Predictions for 2014

The Glassmaker’s predictions for China in 2014:

1.    Pollution

The government will get even more serious about pollution.  It has to.  China’s air quality has reached the tipping point and the problem is no longer confined to Beijing and the nearby industrial cities of Hebei Province.  The world-class images of Shanghai, Guangzhou, and other modern mega-cities are likewise shaded by the cloud of air-borne particulates.

But if this is a byproduct of China’s literal creation, the root cause and effect is truly global, a byproduct of the world’s insatiable appetite for more and the global consumer’s single-minded dedication to lower prices.  The solution, in turn, will not be cheap.  And I think we can expect China to pass the hat.

And they can.  Clothing and shoe factories are built on wheels and they’ve already been moved to new locations with lower wages in Southeast Asia and Central America.  Other industries, however, are far less portable.  They require big capital investments, lots of know-how, and a lot of supporting infrastructure.  In many of these industries the world, knowingly or not, gave up its alternatives years ago while it reveled in the false enabler of a China-priced lifestyle.

My prediction:  Export taxes – both direct and indirect – on energy and pollution intensive industries that will ultimately contribute to global inflation.

2.    Japan.

There is a perfect storm brewing.  China wants respect and deserves it.  Japan, apparently, wants to reinvent it’s post-war image in a way that many are afraid looks a lot like it’s pre-war self.

My prediction:  There will be a standoff.  The U.S. will intervene to allow Japan to save face.  But there will be little question as to China’s emergence as the political and military powerhouse of Southeast Asia.

3.    Inflation

The country wants to pivot away from its export model.  It must.  It can no longer be the world’s factory.  (See prediction #1)  And in order to make that pivot to domestic consumption wages must go up.  What else will people consume with?

But low wages are at the core of everything economic in China.  The Chinese miracle of the last two decades has been ALL about wages.  People is the one resource China has in abundance.

When wages rise – and they have to – so, too, will prices.

My prediction:  China’s inflation will jump substantially in 2014.  By 2015 the government will target inflation rates below 6%.

4.    Financial & Legal Reform

Behind every developed economy is an open and developed credit market and a predictable and accessible legal system.  China cannot mature as the cash society it is today.  But it cannot move beyond cash unless there is access to credit and a way for companies and individuals to manage risk – i.e. to collect bad debts.

The new administration has already promised greater independence for the judiciary and easier access to credible legal remedies.

My prediction:  Today the legal and security apparatus in place in China exist largely to maintain social harmony and protect the interests of the state.  Their agendas will gradually pivot, however, toward more protection of individual rights, particularly in the area of credit and property protection.

5.    Land Reform

Every successful individual in China, no matter how they made their money, ultimately becomes a real estate developer.  Why is that?  Because there is a finite amount of land controlled by a finite number of people.

The current economic model, however, has one fundamental flaw.  It has no viable mechanism to control over-capacity.  In industry after industry (e.g. steel, solar panels, automobiles) companies expand, often with government support and encouragement, to the point where the industry chokes on its excess capacity.

Commercial real estate is no exception.  There will never be enough excessively rich Chinese to ever support all of the luxury shopping malls already built.

My prediction:  Land reform will lead to a decline in commercial real estate values and numerous urban shopping malls will be converted to apartments and office buildings.

6.    Outbound Investment

They have the money.  They don’t have the management.  And it’s not an issue of talent.  They have the talent.  It’s an issue of relevant experience.  Twenty years of experience running a state-owned enterprise, no matter how big and powerful, does not prepare you to run a multi-national company.

My prediction:  Foreign outbound investment will not expand as rapidly as many are predicting.  And many of those Chinese companies that have made the leap will downsize their ambitions or withdraw altogether.

7.    The Wealth Gap

The rich are absurdly rich.  The poor are unsustainably poor.  And the gap is widening.

All social unrest in China is economic, not political.  No one is shouting, “Give me liberty or give me death.”  But when Deng Xiaoping said, “Some shall get rich first” more than 20 years ago, there was an implication that everyone would eventually get his or her turn.  In this regard, however, things just aren’t working out as planned.

My prediction:  Significant steps by the government to redistribute income and wealth.  But more importantly, significant steps to redistribute opportunity by creating a more fertile environment for small private companies.

8.    Corruption

When necessity aligns with ideals things get done.  The government can’t deal with pollution, the wealth gap, or keep people employed until it first deals with corruption.  Forget the morality issue.  Morality is a function of worldview.  It is a universal and intractable reality, however, that corruption leads to the inefficient allocation of all resources, including capital, land, people, and the natural bounties of the earth.

The real problem, however, is NOT government corruption, which the CPC is already doing something about.  The far bigger problem is private corruption.   When sellers pay kickbacks to buyers and buyers pay kickbacks to sellers individuals win but society loses.  For efficiency to yield productivity, the source of all wealth creation, it must be unimpeded by the interference of behavior-influencing capital flows.

My prediction:  Expect continued high-level crackdowns on government corruption AND expect new regulations relating to corruption in the PRIVATE sector.

9.    Foreign Investment

Relatively few foreign companies have met their expectations in China.  And I believe the reason is simple:  They haven’t solved the management puzzle.  Many have sent promising young ex-patriate managers who are totally ill-prepared for the challenges they face here.  And/or they’ve hired Chinese nationals solely on the basis of language skills and academic and work pedigrees, and put far too little emphasis on the alignment of values and management styles.

My prediction:  Many foreign companies will re-think their China strategies.  Some will pull out.  Others will face PR nightmares when the predictions noted above expose what’s really going on in their companies here.

10. Luxury Goods

To the purveyors of luxury goods China is the Holy Grail.  The Chinese are now the biggest buyers of luxury goods in the world and many of the top luxury retailers in the world continue to expand here despite the government crackdown on gift-giving and extravagance within both the government and the state-owned enterprises it controls.

But will it continue?

My prediction:  No.  Not indefinitely, for sure.  The Chinese do NOT aspire to be foreigners.  They don’t crave acceptance by the social elite of Paris, New York, or Prague.  They’re perfectly happy, indeed proud, to be Chinese.  And rightfully so. 

I predict, therefore, a backlash against foreign luxury brands that blatantly pander to Chinese wealth.  The Chinese appreciate quality and are willing to pay for it.  They don’t, however, care half as much about style or image as they care about respect.

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My Final Prediction:  The world has taken notice of China.  Now the world must learn to take it seriously.  On its own terms.  In the context of its own traditions and its own culture.

China faces many challenges.  But it has many strengths.  At the top of the list are two qualities that will continue to drive China’s emergence:  Acute self-awareness and inimitable pragmatism.  Both will serve it well in this, the Year of the Yang Wood Horse.

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Copyright © 2014 Glassmaker in China

Notice:  The views expressed in this post are strictly those of the writer acting in a personal capacity.  They are not in any way endorsed or sanctioned by his employer or any other individual with which he may be personally or professionally affiliated.

 

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