From Sandton to Shanghai

(A Reunification gift from the Mainland to Taiwan. When put together, the Panda names mean ‘reunited.’ Taiwan is a key part in China’s Superpower puzzle. Photo Source: Shanghai Daily)

China’s current rise is often viewed through a lens of economic indicators. It is after all China’s sustained economic growth rates over a period of 30 years that pushed the country back into the global spotlight.

However, while Goldman Sachs famously predicted that China’s economy will overtake that of the USA by the year 2025, the more important question to be answered is:

‘When will it be poignant to say that China has arrived as the world’s next superpower?’

At the end of the day, while a superpower is more than just a big economy, it is through having a big economy that China will start influencing global agendas and exerting significant international influence.

In China reaching superpower status, there are two definitive indicators to look out for. They represent significant global milestones that will be the catalyst for pushing China beyond the realms of a sizable global economic entity.

• Reunification with Taiwan
• Man on the Moon

1. Reunification with Taiwan

The latest gift from Mainland China to Taipei was of a pair of giant pandas. Their names - Tuan Tuan and Yuan Yuan - are deeply symbolic. Added together, ‘tuanyuan’ means ‘reunification’ in Mandarin and there will be much pressure on the panda couple to add to this symbolism by producing a new generation of reunited offspring in Taiwan.

The China -Taiwan togetherness issue, notwithstanding bumps along the way, is a matter of when not if. Even Japan has expressed recent concern at just how much momentum has been made on the cross straits relationships front - to the detriment of its own interactions with Taiwan.

Taiwan’s reunification with China is profound on many levels. Economically, there are great benefits on either side. Politically, it will represent a united force in the region on an issue that has often been a powerful, divisive wedge in recent history.

It will also be a huge gain of face for the Chinese people and government after being spurned by the Nationalists 60 years ago. Reunification will finally show that after many wrong leadership and economic turns, the Chinese nation has thrown off its internal chaos and emerged as a swan on the other side.

Probably little explored is the cultural importance of a China - Taiwan merger. The Cultural Revolution had devastating effects on Chinese society including destroying centuries of traditions and cultural heritage.

This is by no means a unique experience in Chinese history - it has often gone through severe book-burning periods between chaotic dynasty transitions. However, it was the reconnection with this lost heritage through cultural emissaries that have then speeded up China’s subsequent development phase.

Taiwan is this emissary - representing a physical and cultural treasure trove for their Mainland counterparts that have largely been protected from China’s tumultuous purges under the Great Helmsman Mao. The reintegration of this knowledge in all its many forms across various levels of society will give great depth to refocusing attention on China’s long held mantle as the Middle Kingdom.

2. Man on the Moon

As respected academics pointed after the historic 2008 Beijing Olympics, it is fine for China win the Olympic Gold Medal tally, but what really counts is China winning gold on the science and technology front - an area that it is severely lacking in on at the moment.

As mentioned in a previous posting, I predict that the next man on the moon will be Chinese. There are many assumptions that make sense for China to have a big, over-arching national goal - both to see the country through the difficult transition from a socialist to a market economy and also to focus the nation and its economic engine on the next big prize.

In essence, now that the battle for the ‘manufacturing’ mountains has been won, the battle for the ‘science and technology’ plains has begun.

Putting a man on the moon by the year 2020 will show serious intention to spend on military hardware that puts China at the forefront of global martial influence. Such a focus would also serve to wean China away from imported technology. Having a concentration on home-growing innovation has strong downstream benefits too - both for broader society and as a means to build China’s next generation of global super companies.

In the Greater Scheme of Things

Reunification with Taiwan would reflect that China’s economic environment is strong enough to be at the negotiating table in the first place. From cross strait bridges would arise strong political and cultural progress beyond regional borders.

Putting a Man on the Moon will also point to a substantial economy that can effectively engage in long-term planning and invest significant resources in science and technology development. Its outcome of home grown technology will support global business ambitions and significantly increase international military prowess.

Having obtained these 2 key pieces of the puzzle - reuniting with Taiwan and putting a Man on the Moon, China will be in its strongest position in over 500 years, while also clearly having arrived alongside the USA as the world’s next superpower.

