Andy Mukherjee, Bloomberg News
Tuesday, January 27, 2004
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Is China a foreign investment gold mine or a minefield? That was the topic of a panel discussion last week in Davos, Switzerland. Put another way: Is anyone going to make any money by investing in China?
All the investor sentiment at that World Economic Forum event favored the gold mine scenario, completely ignoring the minefield.
Carlos Ghosn, president of the Japanese automaker Nissan Motor, said that after the United States, China was the second-most profitable market for carmakers. "If you don't manage well your operations in China, you're not going to be making any money," Ghosn said. "But then, you're not going to be making money anywhere."
For overseas investors, "the best time to go into China is now," said Victor Chu, chairman of First Eastern Investment Group in Hong Kong. Foreign investors in China will gain from an eventual appreciation of the Chinese currency, which is pegged to the U.S. dollar, Chu said.
"The time is right to do big investments in China," echoed Ulrich Schumacher, chief executive at Infineon Technologies of Germany, Europe's second-largest semiconductor maker, which plans to earmark 30 percent of its investments over the next three years to China.
"China ranks among top three or four markets for us in profitability," said Dinesh Paliwal, an executive vice president at ABB, Europe's biggest electrical-engineering company.
Amid the surfeit of optimism, someone in the audience asked: What's the risk that the red-hot Chinese economy is overheating? Is there more investment going into China than it can absorb? Will interest rates have to rise to beat back inflation?
These are questions that have implications for the global economy. China is the world's fastest-growing market for cars, and the biggest market for cellular phones. It consumes about a quarter of the world's steel, a third of its oil and half of its cement. China has been a bigger contributor to global growth than the United States for the past two years.
Paliwal said he didn't take the inflation threat too seriously because China has just come out of a long period of falling prices. Products being churned out by ABB's factories in China, even export-oriented units, are being lapped up locally.
So have economists at Morgan Stanley, Credit Suisse First Boston and Lehman Brothers - who have put out "China overheating" alerts - got it all wrong? Or is this kind of exuberance just proof that investors are overstretching themselves in China?
"China is experiencing a round of hyper-investment," CSFB researchers, led by Jonathan Garner, managing director of the firm's global strategy division, said in a Jan. 5 report.
"We expect fixed asset investment growth to fall sharply," dwindling from 23 percent annual growth at present to almost zero at the end of 2005, say the CSFB researchers, who predict that the Chinese central bank will start raising interest rates toward the middle of this year.
"China faces a deflationary excess," says Andy Xie, chief economist at Morgan Stanley Asia. "A lot of companies may become unprofitable and we could see another wave of bad debts."
The point of departure between the enthusiastic words coming out of Davos, and what most brokerage economists in Asia are telling their clients, is inflation - the telltale sign of an overheating economy. That's still moderate in China, even as economic growth in 2003 soared to 9.1 percent, the highest in six years. Consumer prices in December did rise 3.2 percent from a year earlier, but that was the result of short-term food shortages.
If inflation is benign, where is the proof of overheating?
And why will the Chinese authorities want to raise interest rates? Li Deshui, a director of China's statistics bureau, said in Beijing that "there's no need yet to slam on the brakes."
There may be a powerful need - unsustainable money supply, which grew 20 percent in December from a year earlier, compared with a 17 percent rise in the same month of 2002, and 14 percent growth in December 2001.
So far, the surge in money supply is not inflationary, because it is feeding more of investment, and less of consumption.
Furthermore, overcapacity is leading to price wars. Average car prices in China fell 7.7 percent in December from a year ago.
Even so, with commodities like steel beginning to become costlier, the risk of bankruptcies may be rising.
China may tighten interest rates and settle for slower growth, because it can't afford bankruptcies when the bad-loan ratio at its state-owned banks is 45 percent, according to estimates by Standard Poor's.
"The bigger risk is that the investment boom continues, raising the risk of a hard landing further out," a Lehman Brothers economist, Robert Subbaraman, said last Friday.
It might all turn out to be so much brouhaha. Hong Liang, a Hong Kong-based economist at Goldman Sachs, says overheating of the Chinese economy may be a medium-term issue, nothing to fret about this year, or the next.
Even then, investors may do well to keep in mind that the Lunar New Year, which got under way as the Davos discussion was taking place, is the year of the monkey. And in the year of the monkey, anything can happen.
Bloomberg News
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