Dear ATCA Colleagues

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

We are grateful to our distinguished and long standing ATCA contributors:

. Ashutosh Sheshabalaya from Brussels, European Union, and Bassilly, Belgium, for "The China Juggernaut's Soft Landing"; and
. Andrew Leung -- en route to Shanghai from London -- for "'Irrational Exuberance' in China's Stock Market, US/China Relations: Rational Economics or Irrational Politics?"

in response to "China and Global Financial Risk -- The Key Strategic Question of a Decline in China's Stock Markets and Global Investor Psychology."

Ashutosh Sheshabalaya is the author of 'Rising Elephant', which is a heavily-researched bestseller about India's rise and long-term opportunity and challenge to the West, published in the US, India and Europe. Described as a "tour de force" by the Director of UBS bank's Wolfsberg think-tank and as "highly provocative" by former Indian Deputy Prime Minister LK Advani, 'Rising Elephant' has been reviewed worldwide. He has worked in Brussels as an accredited foreign correspondent, in public affairs (for the European Federation of Pharmaceutical Industries), and as a strategic consultant -- both for private corporations as well as the European Commission, Invest in Sweden Agency and others. In total, he has led research projects for over 65 studies covering a wide range of industries. Now heading Belgium-based India-Advisory, he is a frequent speaker at conferences and seminars in Europe, India and the US, a columnist for the Indian online news portal Sify and an occasional contributor to Yale University's Center for Globalisation and Washington's Globalist. A winner of the all-India National Science Talent Scholarship and the Wien International Scholarship, he studied at a leading Indian engineering institution, the Birla Institute of Technology and Science, and at Brandeis University in the US. Mr Sheshabalaya is married to a Belgian and is part of New and Old India. His parents were both university Vice Chancellors, and his family includes an Industry Minister in the Nehru government, a Commissioner in British India and representative of the Tata industrial group, one of India's first women legislators, senior military officers, diplomats and seven members of the elite Indian Administrative Service (IAS). He writes:

Dear DK and Colleagues

Re: The China Juggernaut's Soft Landing

Those cautious about Potemkins cannot help noticing growing parallels between today's China and Southeast Asia of the late 1990s, albeit on a much larger scale.

While non-performing loans in the Chinese banking system remain a parody of the Emperor's New Clothes (anywhere upwards from 40%), China lacks the sophisticated, soft/systemic sub-structures to reassimilate them -- without an unwelcome and global-scale Big Bang. Such a situation is especially alarming, given that bank deposits account for anywhere between two-thirds and three-quarters of China's entire financial stock. China has instead proved incapable of even managing a revaluation of its currency to recalibrate its changing position in the world economy.

Instead, as China begins to deploy its massive foreign exchange holdings to buy financial assets overseas, it requires a good deal of faith to see the above factors adding up somehow to a virtuous cycle. The metamorphosis from communism to capitalism may be easier than that from a repository of foreign-invested export surpluses to a global private equity player.

I believe it may be crucial for policymakers to prepare -- politically and economically -- to manage or even force the Chinese juggernaut into a soft landing, before it risks bringing the world economy down like a house of cards.

Kind regards


Ashutosh Sheshabalaya

[ENDS]

-----Original Message-----
From: Intelligence Unit
Sent: 25 May 2007 07:56
To: 'atca.members@mi2g.com'
Subject: Response: Leung -- 'Irrational Exuberance' in China's Stock Market, US/China Relations: Rational Economics or Irrational Politics?; China & Global Financial Risk - Decline in China's Markets

Dear ATCA Colleagues

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

We are grateful to our distinguished and long standing ATCA contributor:

. Andrew Leung -- en route to Shanghai from London -- for his submission to ATCA "'Irrational Exuberance' in China's Stock Market, US/China Relations: Rational Economics or Irrational Politics?"

in response to "China and Global Financial Risk -- The Key Strategic Question of a Decline in China's Stock Markets and Global Investor Psychology."

