From Sandton to Shanghai

(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)

(Shanghai Winter wonderland - View from our apartment. Photo: Julian Hewitt 29 Jan 08)

I have officially decided not to wish a Shanghai winter on my worst enemy. For a city that sits on the tropical cyclone path in summer, the past 4 days of continuous snow have been rather bizarre - blanketing the city in a layer of snow not seen in decades. The result has been a rather bone chilling experience.

Shanghai’s unique aquatic positioning with the Huangpu River cutting a swathe through the middle, the Yangze bordering on the north and the East China sea to the east mean that the air is heavily moisture laden. Throw in bouts of freezing weather, poorly insulated apartments with single glazed windows and I am waking up to temperatures of 7 degrees Celsius in my room.

My winter woes however, are the least of China’s. The country has been hit my some of the worst weather in half a century. The eastern and southern part of the country, often far removed from winter’s icy hand, has taken particular strain with major train lines, freeways and airports having to shut down due to the severe snow storms.

The situation is definitely reaching breaking point with the world’s largest annual human migration on the doorstep. Over the next couple of days, over 50 million plus people are preparing to return home for the upcoming week-long national holiday to celebrate Chinese New Year with their families.

Transport disruptions will hit China’s migrant labour force particularly hard. Chinese New Year is often their only opportunity every year to return to distant families in the far flung corners of the country. In the case of Shanghai, the city’s 6-7 million migrant community make up a third of the city’s total residents.

In addition, the inclement weather is placing severe strain on China’s electricity supply. Luckily this is not affecting the measly heaters in my flat, but the cold weather has spiked electricity usage and the snowed up transport systems are battling to supply China’s coal fired stations fast enough.

On the 7^th February, China will welcome in the Year of the Rat. People born in the Year of the Rat are supposedly good at adapting rapidly to any unforeseen changes. Let us hope China’s snow tribulations are not an inauspicious end to the Year of the Pig - noted for being one of the laziest of the 12 Chinese Zodiac animals.

There might be some pretty big problems to sort out in the next few days.

(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)

I recently had a ‘Rip van Winkel’ moment arriving back in Shanghai after being away for the Christmas week. I returned to find that the city’s transport infrastructure had morphed overnight.

In a single day, a mind-boggling 58 new metro stations were added to the city’s transport network. Shanghai now had 3 new metro lines while another 2 lines had been extended. It felt like I had been snoozing for a few years!

To put it into context, the 80km Gautrain was started in 2006 and only one section of the journey will be finished (hopefully!) by the 2010 World Cup. By contrast, with the bare minimum of fanfare, Shanghai has quietly added 96km of metro lines within a single year. And this was not even newsworthy enough to make a single non-Chinese newspaper.

Shanghai is currently the 7^th longest metro in the world and boasts a 234km long network. Both Shanghai and Beijing have plans to extend their metro lines beyond the 400km mark within the next few years. This will put them in reach of the longest lines in the world.

Coming back from recent trips to the USA, the iconic New York subway looked rather hagged in comparison. Maybe Paris Hilton is right. On her first visit to Shanghai she made arguably one of her smartest comments.

“Shanghai looks like the future!” she poured fourth.

(A New York Subway Platform in its ‘not so finest hour’. Photo - Julian Hewitt, Oct 07)

(Shanghai’s New Line 6 Platform. Photo Wangjianshuo)

“In tonight’s programme we will reveal how the majority of American apple juice actually comes from Communist China.”

Sounds like this excerpt is straight out of the fear mongering of the Cold War era, but actually it is one of the last TV sound bites I took back with me after a recent trip to the USA. While you might argue this is my just punishment for watching something like Fox TV, it does highlight how China is still so rigidly defined by stereotypes.

China is an incredibly complex country to sum up. The huge scale of the nation and its recent lightning fast socio - economic changes make it a country that comfortably holds many paradoxes in a way that few other countries can lay claim too. China is both rich and poor, communist and capitalist, old and new.

Most western minds crave an easy answer to understanding China in a sound bite. Even with fluent Mandarin linguistic ability and comprehensive cultural insight, China does not throw up any easy answers.

Before coming to China, I was interested in exploring the various lenses that popular media view China through. It occurred to me that the country is the modern day equivalent of the ‘Blind men and the Elephant’ Sufi tale.

The parable goes that there are some blind men gathered around a strange beast. One man grabs the elephant’s tusk and proclaims it to be a hard and spear-like animal. Another man latches on to the trunk and boldly claims that they are actually holding a powerful snake and so on. Each man is convinced that they have the answer and that the others are all wrong.

