Wednesday , July 17 2019
Breaking News
Home / International Customs / China / US Business Must Remain Skeptical When Dealing With China
US Business Must Remain Skeptical When Dealing With China

US Business Must Remain Skeptical When Dealing With China

The press is full of articles about China’s economic success and its aspirations to becoming a world military power.

I would like to suggest that a realistic assessment of U.S versus China leads to a more sober conclusion and one that established multinationals need to bear in mind when assessing the risks and opportunities of doing business in China over generational periods of time.

It is not aimed at businesses focused on exploiting short term business opportunities or dealing with short term threats in China.

The U.S and China have had a complex and changing relationship since the establishment of the 1st People’s Republic on October 1, 1949. The freeze in relations during the Cold War and the economic disaster of Mao’s Great Leap Forward gave way to economic liberalization and massive growth in China’s economy under Mao’s successors.

However, this has been at the price of the creation of a political elite which rules the country ostensibly under Communist principles cynically manipulated to maintain its absolute grip on power.

Allied to this has been an increase in corruption at all levels in the country, anti-corruption campaigns being mainly aimed at show trials directed to destroy and eliminate political opponents.

China is a classic case therefore of a country where economic reforms have generated the desire for more freedom among the people at large, yet the very system that has generated the economic growth maintains a firm grip on absolute power.

Added to this, China has its own budding Islamic insurgency problem in Sinkiang even as it plays with fire by abetting its ally Pakistan harbor and train Islamic militants to attack its Asian rival India and attack U.S interests in Afghanistan.

It also has a problem in Tibet arising from decades of occupation of that region and oppression of ethnic Tibetans. Is therefore an irresistible force approaching a collision with an immovable object? Only time will tell!

In January of this year, China announced that its official economic growth rate in 2018 was 6.6% – its slowest pace since 1990. Furthermore, Helen Zhu, head of China Equities at BlackRock, told CNBC that growth in 2019 is expected to decelerate further despite a likely boost to consumption from domestic tax cuts.

How true, however, are these data and who has independently audited the 6.6% number? The answer is: nobody! Yet we believe these numbers wholesale even when we have evidence even in democratic societies of frauds and criminal manipulations, two recent examples being the LIBOR rate manipulation case and the Japanese government’s coverup of bank losses.

This very question was posed by Larry McDonald, author of the book “A Colossal Failure in Common Sense.”

Nevertheless, let us do a few calculations using the published statistics. China’s GDP in 2018 was $13.457 trillion while the U.S GDP was $20.500 trillion. OECD forecasts a China GDP growth rate of 6.4% in 2019 and beyond while the UN and the World Bank forecast 6.3% and the IMF forecasts 6.2%.

There is also a different OECD forecast showing a growth rate of 5.45% in 2019 slowing to 1.55% by 2060.

Morgan Stanley projects an average 6.1% from 2016 to 2020 slowing to 4.6% between 2021 and 2025 and 3.1% by 2026.

For the U.S for 2019 and beyond, all forecasts show a steady 2.78% growth – for 2019 the EC forecasts 2.6% and the IMF and World Bank 2.5%.

A long-term OECD forecast shows growth slowing to 1.3% by 2060.

Let us therefore use the OECD’s US forecast updated on 19th December 2018 and the China forecast updated on October 15, 2018 as reference points, take the potential trade war into account and project GDP for U.S and China into the years ahead.

We can see that China does not overtake US in GDP until 2060. However, under PPP (Purchasing Power Parity) it remains at 79th place while the U.S is at 12th place.

Any U.S business with long term investments and interests in China needs to look through the current rosy picture painted of China to establish the real opportunities and risks of doing business there in the light of long-term economic trends and geopolitical factors.

Therefore, the U.S is likely to remain the world’s No. 1 economy in country GDP at least until 2060.