Andrew Leung has over 40 years of experience in a number of senior positions working closely with mainland China, including Hong Kong, with a focus on commerce, industry, finance, banking, transport, social welfare and diplomatic representation. He has addressed numerous local and international business and strategic fora, groups and organisations on China, including making regular television appearances. He has written many key commentaries on China for various organisations including ATCA. His target audience includes finance and investment houses, institutional investors, large businesses, think tanks, senior officials and business schools. Andrew was twice sponsored personally by the US Government on briefing visits to the United States, including a month-long visit to brief Chairmen and CEOs of multi-nationals in regard to China, post-Tiananmen Square. He was also sponsored by the Economist as a speaker at the China conference in Berlin with the German Foreign Affairs Institute. He was invited to brief personally the Duke of York and the Lord Mayor of London prior to their China visits.

Andrew is on the Governing Council of King's College London; the Advisory Board of Nottingham University's China Policy Institute; and the Executive Committee of the 48 Group Club with historical and working links with the Chinese leadership. He has been appointed as a Global Representative for Changsha City, China. He chairs the China Interest Group of the Institute of Directors' City Branch. He is a Visiting Professor of the International MBA Programmes of China's Sun Yat-Sen and Lingnan Universities. He will shortly begin lecturing as a Visiting Professor at NIMBAS University, Utrecht, Holland. Andrew is a Fellow of the Royal Society of Arts (FRSA). He was awarded the Silver Bauhinia Star (SBS) in the 2005 Hong Kong's Honours List. He has qualifications from the University of London, Cambridge University, The Law Society and Harvard Business School. He speaks Cantonese and Mandarin and practices Chinese calligraphy as well as fine art. He writes:

Dear DK and Colleagues

Re: 'Irrational Exuberance' in China's Stock Market, US/China Relations: Rational Economics or Irrational Politics?

Tightening measures notwithstanding, there seems no stopping in the surge of 'irrational exuberance' in China's stock market. Ordinary people continue to ferret their money from low-interest bearing deposits or borrow more to play in what increasingly looks like Musical Chairs. Seasoned investors highlight hidden values in certain shares many did not realise existed. This is hardly surprising with the less than perfect disclosure of corporate data. Others are betting on a continuing upswing to last even after the 2008 Beijing Olympics and the 2010 Shanghai Expo. The Shanghai and Shenzhen stock markets are seeing 140,000 new private accounts opened each day.

A large proportion of such 'exuberance' comes from state-owned conglomerates which are seeing rising profits from their expanding globalisation. The repatriation of funds raised in the world's largest overseas IPOs adds to the already huge liquidity.

Underpinning it all is the continually booming economy. According to the National Bureau of Statistics, China's first-quarter GDP was up 11.1 %, fixed asset investment up 23.7%, total trade up 23.3% and foreign exchange reserves up 37.36% to USD 1.2 trillion. A closer look, though, reveals some USD 74 billion 'hot money' and increasing use of Transfer Pricing by exporters.

Apart from tightening against speculative exuberance, China's Ministry of Commerce announced in April that China will further increase imports, particularly mechanical and electrical machinery. At the same time, it has reduced tax rebates on exports from energy-intensive and less environmentally-friendly industries.

Tao Dong, Chief Economist of Credit Suisse First Boston, expects that China's imports will continue to grow robustly, at around 21- 25% pa, while exports will grow at the 16 -17% range from a much larger base, leading to a trade surplus of 17.7% over 2006.

On 18th April this year, Premier Wen Jiabao chaired a meeting of the State Council to discuss the economic development of the first quarter. While recognising that the overall macroeconomic situation remains sound and positive, the need was emphasized for continuing structural reform with priority given to energy and resource conservation, better economic balance, innovation and people's livelihood.

The overall level of confidence was highlighted by Nicholas Lardy, senior fellow of the Institute for International Economics based in Washington DC (Beijing Review, April 19, 2007). Already the world's third largest trader, China is set to overtake the US in exports in 2007, to become the world's second largest trading economy in 2007 or 2008. Foreign-invested enterprises produce a third of China's manufactured output (compared with the EU's 25% and the US's 20%). The value of China's imports in 2005 was 30% of GDP, compared with the US's 17% and Japan's 10%. China is now the fourth largest US export market. US sales to China in 2005 were nine times more than in 1990. This compares with four times for Mexico (NAFTA notwithstanding) and 15% for Japan, over the same period. Likewise China is the largest trading partner for virtually every country in the Asian region and is a huge importer of agricultural products from both developed and developing countries. Barring unforeseen circumstances, China's dramatic growth stands a good chance to continue, at least until her rapidly aging profile begins to bite from 2015 onwards.

