Last month, China held a leadership conference that attracted a great deal of press attention. Most of it, however, focused on China’s announcement that it planned to start easing up on its infamous one-child policy. According to Investec’s Michael Power, by focusing on this, the media missed the real story, which was China’s announcement that it would be introducing a lot more competition into its economy, particularly into those industries that are currently dominated by state-owned industries. According to Power, this is a major step in China’s economic development. Although most analysts expect the Chinese economy to grow more slowly over the next few decades, this doesn’t mean that China should be ignored. Growth will still be strong, and new industries like consumer goods could flourish, offering investors plenty of opportunity. Indeed, Power says that for South Africa, which has a somewhat ambivalent attitude toward the Asian giant, these shifts in the Chinese economy could portend good things to come. – FD
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ALEC HOGG: Welcome to Cape Town now. Because China is experiencing natural economic growing pains according to specialist Michael Power – He’s with Investec, he conceded that growth would be slower, but off an ever-growing base. Power joins us now to explain what impact these growing pains have, not only on the Asian superpower, but also for the rest of the world. Hi Michael, it’s good to have you back in the studio. You’re one of our men who has been watching the Chinese growth story over the years. At the recent congress, there were some quite significant decisions. Most of the world picked up on the ‘one child’ policy. We did talk to Martin Davies about that. He said that’s not really the thrust. There were other issues that, in his opinion anyway, were more important. How did you view it?
MICHAEL POWER: I agree with Martin. I think the central issue that was of importance, was that they were going to do what Adam Smith said in the Wealth of Nations and certainly Adam Smith – one must often be reminded – did not support free markets. He supported free competition, which is a much more profound insight and I think what you’re going to see in China over the next few years, is the introduction of competition into many of the areas, which previously had been the preserve of the state owned enterprises. This for me is – and I’m using the word that they’ve used – decisive.
ALEC HOGG: That’s fascinating stuff Michael, and particularly because we were brought into Brics by the Chinese. It was all ‘Russia, India, China’ and South Africa, so I guess we have to pay very close attention to what’s happening there.
MICHAEL POWER: I think we do. I think when we can look back on what’s been going on in this part of the world, in 50 years’ time we’ll realise that this third plenary session was a critical one, in the same way that Deng Xiaoping won in 1971. It was a critical one.
ALEC HOGG: What has often exercised my mind is the dollar being the central currency in the world, and quite a few people in the emerging markets are saying ‘why can’t the renmimbi start taking more of a role there?’ Do you think it’s inevitable?
MICHAEL POWER: It is already taking. I see, in a Wall Street journal yesterday, that it’s now become the second-largest currency in the world in terms of the denomination of trade finance. One has to remember that the Americans overtook the Brits, probably in 1895, but for another 30 years beyond that, Sterling was the world’s largest Reserve currency – partly because of the importance that gold still played in the world of trade and finance at that time. I think the United States dollar will continue to be the world’s largest currency for a considerable period of time after China becomes the world’s leading economy. That doesn’t mean that slowly but surely the renmimbi isn’t going to…actually quite quickly, but surely the renmimbi will assume it’s proper place in the world if finance.
GUGULETHU MFUPHI: Michael, just coming back to the relationship between China and South Africa: many people believe that China is potentially benefitting more from this partnership, or the union within the Brics nations. How do you evaluate this? Is South Africa benefitting perhaps from its relationship with China?
MICHAEL POWER: The bee pollinates the flower it uses. I think the relationship, not just with South Africa, but Africa is a difficult one in the sense that it’s hard to understand and I don’t think we’re immediately understanding the role that China is playing in transforming Africa’s economy. What we are beginning to see, and it’s most obvious in East Africa, Ethiopia, and Kenya, is that we’re beginning to see assembly plants move out of Asia where wages have now risen to such a level – especially in China – they’re no longer competitive, and move into East Africa to begin the industrialisation process. Sadly, here in South Africa we’re not feeling that effect.
ALEC HOGG: Michael we need to wrap up now, but I can’t let you go without tapping into your worldview and this whole story that’s going on around Adcock Ingram with the Chileans coming into the country – or hoping to make that investment – and then a South African operation competing with them. In the context of a developmental state, is this quite a big deal?
MICHAEL POWER: I think it’s a very big deal and there are two things – and I don’t want to be commenting on the specifics – but two things that strike me. Firstly, in any company where there’s just a 35 percent stake being bid for, there’s a risk that you’re selling control of the company without getting a control premium when you do so, so I think we have to ask Bidvest in that regard exactly what they’re getting and why they’re getting into it. The second thing is – and I detect a very unpleasant whiff of economic nationalism on the part of South Africa towards the Chileans here – and I think we need to be a little bit more open-minded in our view. Just as many South African companies have gone abroad and done very successfully by doing so, so too, when a foreign company comes into South Africa I think we need to accord them the same acceptance that, by and large, the South African companies have been afforded when they’ve moved abroad. Do remember, South African Breweries went into Columbia. Indeed, Columbia is, I now think, the largest source of profits of any one country, to South African Breweries, and we were welcomed when we went into Columbia, so perhaps we need to be a little bit more open-minded towards the Chileans when they come here.
GUGULETHU MFUPHI: Well, some interesting insights being shared there by Michael Power who is from Investec.
