China's growth

China, in my view, will drive growth in Asia for the next decade. To fight head on (on cost basis) with China is madness, to ignore it is just as foolish. Opportunities for the entrepreneur in China is immense, with the growth creating a whole new segment of middle class consumers eager to experience the Western lifestyle. Having recently met with quite a few corporates currently expanding their retail operations in China, it is not a surprise to see meteoric growth rates coming through. Franchises especially, in my view, are thriving. With little experience in consumer products, the chinese entrepreneur is hungrily grabbing any half decent franchise he/she can lay their hands on. Companies with strong brand names and products with good potential in China are getting hundreds of enquries from potential franchisees looking to invest in China. Huge investments are being ploughed into China, however, interesting to note that the majority is actually coming from outside of US/Europe.

Many people have asked me what I think of China. Some of the growth rates coming out of China seems to defy gravity, and when we look at China sitting from another country, I can see why it is difficult to dismiss the growth as unsustainable. However, when we look at the size of each province (each the size of a developing country), it's not difficult to see how when we put lots of these together, all looking to grow rapidly, that astronomical growth rates are being seen.

However, the important question to ask is how sustainable this growth is, but rather, at what cost, this growth is being achieved? China currently consumes 12 percent of global energy, 25 percent of aluminum, 28 percent of steel and 42 percent of cement but yet only still accounts for less than 4.5% of total global economic output. The huge inefficiencies in the system is likely to put a strain on its banking system, especially the state run banks, which are potentially loaded with up to 50% of their assets in bad debts. Shuffling assets into asset management companies or selling some stakes in banks to foreigners is a small mitigating force, that in my view only delays the inevitable, the cost of sorting out the millions of $ of bad assets. From my experience from the Asian crisis, easy money is like heroine. The more you get, the more addictive it is. You can't go without it, and when it's time to go cold turkey, it's going to hurt. Banking crises rarely happen overnight, but it's going to be more like a burst dam. First, it starts leaking (and this stage can take a long time) before it starts gushing.

To conclude, high growth by itself does not necessarily equal health. Unfortunately, with the inefficiencies in the system, the faster the growth, the more unhealthy the Chinese economy could become (sort of like eating too fast causing indigestion). It would be interesting to see how the government can implement measures to ensure a healthy Chinese economy, measures that would ensure that the economy lives according to traditional Chinese medicine philosophy "take everything in moderation".