China's global footprint is already everywhere. But this has taken on an even more exciting dimension since 20th May, when news broke on China's first-ever deal to take an equity stake in Blackstone, one of the world's largest private equity funds based in the US. During two consecutive TV interviews with CNBC Europe and BBC Asia, I hinted that this was more than a sweetener for corporate America to pave the way for the current Sino-US Strategic Economic Dialogue. At USD 3 billion, it was only a drop in the bucket of what the newly set-up State Foreign Exchange Investment Corporation is expected to manage by way of diversifying the investment of her gigantic foreign currency reserve - the annual growth of 20% or USD 210 billion. The Blackstone venture was a trial balloon for the much needed global outlet for China's pent-up savings, which stand to benefit from the international business savvy and agility of these funds. With greater alertness to geopolitical sensitivities, these funds would provide a comfort zone for China's overseas investments. The CNOOC/UNOCAL saga is still fresh in people's minds.

The US has flagged up five areas for the Strategic Economic Dialogue - Services, the RMB, Intellectual Property Rights (IPR), Energy and Environmental Cooperation. With varying degrees of success, China has been trying very hard to clamp down on IPR violations in a decentralised continental-size country. As for the RMB, China has recently widened the daily trading range for greater currency flexibility. Moreover, it is becoming increasingly clear that the RMB appreciation argument could be turned on its head - that it would instead hurt America and benefit China (Lost in Translation, The Economist, May 19, 2007). But for China, the key is financial stability and the avoidance of speculation. The process of appreciation and eventual international convertibility needs to be very carefully managed.

More interesting about China are two recent key developments: her growing domestic consumer market and signs of a 'Green Partnership' with the US. A report in China Today (April 2006) has lent support to the remarkable Chinese consumer story. Since 1994, over 90% of the state-owned housing stock in large and medium-sized cities has been sold into private ownership. In addition, new stylish apartments with high-ceilings and split-level luxury condos are becoming popular. Middle-class executives are waxing lyrical about their China dream of personal tastes, preferences, and lifestyles associated with their new-found home ownership. The National Bureau of Statistics data of 18th April 2007 show that retail sales of consumer goods nationwide grew 14.9% compared with last year, ahead of the increase of per-capita disposal income of 10.4% in urban areas and 7.4% in rural areas. The consumption growth in 2006 was 6.7 times the volume in 1990, including household goods, automobiles, hi-tech products, culture and entertainment.

Recent research shows that 16.5% of middle-income urbanites switch to a new mobile phone within one year and 26.1% to a new MP3 player within two years. Online shopping (especially for cosmetics and mobile phones) is in vogue, accounting for one quarter of China's internet user population, which is the second largest in the world. Healthcare products are also attracting increasing demand, with 86.1% of those surveyed naming them as their top priority. Most of these consumers are the products of the 'One Child Policy' with relatively high education and income security. Some of them are known as the 'yueguangzu' (wage spenders who don't save anything), the 'xingguizu' (the young nouveau riche) or the 'kenlaozu' (those who spend their doting parents' income).

In 'The Rise of the Chinese Consumer: Theory & Evidence' (2005, John Wiley and Sons Ltd), Jonathan Garner with his colleagues at Credit Suisse conducted consumer surveys in 10 tier-1 cities in China and projected the growth of consumerism in China by 2014, using econometric modelling. Assuming continuing economic growth of 7% and a gradual RMB appreciation from the current 0.2 of PPP exchange level (as estimated by the IMF) to 0.55, there emerges a high probability projection that the US Dollar-size of China's economy will almost quintuple to about 90% of the US economy with an expected annual incremental consumer spend twice the level of USD 262 billion obtained in the US. The pendulum of global incremental consumer growth looks poised to shift to China.

Topping the consumer growth rates will be such product categories as personal computers and autos. Although the expected growth rates of other product categories such as televisions, mobile handsets, radios, fixed-line telephony and air travel are much lower, they are still expected to represent 36 to 50% of total incremental demand of the world's 15 large countries surveyed (including China).