(Australian Mining Stocks on the Decline: S&P ASX 300 Mining and Metals Index showing a 49% drop over 6 months ended 1 December 2008)

‘Be bold on expanding overseas’ is the near official line hailing from China Daily’s front page yesterday.

After years of battling to keep input costs down amid a rampant commodity boom, the current global economic marketplace has swung round 180 degrees in China’s favour.

A strong sense of risk aversion is definitely needed after China’s baptism of fire on the international investment scene. Recent overseas equity purchases at the height of the business cycle have definitely burnt deep holes in the balance sheet: Rio Tinto, Fortis, Barclays and Blackstone have all been far from pretty.

“These are rare opportunities for Chinese enterprises which want to expand overseas,” emphasized Zheng Xinli, vice-director of the Policy Research Office of the CPC Central Committee. You can almost sense the anticipation in the air. Hard lessons have been learnt, but we seem to be in a strategic pause before a concerted buying spree in 2009.

Australia will be one of the first destinations.

In the past 6 months, listed Australian resource stocks have lost up to 60% of their market capitalisation. Over the same period, the Australian Dollar currency depreciation has moved over 30% in China’s favour.

Australia is China’s most successful resource investment destination. The market is efficient, well managed and transparent. Its proximity to China keeps logistics costs down. Iron and high quality coal - bountiful in Australia - are staple products for China’s manufacturing economy and in short supply back home.

What will make this investment period different from before is the move to M&As and significant ownership levels. This is a sharp contrast from China’s previous preference for a more hands-off policy of minority stakes, off-take agreements and long term contracts.

Here are a few more tangibles to look out for:

• Iron Ore and Coal Companies are priorities
• China’s SOEs will take the lead like Sinosteel, Baosteel, Angang Steel, CITIC, Yangzhou Coal, Shenhua and Chinalco
• Keep tabs on smaller, more nimble and internationally adept Chinese resource players like Jiangsu Shagang , Zijin Mining, Western Mining, Jinchuan and Hunan Nonferrous
• Expect large equity stakes in companies part of recent large-scale M&As who are now saddled with a huge debt burden like Rio Tinto, Oz Minerals

(An old symbol of China’s bygone colonial legacy nestled in the bamboo mountain retreat of Moganshan near Shanghai. Picture: Julian Hewitt)

The Chinese economy is still on track to overtake the USA economy in real GDP terms in less than 2 decades Is this the ominous decline of the American empire and rise of the new Chinese global order?

I think not. It’s a question of Empire v Economy and is often easy to get swayed by the latter as the overriding measure of global worth. Empire v Economy is really a hardware v software debate or putting it even more bluntly, it is a question of ideology v stuff.

The real issue at stake is not so much country X v country Y , but really a battle of ideologies. At a trade issue, China can command considerably sway over USA policy and decision makers and even the throngs of Wall Mart consumers directly impacted. Here China has strong elements of leverage over (for example) the USA in terms of a significant trade deficit, artificially strong currency and rising American consumer credit built up on cheap Chinese imports.

Of course, if you do favour the Economy argument, then it is worth keeping in mind the other side of the GDP debate. By the year 2030, China’s GDP capita is predicted to reach the 1990 level of Western Europe and Japan. Given China’s population size and the complexity this brings, it is close to inconceivable for China to ever lead the way on this front.

In my mind, the recent clash of interests over Tibet scratched the surface of one very interesting dimension. While China can have strong sway on a country to country basis, its power and influence over a more united West seems very adolescent in comparison. In many ways, China was at a loss how to actively engage with the West - apart from marshaling statements of support from emerging economy friends and filling page upon page of propaganda in local Chinese newspapers.

So in my view, whether or not China’s economy eclipses the USA economy in 2027 misses the point. It is all about Empire. Let us assume that the USA is an empire. There is some debate about this but a quick glance at the USA’s military presence around the world shows there is some fire behind the smoke. Before the USA it was the term of the British Empire and so on.

The reality is that both the USA and UK are really part of a broader Western Empire whose democratic, social, educational, legal, capitalistic and of course religious nature all drew strongly from Christian influences. That is to say that over the last half a millennium, while individual countries in the West have experienced rising and falling fortunes, a vast economic entity has all arisen out of shared common values.

It is important to create this broader distinction, because there is a time in the future that ideologies will come into play when people really start to analyse the nature of Chinese software that it brings to the global stage and ideological lines will be drawn not between country v country parameters but on a broader Western Empire v China context.

