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Musings: China's Contradictions

Having returned from a seven-day whirlwind trip to China which took me from Xi'an to Zhuhai, I was struck by the contradictions in China. On one hand, every city sported a new billion-dollar airport, but was largely under-utilised. Yet in the cities, traffic was still horrendous and trains, the more common form of transportation were packed.

Signs of a booming economy were everywhere. The up-tick in interest rates might have dampened the bubble-type real estate speculation but there were more cranes then ever. Infrastructure spending, rising disposable income and foreign investment will maintain China's growth at a 9 percent plus growth rate. Beijing recently reported that retail sales rose 13.9 percent in November, and for the first eleven months of this year, retail sales increased 13.2 percent. Car sales were a big component of this increase.

I arrived in Xi'an, best known for the magnificent terra cotta warriors. While the international airport was new, it was also under-utilized with only a handful of airplanes, probably because spring is the peak tourist season. I did visit the site of the 8,000 life sized pottery horses and human figures including chariot warriors, which were arranged in order as part of the underground army for Emperor Qin. In deference to tourist sensibilities rather than a comment on the currencies, the museum "coffee table" table book was cheaper in US dollars than local yuan. While the airport was less used, the train station and train system in Xi'an were packed and it appeared this city of 5 million people were all travelling at the same time. Our two and half-hour train ride to Lingbao was noteworthy for the massive industrialization of the former farming province of Henan. We arrived at Lingbao City, once known for its delicious apples but now has become the second largest gold producing province in China. Even here, the growth on the east coast has reached Henan, located inland, southwest of Beijing. Again, contradictions were everywhere. On one hand, every office, restaurant or store had air conditioning but only a few had heaters. Dining was a chilly breathtaking experience since you could see your breath.

From Lingbao City, I travelled by bus through the gold mountains back to Xi'an where I caught a plane to Chengdu in Sichuan. I somehow visited three provinces in one day. Chengdu has a population of 15 million and the province has over 130 million people. The city is very similar to Melbourne from an architectural standpoint and in the evening it is festive with lights. I visited with one of China's tycoons heavily involved in real estate and the chairman of the Forbidden City of Liquor, a top selling rice wine. The up-tick in interest rates in China was considered more of a nuisance and this tycoon's ambitions and growth expectations were unparalleled. The Chairman started his career as a 38 yuan a month soldier and now is one of Sichaun's leading executives. Chengdu is located near the centre of China and was given tax breaks and considered a development zone. The area has prospered with real estate and like the coastal cities, Chengdu has more cranes than all of Canada.

The Chinese are sensitive about the world's concerns but believe that their growth is necessary. The slight up-tick in rates might impact speculative investment in real estate but growth is still expected to continue at double-digit levels. In Chengdu, a new condo development was going for $5,000 per square meter and this was in the middle of China.

From Chengdu, I travelled to Hong Kong, which is always booming. Most of the people in Hong Kong were either going to or arriving from China, and there is no question that Hong Kong is becoming part of China's important financial infrastructure rather than the financial centre it once was. An important part of Hong Kong is the stock market and China is expected to raise up to $40 billion as their state-owned and private companies seek capital. The pipeline of the Chinese IPOs is long and will include some of its big banks and major industrial enterprises. China's biggest group Henhua will likely go public in the first part of the year.

From Hong Kong I travelled by ferry across to Zhuhai, which adjoins booming Macau. Zhuhai reminds me very much of early Florida and its location is ideal for development. Like, the north, Zhuhai was booming.

In Lingbao there was a two hour power outage, and most appeared accustomed to these blackouts. Apparently some 180 million kilowatts of capacity is now under construction with much of this growth not authorized by the central government's National Development and Reform Commission (NDRC). With the average cost per kilowatt of generating capacity pegged at 5,000 RMB, the total cost of 180 million kilowatt expansion is $108 billion. China is concerned that there will be a surplus in generating capacity and thus they are trying to clamp down on some the unauthorized power plants, which is believed to be about two thirds of the 180 million kilowatts of capacity. And that is the problem with China. What you see is not what you get. China needs power, but much of the new capacity is unauthorized and a cash drain.

Similarly, when China embarks on a billion dollar airport for every city, the airports are little utilized. Yet, their train system while efficient is jam-packed. The highway system is magnificent with more than 30,000 kilometres built in the last couple of years. Fortunately not all 1.3 billion people have licenses since there would not be enough room, but certainly there are enough cars to satisfy the demand. Indeed that is one of the problems today. To purchase a taxicab for example it would cost $5,000, but just to drive that cab, the license alone would cost $2,500.

Throughout my weeklong visit, no one was concerned about a slowdown and expressed the belief that growth will continue and was necessary. Therein lies another contradiction. While there were cranes everywhere, many of the buildings were put up and left empty. Buildings would be sold out, but investors would prefer to keep the buildings empty and count on capital appreciation instead of rental income.

Overall, we believe China will continue to grow. China's savings rate is high and the consumer has money to spend. In Hong Kong alone, almost 10 billion yuan has flowed into Hong Kong's banks now that the depositary rules were liberalized.

China has absorbed more than $50 billion of foreign direct investment. For the first ten months of this year, foreign direct investment has already reached $54 billion, exceeding that for the whole of 2003. Expectations for next year are for another record. Everywhere I went, I asked if there was a slowdown in the offing. The universal answer was that growth is more likely than a slowdown. Next year, the Chinese economy is expected to grow at 8.5 percent in contrast to the 9.3 percent this year. Money supply continues to grow at double-digit levels so the fears of a hard landing are overblown. China has grown at an average rate of 9 percent a year since 1976 and we do not expect any change.

Over the past few years, China has been a major importer of commodities and this is expected to continue. However, it is my understanding that mainland companies are being encouraged to invest into major overseas projects, reflecting the view that China's resources are somewhat limited and thus China is sourcing raw materials and energy to ensure the continuation of its growth. Get ready for the Middle Kingdom's shopping spree.

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