This consumer evolution is put into sharper focus in a 2006 Special Edition of The McKinsey Quarterly 'The value of China's emerging middle class'. This highlights that while 77.3% of urban households in 2005 were still in the 'poor' category (annual income up to RMB 25,000), by 2015 this category is expected to be replaced by a richer cohort. This comprises a lower middle class of 49.7% (up to RMB 40,000), an upper middle class of 21.2% (up to RMB 100,000) and a 'mass affluent' class of 5.6% (up to RMB 200,000). This profile is expected to change further by 2025 when the upper middle class will outnumber the lower middle class threefold with five times more total disposal income. The mass affluent and the global affluent (7.7% and 3.3% respectively of urban households) will increase their proportion of total disposal income from 23.6% in 2015 to 36.4% in 2025.

The continuing growth of a more consumer-oriented economy would address some of China's problems of over-dependence on exports. However, before one is carried away, it must be remembered that in per capita GDP terms, China still ranks below 100th in the world alongside some of the poorest countries in Africa. The majority of China's peasant population is still struggling with basic daily needs, such as access to essential healthcare, provision for children's education and their old age. Although China has switched to a more balanced development model since the 11th Five Year Plan, it is likely to take some time before the majority of her peasants could aspire to the level of consumption of the urbanites.

Nevertheless, while China's upper middle class and above is expected to increase from the current 9.4% to 26.8% of urban households by 2015, this proportion is forecast to leap to 70% by 2025. These numbers speak volumes on how investors in the consumer business in China should position themselves for the future.

The second key development is the promise of a 'Green Partnership' between China and the US. Before President Bush's latest State of the Union address, Senator Lieberman in his 2005 address to the Council on Foreign Relations underscored the need for US and China cooperative international policies and R&D to mitigate oil dependence and mutual competition. At a press briefing on September 19th, 2006 following the China-US Energy Dialogue in Beijing, Assistant Secretary for Policy and International Affairs Karen Harbert pinpointed energy efficiency, clean coal, nuclear and biofuels as priority areas for cooperation (Beijing Review, May 3, 2007).

The Jackson Hole Centre for Global Affairs identified 10 areas for US-China clean energy cooperation: natural gas technology, combined cooling, heating and power, clean coal, hydrogen and fuel cell vehicles, eco-buildings and transportation systems, air and water quality, solar photovoltaics, and a Beijing-Chicago Friendship Cities initiative to promote local environmental efforts.

Clean Coal is particularly important as it is common knowledge that China is building a new coal-fired plant every week while the US directly follows China in adding more coal plants than India. So it is encouraging that the US may consider partnering with China in a USD 1 billion experimental project to build an emissions-free coal-fired plant. There are other related technologies or ideas such as the capture and utilization of coalmine methane and other wastes, combined heat and power, and SO2 emissions trading.

Indeed China is already cooperating with the US in making the 2008 Olympics a Green Olympics. For example, a hydrogen park is planned in the Olympic Village to showcase five buses operating on a blend of hydrogen and natural gas.

China has set a national goal of boosting her 2003 level of 3% of power generation from renewal sources to 12% by 2020, including solar, wind, hydro and biomass, supplemented by a vigorous programme of building two additional nuclear power plants every year for the next 15 years. To realise her goal, she needs all the help and cooperation she can get in terms of research, technologies and international business savvy from the West, including the US, EU and Japan.

I have heralded prospects for international cooperation in developing responses to Climate Chaos in my previous ATCA articles 'Energy Security and Climate Chaos: China's Approach and Global Impact' (ATCA, 8 August, 2006); China and the Middle East: an Eastern Alchemy for Global Harmony' (ATCA, 17 February, 2007) and 'China's Confucian Harmony with Nature: Timeless Wisdom and Boundless Opportunities' (ATCA, 29 April, 2007). In particular, I have proposed that China could make use of some of her huge foreign exchange reserve to invest in such cooperation. Hopefully, China's recent Blackstone venture would open doors in this direction.