(Will the Dubai Burj soon have a Shanghai Rival? Source: Imre Solt)

Shanghai is about first impressions and built to capture not just your attention, but your imagination as well. The Dream of the New China is represented no where else in the country as clearly as in this city. Shanghai is China’s new face for the rest of the world.

Step off your plane at Pudong’s brand new international airport and the Maglev train whisks you into the city at 431km per hour. A short while later you will be dwarfed by the city’s futuristic Financial Centre with half a kilometer high buildings rising out of what were rice paddies not that long ago. It is hard not to be impressed by this sight.

Tourists to China always joke at China’s love of being the best, first, oldest or longest. It is surprising that the Guiness Book of Records were not started here first. Want to ride on the world’s longest bridge, see the world’s highest mountain, biggest company, most populous country with the longest continuous civilization then you have come to the right place. Whether you take all the statistics with a pinch of salt or not is another question.

So, when Dubai announced plans to build the world’s highest building, it must have been something of a slap in the face for Shanghai’s top brass. After all their efforts of cultivating the world’s most modern city out of Pudong’s rice paddies, along comes along a little desert usurper to contruct the Burj Dubai.

The Dubai Burj planners have cloaked their building in mystery and have not announced its exact height yet. However, the monolith is already at 611m (far surpassing Taiwan’s Tapei 101 - at 508m it was the world’s tallest building) and is rumoured to be heading over 800m into the heavens.

Sip cocktails from the 87^th floor Sky Bar of Shanghai’s Jin Mao Tower and the helicopter-like view is magnificent. Look straight down and you will see a golf driving range occupying one of the most prime land spots in the city - a strange anomaly until China recently announced plans to build the world’s city’s tallest building on that spot.

This is where it gets interesting for me. The Burj will be finished in 2009 and then the records will become clear for China and their team of international architects to peruse. China’s new mega structure will start its construction process in 2009 and it is ‘proposed’ to reach 580 meters.

The city planners have always envisaged a triumvir of buildings dominating Shanghai’s Financial skyline. This will be their last shot at another Guiness Book of Records. In something of a faux pas, China’s official news agency - Xinhua - recently claimed that the ‘Shanghai Centre’ would be the world’s tallest building surpassing the Burj which is still under construction at 555m.

My prediction is something of a long shot. Shanghai will definitely soon have the world’s second and third tallest buildings by 2010. Whether building plans ‘change’ to challenge the Burj is something to watch. However, given Shanghai’s large empty office rate in Pudong and the difficulty of building on what is essentially swamp land with a high water table is something to be seen.

Whatever the case, there is no doubt that China would love to occupy number 1 spot to add to all is many other highest, tallest records.

(Platinum Ore. Source: DK Images)

Here is a straight forward prediction for years 2008 and 2009: A Chinese mining company will buy a minority stake in a major South African platinum mine.

China’s automobile production has skyrocketed in recent years. In Beijing if you are a successful government official you drive a black Audi and if you are a successful entrepreneur (or at least want your friends to think so), then your vehicle of choice is a black BMW. Driving a car is a great status symbol and the only difference with most of South Africa’s up and coming black professionals is that in China, you first buy your house, then a depreciating asset.

As China gets richer, so the local vehicle market is hotting up and major cities like Beijing are experiencing huge traffic congestion on roads that were predominated by bicycles a generation ago.

Shanghai is smarter on the car front. Firstly, people are happier to catch public transport as image is not as important is its political rival to the north. Elevated highways, sometimes 4 layers deep and stretching up to 10 floors above the hum drum of congested traffic lights spirit traffic along at a speedier rate. But probably the biggest deterrent is that while an entry level car will cost just over R30 000, you need to participate in an auction process to buy a Shanghai license plate. Without this you are relegated to driving along non arterial roads. At the end of 2007, buying your local Shanghai license plate was a whopping R55 000 - nearing double the price of your car!

China now produces in excess of 7 million cars per annum and is second only to the USA in vehicle manufacture. In 1999, China adopted the Euro 1 emission standard that required all domestically produced vehicles to be fitted with catalytic converters and almost all of China’s vehicle exports are to countries with emissions standards in place.

