Paul Gambles continues his views on China: There’s a real worry because there are all these different symptoms of malinvestment and manipulation underneath the system. The biggest bank in the world is the Chinese bank, and that bank had to be rescued in 2008, when we had a situation where the Chinese sovereign wealth fund borrowed money to go and buy 70% of that bank, so unless that bank really is generating enough profits and really is behaving like a commercial entity, rather than just part of the Chinese government, then the Chinese wealth fund isn’t going to be able to generate enough of a return to pay back its interest and to pay back its capital.
These kinds of manipulations underpin the system. The market didn’t want to go and buy those shares when the banks collapsed in 2008, so the Chinese government did instead, and it bought them at artificially high prices; it didn’t let the market do the adjustment and the correction, and that’s pretty well true across a whole range of assets in China, and that’s what really worries us right now. What are any of these assets worth? It seems to me that nobody really knows.
People talk about the elections in the States as though they’re the biggest political event of the year, and maybe from a prime-time-TV point of view they are, but what’s going to happen in China could be even more important. One reason Chinese politics maybe doesn’t get the same amount of attention is that it’s not really a democratic process in the same way; it’s much more of an ordered process. In the same way that the economy is controlled, also the politics tends to be controlled.
There’s always been this situation where effectively the Chinese President and the politburo in China have always chosen the President and the Prime Minister, but this year, there seems to be a little bit of concern about the fact that the person who everybody thought was the president-elect, a guy called Xi Jinping, who was going to automatically replace Hu, but there was a ratification that was supposed to happen by the Chinese military council, I think in January, and this didn’t happen. They decided they wouldn’t ratify him, and nobody quite knows what that means.
Some people are saying that they think there might actually be two different camps within the Chinese politburo. One which is aligned with President Hu, which is very much a believer in spreading the wealth more democratically and more evenly across the country, and the other is more of a business faction called the Shanghai clique, which is more attached to Prime Minister Wen. It seems like, in the past, these two factions managed to get on ok, but people are now wondering, because of the imbalances in the system and the jasmine riots and social unrest coming through, whether all the imbalances that have built up over the last twenty years are causing some kind of a disagreement and a conflict between the factions that supposedly represent the mass of the population and the factions that represent business.
In the past the two of them were able to get on. If they’re not able to get on any more, to us, that’s a really bad sign that all the imbalances in the system are starting to squeeze. If there isn’t enough fat on the Chinese pig to be able to feed the people and to feed businesses, then if one of them is going to have to go without, if one of them has got to be a little bit leaner, that’s going to be an uncomfortable adjustment after China has had such a phenomenal growth rate. If that starts to ease off or if that doesn’t translate into increasing wealth for the people or increasing volume, size and scale for Chinese businesses, then that’s really a major conflict, and I think the politics is starting to potentially reflect that.
Again, nobody really knows what’s going on outside of the politburo, but watch that space very very carefully. Maybe it will all be ok; maybe they’re having negotiations and they will work it all out, but it could well be that there are much bigger problems under the surface.