In many ways, China is very much like this elephant. It is hard and soft, sharp edged and rounded - depending on how you look at it and where you look at it from. If you look at it from political, economic, human rights, ecological, cultural or historical lenses; China will jump out at you like a different creature.

No lenses are necessarily wrong, but neither are they right. Some people have the benefit of seeing China through numerous lenses, but even if all the views are thrown in together, the sum of the parts will never equal the whole. But many people like try to convince you that they have the answer.

Books are one of the many places were this one sided view of the Chinese elephant is probably apparent. And there really are some shockers out there with titles like my all time bugbear “The Coming Collapse of China” or “The China Threat: How the People’s Republic Targets America.”

The reality is that you can’t claim to understand China through the lens of Tiananmen Square or the Shanghai Stock Market. Nor will you get any closer by visiting Beijing, Shanghai and Hong Kong. Reading the latest “Art of War for Marketing Managers in China” or “China’s Secret Plans for Global Hegemony” will probably take you far from the point.

Unless you are comfortable with holding two opposing paradoxes in either hand, like the idea of uncertainty and don’t shy away from complexity; then the Chinese elephant will be a mysterious animal worthy of being afraid of.

What China will always remain is a collection of many lenses rather than a single reference point.

Hot off the press news according to the Telegraph is the ‘Blackstone is planning an audacious break-up bid for miner Rio Tinto’ The Times is running the same story ‘Blackstone, the American private equity firm, is to join the battle for Rio Tinto with a break-up bid’

Should these reports be accurate, it presents in my mind a viable and political savvy way that China can:

a) halt BHP’s hostile takeover of Rio Tinto
b) make its first significant investment in the multinational mining sector

In 2007, The China Investment Corporation invested USD 3 billion in Blackstone to secure a 10% stake in one of the world’s top private equity companies. Blackstone’s Rio consortium includes China’s USD200 billion sovereign wealth fund.

(Post Script: Unfortunately the Daily Telegraph proved to be an unreliable source and Blackstone entering the Rio space was officially denied later on the day this news broke) 

(If your career is 45 years long and you wanted to follow the global megatrends of your generation, which way would you turn? Photo: Julian Hewitt, Moganshan, China)

The ‘Billion Club‘ - China, India and Africa - seem to have an analogous recent past and are being thrust together in parallel evolving economic futures. As this takes place, so too will their bearing on the state of world affairs. Putting this into context, if you want to capitalize on the global megatrends of our generation, here is the counsel that inspired my wife and I to move to China 16 months ago.

I leave you with the very wise words of Dr Cees Bruggemans, the Chief Economist of First National Bank. In an insightful article penned in 2005 and titled ‘Modern China: An Out of Body Experience’ this was his final paragraph:

“As to sagely advice for anyone under 25, having completed the educational stage of life or doing so shortly, here are a few thoughts:

• Consider your remaining educational ambitions, in quantity and quality, and then double (or triple) them. Much more effort and skill accumulation (differentiation) will be required for what you will be facing in the short productive life that remains you. It is your luck that it will coincide with the most momentous collision in history as developing Asia transforms the world.
• As to how to participate most meaningfully in what is being unleashed during your productive years, I suggest you spend the next 15 years in China (or in activities dealing with its opportunities), then shift for the following 15 years to an Indian exposure, and complete the line-up with a final 15 years in an African context. This way you will be riding each stupendous regional development wave at its peak intensity in turn. If that doesn’t make you filthy rich, nothing will.
• It will also mean retirement at 70. Consider that a futuristic omen.

Most of all enjoy the coming challenges. As an old Chinese curse had it: ‘May you live in interesting times’. The global opportunities opening up certainly will be endless for a long time to come.”

(Its China’s encore for now as it leads the ‘Billion Club’ but will India and Africa come to the party? Photo: Ena Hewitt - Hangzhou, China )

The triple axis of China, India and Africa represent more than half of mankind and Africa is soon to become the newest addition to the world’s ‘1 Billion Club’. According to the latest data from the United Nations Population Division, Africa’s population currently stands at 962 million will climb beyond 1 billion people to join ranks with China and India in 2009.

After their troubled recent history, this massive emerging-market triumvir is slowly rotating into the global spotlight. China is leading the pack having sustained almost 3 decades of economic growth in excess of 10%. India’s economy is starting to pick up pace with its Asian rival and has seen impressive growth of over 8% since 2004.

Africa’s Economic Prognosis

Even Africa is starting to come to the party with its economy having expanded at a rate of 5.4% for the past decade. At a macro level, the continent is definitely heading on the right track. Step back in time 20 years in time and what is now SADC was a very troubled region. Angola, Mozambique and Namibia were all experiencing a civil war. The DRC was hardly any better and apartheid violence was peaking in South Africa. Fast forward to the present and outside of isolated issues in the DRC’s diamond and gold hotspots, it is just our northern neighbours that somewhat ruins a rosy picture.