Currently, catalytic converters account for over 60% of platinum consumption. Only one Chinese mining company on the planet has a direct interest in a platinum mine and this is not even an operational development yet. South Africa has over 77% of the global platinum supply with 50% of this is processed locally.

While platinum was not one of China’s strategic resources, it is fast becoming more important as China powers up the global car manufacturing rankings. All this points to South Africa sooner than later…

I am happy to say that my first big prediction in this blog has come to fruition. On 12^th November 2007, I wrote that:

“By purchasing a bigger stake in Rio, China Development Bank could thwart BHP’s acquisition plans. It would also as the perfect excuse for China to make its first big investment in a major mining stock. This would probably be one of the few times that a company like Rio would actually welcome China taking a significant stake in them.”

Almost 2 months later this is exactly what happened. On 31^st January, according The Wall Street Journal: “Chinalco and Alcoa managed to snap up 9% of Rio by purchasing London-listed shares overnight Thursday, while avoiding leaks that might have alerted the market to their plans and given BHP time to respond.”

The deal was valued at massive USD14.1 and surpassed China’s previous international investment deals by a huge margin. While there is still the possibility of BHP upping the ante, China has a strong hand with its 9% stake in Rio Tinto. This makes future BHP efforts more financially risky and complex and significantly narrows their window of acquisition opportunity. Even if this happens, China will be happy in the knowledge that they have their first ‘super-stake’ in a global mining company.

Living in China is a fascinating experience and gives me an ear closer to the ground. Far from being a mysterious and opaque country that making foreigners perceive, many things are quite straight forward on a macro level in China. It is the micro level that defies comprehension.

On many accounts, China’s interests in thwarting a BHP - Rio takeover are very straight forward. If you understand the dynamics that drive China’s growth and the direct threat that a mining mega merger poses, then the outcome (but definitely not how the outcome is achieved) is more certain. Add to this China’s centralized decision making ability (which means that if something is of national importance it will be dealt with as a key prerogative) and China’s burgeoning foreign reserves mean that all but the biggest deals are out of their reach.

(China has gone from zero to significant international investor in 3 years. Source: Wall Street Journal)

(Charting a new course to the mainland? Photo: Julian Hewitt)

In a busy week for China - Taiwan relations, Malawi switched its diplomatic allegiance to China after officially recognizing Taiwan for the past 4 decades. The rumoured USD6 billion dollar cash incentive will easily smooth over any transition challenges.

Taiwan have also just concluded their parliamentary elections, with the Nationalist Party (KMT) winning an overwhelming majority from the ‘splitist’ rhetoric of Chen Shui-bian and his Democratic Progressive Party that has been a thorn in China’s side for the last few years.

With Malawi in the China fold, it is now a case of ‘1 more country down, 23 to go’ in China’s 59-year long sovereignty tussle with Taiwan. On the other side of the fence, Taiwan is quite literally playing its end game with some of the most random countries in the world.

It was in 1949 when China’s Nationalist Party (KMT) took refuge on the island of Taiwan after fleeing from Mao’s Communist Party. It was from their island base that they continued to claim ‘rightful rulership’ over China. For a while thereafter, the threat of global communism went a long way for most Western countries to support their claim.

However time and economics are the great levelers. Today, Taiwan is home to 23 million people while China boasts over 1.3 billion inhabitants.

China’s coup de grace came way back in 1971 when it not only replaced Taiwan as a UN member country but also ascended to the lofty heights of the 5-member UN Security Council. Not only did most of the big economies shift diplomatic ties around this period, but China’s power of veto has precluded any Taiwan membership applications ever since.

The interesting thing is that Taiwan has never officially claimed independence from China. It still clings doggedly to the notion that it holds the mandate of heaven for Chinese people. As this becomes a more and more remote possibility, Taiwan’s threats of independence have become more amplified as a last desperate straw. It is this independence proposition that gets the China - Taiwan relationship on edge more than anything else.

While South Africa enjoys 10 years of diplomatic relations with China this year, Taiwan is still recognized by 4 African countries: Swaziland, Sao Tome and Principe, Burkina Faso, and Gambia. It is only in Central America that Taiwan still holds some semblance of sway with diplomatic relations to countries like Belize, El Salvador, Guatemala, Honduras, Panama and Nicaragua.

