foreign banks – the very same ones that bought their cut-price assets – will participate.

This does not smack of enlightened Western participation in the Chinese economy. It would be wrong to name any particular Western banks in these schemes, because they’re all at it really. But, taken overall, the process has more to do with looting the Chinese economy than with putting it back on its feet.

The very fact that our banks are striking cut-price deals for Chinese assets that they can sell at a profit, in order to buy shares in Chinese banks that we will consequently control, suggests to me that we are deliberately creating an unlevel playing field, tilted to our advantage.

Another clue to what is really going on is betrayed by the phrase, beloved of all manufacturers, that jobs in product development, design, engineering and marketing are “skill-based functions that we do best in the UK.”

I see. China is a source of cheap assets and labour, but let’s keep the real wealth from proper jobs in our own markets. We do, after all, have a vested interest in keeping emerging markets in their place.

I don’t know what the answer is – after all, it’s economic exploitation that makes the world go around. And economic penetration by the West is arguably better than a huge, closed market in which no one can participate. What I do know, however, is that when companies talk with enthusiasm about the future of Chinese markets, we should be under no misapprehension about their motives.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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