Don’t worry about US sub-prime, worry about China!
Friday, August 17, 2007/
Our growth is so intimately involved with China that it worries me. For Australian SMEs, some salient steps need to be taken now.
It is really not amazing that whenever we have a financial melt down we can always trace the cause to the undisciplined lending of banks or organisations that provide some form of banking service.
The Asian meltdown was due to undisciplined lending to entities in countries where standard safe guards were not present, with the result that irregularities (some dared called it “corruption”) were rampant.
The earlier South American melt down was due to undisciplined bank lending on the belief that sovereign states could not go bankrupt. The current crisis is due to banks ignoring once again the fact that over-zealous lending in specific areas (this time in the US housing market) depreciates the value of the assets that secure the loan, and hence we have this so called “sub-prime” debt crisis that has spread like a virulent virus through financial markets.
Dare I say that the crisis will be overcome and the banks will be rescued because we cannot tolerate in Western economies the thought of the banking system failing. Once the ship has righted itself, the banks will find yet another area in which to over-lend and create yet another crisis like the “Savings and Loan” fiasco back in the early 1990s in the US.
So, is the current crisis a threat to growing companies? It sure is if you have been imprudent in your financial management, but it won’t be so bad if you have kept some money in the till.
But that is only by way of introducing what to me is a much bigger concern somewhere around the corner – and that is China.
Everyone considers China is the power house economy (remember the “Asian tiger”). The economists project the Chinese economy overtaking the US economy in the not too distant future. Do you know? I think that is baloney and that China represents a far greater threat to the world economy than the banks.
China has been able to produce incredibly inexpensive goods to sell in every cheap market in the world. Many of the products, although made in China, are manufactured for foreign companies including European as well as American. These companies have been the beneficiaries of cheap labour, relaxed environmental regulation and supervision, an artificially controlled currency and local government performance that does not conform to the levels of integrity we expect in Western society.
As a result, the Chinese have been buying our commodities as though their life depended on it and we are reaping the wonderful rewards while believing that the world is not going to come to an end. The rest of the world and mainly the US have been buying every bit of Chinese merchandise with voracity.
What happens if banks become cautions and stop lending to Chinese manufacturers which are polluting the atmosphere? What happens if activist groups get together and put embargoes on Chinese goods that are manufactured by slave labour or don’t comply with environmental standards (have you heard of Mattel?). What happens if the debt crisis in the US results in reduced consumer spending with the result that fewer people buy Chinese goods? These are the tip of the iceberg in the risk facing growing companies.
To me, there is a more fundamental risk. Despite everything – and the so called necessity to manufacture in China – who is the largest, most efficient and profitable auto maker in the world? Toyota. And it manufactures in economies that are regulated, where the wages are the highest in the world and in an unregulated currency environment.
Japan will continue to be successful long after China hits the wall of sophisticated competition. The reason is that after the war, the Japanese embarked upon a program of quality at every level of manufacturing. High wages and strict environmental controls and a deregulated currency are of little concern to the Japanese, because year on year they refine what they are doing so that they are better, more cost effective and more sensitive to the needs of the customer.
China never went the Japanese route. To the extent that there are standards in manufacturing in China, they are imposed by Western pressure. To the extent that we overlook the necessity to ensure compliance, we get disasters such as the recent Mattel episode.
Our growth is so intimately involved with China that it worries me. I believe that ultimately, factors such as the environment, compliance with standards that are part and parcel of Western processes, the necessity to cope with a floating currency, will create opportunities here in Australia for those who have been financially prudent, patient and steadfastly committed to being exceedingly good at what they do.
I might be wrong (and it is certainly not conventional wisdom) but I believe that hedging bets against the Chines phenomenon will pay dividends for manufacturers in Australia that take the long view.
So, sure, the banks are a worry – but if China gets into strife, I don’t think that world banks will come to the party in the same way as if one of their own gets into strife. Just keep an eye on China.
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