However, there is one country that still retains Taiwan links that carries the weighting of at least the other 22 countries combined. This country is a key cornerstone in China’s foreign policy and actually has some serious bargaining power with no hindrance of political time pressure.

With 1.1 billion members around the world, the Holy See of Vatican City still recognizes Taiwan above China. However, relationships are already thawing with China and when the Vatican City inevitably switches flags (I give it 5 - 10 years), this will truly be the last diplomatic nail in the Taiwan’s coffin and a big boost for Christianity in China’s largely spiritual vacuum.

(In this article, China refers to ‘The People’s Republic of China’. Taiwan is officially known as ‘The Republic of China’ or ROC. Taiwan is actually the name of the largest island under ROC leadership)

(Not a NASA lift-off, but China’s Shenhua rocket that propelled the country’s first manned space mission in 2005. Photo: Xinhua. )

As the new millennium winds on, many people will look for concrete evidence that China has indeed arrived on the world superpower stage. If you are looking for a definitive date, then diarise the year 2020 when China plans to send its first man to the moon.

Thus far, there have only ever been 3 countries in the world to send humans to space. In 2005, China became the newest member of the 62.1 mile high club. It joined US astronauts and Russian cosmonauts when its taikonauts (from 太空 - ‘taikong’ or ‘outer space’) blasted into the heavens on a Shenzhou spaceship in 2005

USA and Russia both staked their claim to superpower status during the height of the cold war. Their competing space programmes signified the apex of global military and technological advancement. But it was only the USA that was able to sustain this advantage and put a man on the moon in 1969. In 1972, Eugene Cernan was the last man on the moon and both China and the USA are speculating that the year 2020 will see a lunar return after half a century’s absence. My money will be on China.

While China’s space ambitions are not a state-held secret, what is unique will be its method of delivery. Very simply, China is in dire need of a overarching goal to drive its national agenda once the Beijing Olympics and Shanghai Expo are resigned to the history books. It is my belief that China’s next big national goal will be its space programme. More specifically, this generation of Chinese citizens will be compelled into the 21st century by seeing a Chinese person on the moon in 13 years time.

The Chinese having a saying: “旧不去，新不来” which basically means if the old does not go out then the new can not come in. At the moment, Shanghai and Beijing are the hotbed of China‘s national development goals. These are driving China‘s modernizations and its rise to global prominence. Just about nothing happens in Beijing that is not linked to some pre-Olympics goal and ditto goes for Shanghai’s hosting of the World Expo in 2010.

In Beijing this means teaching taxi drivers to speak English, cutting down on the fake DVD sellers on the roadside, banning spitting in public, encouraging metro manners and getting people to walk on the right side of passage. It has also meant massive infrastructural investments in new subway lines, high-speed trains, airport modernizations and of course hugely impressive sports stadiums and related infrastructure.

In Shanghai, the dawning of the World Expo in 2010 has meant (amongst other things) the construction of an 18km bridge to Chongming Island, adding a few dozen more metro stations to the grid, increasing the font size of local street signs, testing the world’s first 4G cell phone network and demolishing 3km of prime land on the banks of the Huangpu River.

In this light, the Chinese government has shown strategic smartness to the highest degree. There is nothing to smooth-over the difficult transition of moving a fifth of the world’s population from a communist to market society quite like having big aspirational goals on the horizon. This type of socio-economic evolution is painful at best and creating a sense of ‘future hope and present progress for the greater good’ is an imperative chasm-crossing feat.

Ever since I arrived in China, I have had much respect for how well the Chinese are capitalizing on the opportunity of hosting 2 of the 3 biggest events in the world. In some ways, I am also seeing the many lost opportunities that South Africa seem to be passing in the night as our Soccer World Cup stage draws closer.

Sure, we will hold a successful World Cup beyond all the eternal pessimists of the world that sell newspapers or who we have thankfully forever banished to Australian and New Zealand shores. However, where are the big housing, education and crime goals that should surely be proactively addressed through such a unique cause to unify the nation around?

