From Sandton to Shanghai

(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)

(Because this cement plant is on a tourist route near the Yantze River, plans are afoot to move it a couple of valleys along. Out of sight… Photo: Julian Hewitt)

Much has been said about China’s political and economical challenges. The reality is that China’s biggest challenge will not come from either of these tightly controlled and well managed aspects of society. China’s biggest problem will be environmental.

Mao once famously said that a revolution is not a dinner party, and the Industrial Revolution that swept across the Western world in the 18^th and 19^th centuries was by no means a pretty affair for the environment. The Industrial Revolution gave rise to great fossil fuel-guzzling, coal-burning factories that massively increased air pollution and chemical discharges.

China’s industrial revolution is hardly a walk in the park either. The difference is that Britain industrialized a population of less than 20 million and the USA went through the same process with under 100 million. China is walking down the same path, but with 1.3 billion people and it is doing so under the microscopic scrutiny of the West.

There was no internet, Greenpeace, Al Gore and Kyoto Protocol to maintain accountability 2 centuries ago. Nor were there delicate trade issues to consider. When a Dutch research team recently announced that China had overtaken the USA on the pollution stakes, it was splashed across the American newspapers, but received scant attention here. China rightly claims that it has 4 times the population of the USA and most of its industrial output ends up in the American homes anyway.

However, there are different issues at stake. China has more localized problems to be concerned about. There has been a rash of publicity regarding defective and hazardous Chinese products hitting international shelves. A few examples include contaminated toothpaste, deadly dog food, and according to the New York Times, seafood that was stopped 391 times at the USA border last year. Essentially, what were isolated issues has now become a serious bout of negative publicity for Chinese foodstuffs

These problems have found their way back to South Africa, right to the doorstep of my hometown. High levels of cadmium have been discovered in South African pineapples after local farmers unknowing used contaminated Chinese fertilizer. Shipments of canned South African pineapples have subsequently been rejected by the EU, after they were found to contain high levels of lead, arsenic and the carginogenic cadmium.

Bear in mind that for every case of contamination reported overseas, there are hundreds more happening on a daily basis in China. Addressing defective products is not that complex. What is required are many more balances and checks – tighter legislation, greater consequences for overstepping the boundaries and increased manpower to monitor product safety standards.

In a sign of growing urgency, the former head of China’s Food and Safety industry watchdog - Zheng Xiaoyu – was recently executed after being convicted of taking bribes to register substandard medicines. These inferior medicines resulted in the deaths of at least 10 people. Much attention has been given to this landmark case. To put it in a more Chinese way, it was a question of killing the chicken to scare the monkeys away.

The real challenge is to address the causes and not the symptoms though. While superficial issues rage around the global media, China has a much bigger fire looming in the background. The problem is not a complication one. China is still largely driven by manufacturing output. The manufacturing sector has large energy requirements as inputs and large amounts of effluents are discharged into the environment as outputs.

If this process is not competitive, then business moves to Vietnam, Myanmar or India. Using coal for energy is less expensive than sustainable energies and discharging untreated chemicals into the local river is cheaper than treating them.

However, when a massive lake has been so polluted from industrial discharges, that huge swathes are covered in a poisonous algae and the adjacent city of nearly 5 million people can’t even boil the water to make it potable, then your environmental challenge becomes a question of social harmony.

When this same incident repeats itself in nearby lakes and affects other large cities, then these isolated incidents soon become trends. This then leads on to a question of priorities. What is more important – a city with high economic growth or one with lower growth but where you can at least drink the water when you have boiled it.

The big issue at stake is that environmental challenges are less predictable than next year’s economic growth rate, next month’s trade surplus with the USA, the appreciation of the Chinese currency or even the next country president. Less predictable means less manageable and therefore more risky. The next outbreak of SARS or the next occurrence of poisonous algae has a much more direct impact on the man on the street than next month’s global trade figures.

(Shanghai’s impressive skyline viewed from the lofty heights of the Jin Mao Building Photo:Laurette Moolman)

Time to Return the Compliment

For too long, South Africa has viewed China as a nation of cheap textiles and import quotas. There are much bigger opportunities and threats to grapple with on the very near horizon. China has a pragmatic view of its relationship with Africa and it is time we returned the compliment.