With more and more democratic elections (the next step is working on more ‘free and fair’ democratic elections) and the advent of pan African ‘from-Africa for-Africa’ institutions such as NEPAD and the AU, the continent is slowly shaking off the doom and gloom shackles that is has been synonymous with for so long. Africa is showing signs of promise on the technological front too. Cell phone penetration has reached 17% of the continent leapfrogging cumbersome landline technology. A 10 000 km undersea cable is being built that will connect 21 countries to the digital age of cheap and fast bandwidth.

A note of caution is that Africa’s economic growth is still largely fuelled by the global commodity boom. Here, China is a key catalyst. Not only has China buoyed international demand for raw materials and is driving their price to all time highs, but China is also investing heavily in raw materials and oil in Africa. These two factors have also seen an increase in Indian and even recently Japanese investment suitors on the continent. This resource money is buffering the national coffers of Africa’s largely trade driven economy and smoothing over some of the more challenging aspects of African society today.

Africa still lacks large scale job creation and this is a pivotal factor needed to lift hundreds of millions above the poverty line. Most current economic growth is jobless and pure resource extraction minus the processing has limited community impact. Massive infrastructural investment is lacking to connect Africa not just to the rest of the world but to itself and this is a remnant of the serious conflict that has hamstrung the continent for so long. Education levels are still shocking inadequate and this is another area that needs urgent attention in parallel with other needs. Furthermore, formalising the informal sector and enshrining land ownership are two pillars of capitalism that Africa is still far, far behind on.

A positive sign is ‘Trade not Aid’ movement that is defining current African debates. Enabling business on the continent is where Africa’s redemption will come from. Making sure this trickles down will sustain this redemption. But if you are not a Chinese or South African company, or do not come from the FMCG, resources or communications sectors then a bit more patience might be prudent.

However, the writing is already on the wall. Continent-wide society political improvements and an enabling commodity surge have taken root and making it an ever more attractive investment destination. The question is now when not if…

(A picture paints a thousand words as to why a BHP-Rio merger is bad news for China. As testimony to the staggering growth of China’s steel industry, an armada of 60 bulk carriers wait patiently off Australia’s Newcastle Harbour to receive coal and iron ore payloads. In May 2007, the line of ships at off Newcastle Harbour stretched to a record 79 vessels. Photo: James Croucher, The Australian)

After my predictions of a looming Chinese investment in Rio Tinto 2-weeks ago (Prediction 2: Chinese Investment in a Multinational Mining Company, November 12th, 2007), China has already fired the first salvo depending on which sources you want to believe.

According to a Forbes article released yesterday, “Shares of Rio Tinto jumped 7.5% Monday in Sydney on a report that China’s new state investment fund and some of its largest state-owned steelmakers could enter a joint counterbid to BHP Billiton’s offer for its mining rival. A state-owned Chinese weekly, China Business, reported over the weekend based on unnamed sources that China Investment Corp., which has been tasked with managing the country’s burgeoning foreign-exchange reserves, and the steelmakers Baosteel, Shougang Group and Angang Steel, were working on a $200 billion bid for Rio Tinto.”

In my mind the response from the China Daily (which when necessary can be heavily influenced by the powers that be) was a bit too quick for comfort. In these instances I tend to favour reading between the lines. This is what they had to say 12 hours after the Forbes report:

“China Investment Corporate Ltd (CIC), the country’s newly launched state foreign exchange investment company, said in a statement Monday that it had never been involved in a bid for Rio Tinto. The statement was intended to dispel market rumors started by a report in Chinese weekly newspaper China Business saying the CIC was leading a group of Chinese steel makers in a bid for Rio Tinto.”

Personally, I am still happy to stick to my initial reaction. A merger between BHP and Rio is not good news for China however you look at it. It is an area of strategic national interest when one company controls 40% of the iron ore in the world and you import most of that. I can assure you that as I write this, Chinese decision makers are doing anything but sitting on the fence. They will be actively pursuing every possible angle necessary to alter the status quo in China’s favour.

BHP has already engaged in some ‘ungentlemanly’ iron ore price negotiations with China. In 2004, BHP lumped the Chinese Iron and Steel Association with a 71.5% year on year price increase. Rather patronizingly, BHP also demanded an unprecedented surcharge of up to USD10 per ton. Their reasoning was that importing steel from its Australian mines would save on transport costs for the Chinese companies importing Brazilian Steel.

If this was the leverage BHP thought it had as a ‘Rio Tinto-less’ entity, China will definitely not be going gently into that good night…