However, realizing the just how important the Olympics and World Expo are to China’s bigger national cause and global interests, I have always been fascinating to ask “What Next?” There is little else on the global calendar to compare. What China needs is a massive externally focused goal. These are its characteristics:

• Bigger than just a city centric goal like Shanghai or Beijing
• From 2010 to 2020. Beyond this is too intangible a time span
• Aspirational goal of the highest possible military and technological achievement

This goal needs to combine China’s unique assets: its immense financial capacity, the long-term planning capabilities of an autocratic government, large doses of national pride and vast pool of intellectual resources to draw on. There is nothing else as tangible or logical to accommodate all these facets as putting a man on the moon. Not only is this something to unite the country around, but it is something that says to the rest of the world that China has finally arrived.

There are some shortcomings to contend with. China is often judged for where it is going rather than where it is. The reality is that it is many (many, many) years behind the USA’s current space prowess. It is catching up really fast and it has the extra capacity to catch up even faster. Money, smart vision and a big national goal can get a man on the moon and this is what inspired the US in the 1960s.

The second issue is one of pride. Simply putting a man on the moon is doing what the USA did 50 years ago. The Chinese definitely don’t want to emphasize that for all their advancement, they are still miles behind the USA. So expect the rhetoric and tweaks to come in so as to differentiate the two space programmes. While China is not the threat that Russia was, it is still a proud nation to contend with.

As I write this, China’s first lunar probe, Chang’e, is circling the moon and I am sure that China’s top brass are already contemplating the next big thing. With this in mind, I am happy to stick my neck out to predict that:

• The space programme will be China’s next big national goal after 2010
• The next person on the moon will be Chinese

(Source: Xinhua. Hot off the press. One of China’s first ever lunar photos taken by Chang’e I and published on 26 Nov 07)

Rather strangely, China has made virtually no investments in major multinational miners. In 2006, Larry Yung made a small blimp on the radar screen by purchasing a 1.1% (USD800 mn) stake in Anglo through his company China Vision Resources.

Investing in a multinational mining company is a highly sensitive, politically challenging task for China. Any Chinese company that has the ability to do so also has strong government ownership and this turns an equity purchase into an issue of national interest rather than a pure business transaction.

At the same time, China is finding itself in a difficult position. It is still heavily reliant on companies such as Rio Tinto, BHP Billiton and Anglo American for its supply of key resources such as iron ore, high grade coal, copper and nickel. Rising commodity prices are placing pressure on manufacturing costs and resource sustainability – the backbone of China’s current economic rise to fame.

The ‘hot off the press’ news that the China Development Bank has bought a 1% stake in Rio Tinto. It comes at a very revealing time indeed. Rio is currently subject to a hostile take over by BHP Billiton. According to a Daily Telegraph article, if successful, this super-sized merger would give the company a 40% control of the iron ore market. As a crucial commodity to its manufacture-driven economy, China currently consumes half the world’s iron ore supply.

A merger of this magnitude would definitely be detrimental to China’s iron ore bargaining power. By purchasing a bigger stake in Rio, China Development Bank could thwart BHP’s acquisition plans. It would also as the perfect excuse for China to make its first big investment in a major mining stock. This would probably be one of the few times that a company like Rio would actually welcome China taking a significant stake in them.

There will be some hard bargaining and Mandarin translation going on in the Rio Tinto boardroom. And if that fails then attention will shift to the next most likely prospect…

Photo courtesy of China Daily

After ICBC opened Chinese and South African eyes to a new world of investment possibilities, there must to be a number of large Chinese companies taking a closer look at South African service sector companies with a large African footprint.

There is not a huge amount to choose from that satisfy these criteria while allowing for a significant level of investment , but here are two companies to keep eyes your on:

MTN

MTN’s name has already been bandied about by the South African press as a possible target for Chinese investment. It has the widest coverage of any cell phone company in Africa, its making a lot of money on the continent and has a strong presence in countries where China has already invested significantly. These countries include Nigeria, Zambia, South Africa, Angola and the DRC.

Sanlam

(Click here for the a report on Sanlam’s Developing Markets prospects)

Sanlam is another interesting prospect. It has a presence in Botswana, Kenya, Ghana, Tanzania, Zambia and is looking at expanding into Nigeria. While Sanlam’s Africa strategy is not yet properly developed, it does have the potential for African expansion to suit a Chinese emerging market focus. The Chinese insurance sector has also recently seen the IPO of two massive companies and this has given them capital to burn. Of course, the Chinese sector has much room for development, but China’s insurance heavy weights will already be contemplating international strategies.