When Standard Bank issued a recent cautionary that a transaction of material nature was soon to be announced, it was clear that a big shake up was headed the way of the South African banking industry.

A big deal was afoot. For it to be material, the imminent investment had to be over 25% of Standard Bank’s R150 billion market capitalization. The money market soon provided further clues. Since the notice was publicized, the Rand had strengthened considerably. It was a sure sign that the market was already pricing a foreign purchase into Standard Bank.

Standard Bank and ABSA have the largest African footprint of South Africa’s Big 4 banks, but ABSA had already been snapped up by Barclays. Most American and European banks were still recovering from the sub prime mortgage debacle and were in no mood for international acquisitions. It looked like a Chinese bank was in the running.

Since ABSA was already under foreign ownership, the Competition Commission loomed as a large obstacle for any company braving a majority purchase in Standard Bank. Chinese suitors have access to money and not international management expertise, so a minority stakeholding was most likely.

Armed with these facts, 2 days before the official announcement, it would have been possible to make an informed prediction that a Chinese bank was buying a minority stake in Standard Bank.

A Lesson in Pragmaticism

In a similar lesson in pragmaticism, any rudimentary analysis of mining opportunities in the DRC would have pointed to the fact that it would have had to be high on China’s wish list. After all, the DRC has the largest untapped mineral resources in the world and had a complete lack of infrastructure to mine it.

This was the perfect situation for an increasingly risk averse China with regards to exploiting mining situations in Africa. Given that China already has significant oil and raw material investments from Sudan and Zimbabwe to the most unstable parts of Nigeria and Ethiopia, a sizable investment in the DRC was only a matter of time.

Again, when China announced a USD5 billion mining development and infrastructure package to the DRC, the world seemed to have been caught off guard.

Rather than be astonished by China’s foreign investment strategies, it is essential for South African decision makers to step back and look at the situation from a rational perspective.

China’s first wave of investment in Africa was state-driven around national interests and focused on developing sustainable supply lines for oil and energy extraction. South Africa was largely left out of this investment loop as Chinese money flowed into Nigeria, Angola, Sudan and Zambia. In many ways China was a direct competitor to South African mining and construction companies with an African agenda

China has a very comprehensive investment plan for Africa. It has already invested heavily in continent-wide mining, construction and infrastructural projects. China’s assumption is that this will also equate to a bottom line impact on the economic development of the countries being invested in.

As it is, Africa’s recently strong economic growth rate is riding the wave of a largely Chinese-fueled commodity boom. Higher growth rates are supporting increased household spending on goods and services. South African companies boast a significant African footprint and are in a prime position to benefit for this. From China’s viewpoint, they make for attract investment vehicles.

The Second Wave is just Beginning

The second wave is just beginning. Massive Chinese state owned enterprises are listing for the first time. In the space of 5 years, the global capital market has shifted from New York to Shanghai and Hong Kong, buoyed by a rampant Chinese stock market.

Make no mistake of the size of these Chinese companies. Their market capitalization might be propped up by over exuberant mainland investors, but Standard Bank’s new partner – ICBC – is 60% larger than its closest USA banking rival. Keep in mind that China has 1.3 billion consumers to tap into - 400 million of whom own cell phones and another 100 million who surf the internet.

These huge enterprises are cash flush from recent listings. They have capital to burn and global ambitions to pursue. While most companies still have significant government ownership, the second wave of Chinese investment is driven by business opportunities.

For shrewd local investors and local business leaders, it is crucial to weigh up two important facets. Firstly, keeping tabs on big Chinese IPOs is important as this will inform the source and sector of future global and South African investments.

Prophetic Insight

Secondly, an analysis of South African service sector companies with a large African presence is essential to predict future Chinese investment patterns. Linking these companies and their sectors to their respective listed Chinese counterparts will provide prophetic insight.

ICBC’s investment in Standard Bank was the biggest international investment China had ever made. If Sasol’s USD6 billion Coal to Liquids programme sees the light of day in China, it will be the single largest FDI into the country. As a relatively small economy, South Africa has the scope to play a surprisingly influential role attached to the coattails of an emerging economic giant.

We do however need to get closer to the action and be less surprised by the possibilities that are emerging from China. A rather large second wave is already hitting our shores.