Thus a fast changing China presents huge challenges as well as exciting business opportunities. However, the looming US Presidential Election in November 2008 and Capitol Hill's increasing penchant for China bashing, already armed with an arsenal of punitive draft bills against China, do not augur well. Moreover, many of China's continuing developmental challenges come in handy for finger-pointing, including her perceived relentless exports, unbalanced economy, slow pace of RMB appreciation, stifling environmental degradation, IPR infringements, corruption, and alleged human rights, freedom and democratic deficits.

Whether and how the US sets out to engage China with rational economics or irrational politics remain to be seen. But with US's Soft Power increasingly under stress, an imaginative and positive engagement could well present a powerful platform for America to regain her global Soft Power leadership.

Best regards


Andrew K P Leung, SBS, FRSA

[ENDS]

-----Original Message-----
From: Intelligence Unit
Sent: 21 May 2007 12:15
To: 'atca.members@mi2g.com'
Subject: ATCA: China and Global Financial Risk -- The Key Strategic Question of a Decline in China's Stock Markets and Global Investor Psychology --

Dear ATCA Colleagues

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

China and Global Financial Risk -- The Key Strategic Question of a Decline in China's Stock Markets and Global Investor Psychology --

Chinese authorities moved on Friday, 18th May, to take some pressure off their accelerating stock markets, raising benchmark lending and deposit rates, lifting bank reserve ratios and widening the trading band of their currency, the Yuan. This move and further ones, could spark a market correction according to some ATCA sources.

The Shanghai Composite Index (SCI) is up more than 50 percent so far this year, and has climbed almost 250 percent since the beginning of 2006, leading to fears Chinese stocks are in a bubble. Since the SCI has risen so high so quickly, many ATCA colleagues think China runs the risk of a more meaningful or longer lasting correction in the Chinese financial markets, something far more longer lasting than what occurred back in February this year. Even though China is an engine of global economic growth, its linkage with global stock markets is minimal, making some investors question why a Chinese downturn could drag other markets down.

For investors, China represents a more psychological than real connection with the rest of the world, aside from any cross-over effects from slower economic growth that might result from a slide in Chinese stocks. Investors hunting for a barometer for risk appetites are increasingly looking to China, whose frothy stock market has become like the canary in the coal mine. Investors fear a sharp decline in Chinese stocks could again roil world markets and cause a global pullback like the one sparked by a plunge on the Shanghai stock market on 27th February, extensively analysed on ATCA. The collective psychology among many investors works on the basis that they will stay in equities for as long as they feel comfortable with China as the canary in the coal mine. Those investors work on the understanding that if there is a meaningful correction then that will signal the precise time to move to higher ground and to safer assets.

The key strategic question for many international investors is how much weight to give to the Chinese stock market, where few foreign investors own shares, and how much of an impact on global markets would a disruption in China cause? There are many concerns, all related to China's increasingly dominant economic and geo-political status. The China specific risk of public unrest, conflict between the Communist party and capitalist-style prosperity and need for freedom, and the requirement to keep fast-paced Chinese economic growth from overheating are issues that make investors nervous as the world fears a domino effect.

The temporary drop in the Shanghai market in February this year in reaction to Chinese government policies to try to slow growth raised short-term concerns, which shook markets around the globe. This occurred because the rapidly growing economic engine of China -- the world's most populous country -- is especially important to the US-centric global economy from China-led debt financing through to off-shore production of a wide array of vital industrial and retail products. For many investors equity prices not just in China but across the globe have become overextended. They believe a correction must occur but they also don't want to be on the wrong side of a bull market that has pushed world stock prices significantly since the start of the year, delivering double digit growth and more.

[ENDS]

We look forward to your further thoughts, observations and views. Thank you.

Best wishes


For and on behalf of DK Matai
Chairman, Asymmetric Threats Contingency Alliance (ATCA)
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ATCA: The Asymmetric Threats Contingency Alliance is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies -- bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of ATCA is by invitation only and has over 5,000 distinguished members from over 100 countries: including several from the House of Lords, House of Commons, EU Parliament, US Congress & Senate, G10's Senior Government officials and over 1,500 CEOs from financial institutions, scientific corporates and voluntary organisations as well as over 750 Professors from academic centres of excellence worldwide.

The views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. Please do not forward or use the material circulated without permission and full attribution.
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Intelligence Unit | mi2g ATCA The Philanthropia Φ

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