Posted by: Richard | June 9, 2014

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Posted by: Richard | July 25, 2010

China’s economic transition

Like many people, I view China as a place where a lot of ‘stuff’ is made.  I admit ignorance at  never having thought about what Chinese people buy themselves.  I was surprised to find out that Chinese people don’t actually buy much of their own stuff.  Instead, they prefer to save their RMB, putting cash away to save for a rainy day.

Now, you’d likely think that a Communist country would have a significant social safety net.  In fact, they don’t.  Migrant workers have virtually no social safety net while they are working, away from their home village.

What this means is that almost 65% of income is saved against potential future needs, leaving only 35% to be spent.  This level of savings is virtually the inverse of developed economies, where up to 65% of income is spent on basic consumption.

The free-spending ways of foreigners (notably the EU and the US – China’s two biggest trading partners) is likely coming to an end, as individuals start to repay their numerous debts and lenders tighten access to credit.  The change in consumption by the EU and US poses a serious problem for China as there is nobody else who can pick up the slack and keep Chinese factory workers employed.

With dropping exports, China will have reduced employment which leads to the dangerous potential for political unrest.  It is clear that the Communist party will hang onto power with every available trick, so a range of responses is expected to compensate for the drop in exports.  The most notable response is the desire of Chinese leaders to increase domestic consumption.  Essentially, China will sell Chinese goods to Chinese.  How radical!

China will promote domestic consumption through the following efforts:

  • Subsidizing consumption – an example has been the recent incentives rolled out for the purchase of ‘white goods’.  Expect more incentives, such as automobiles and apartments in tier 2 and tier 3 cities;
  • Providing a social safety net.  The government can loosen the robust savings rate by providing social services.  Expect to see health benefits and old age support start to roll-out over the coming decade.  As these policies reduce future cash needs, expect savings to drop as Chinese buy tv’s, stereo’s, automobiles and ultimately services!
  • Appreciating the RMB.  Currently, a low RMB means that commodities and imports are very costly.  As the RMB appreciates, the cost goods will drop and demand will rise.

Ultimately, while Chinese officials are hoping for a rapid increase in internal consumption, I believe that old habits die hard, and internal consumption within China will appreciate modestly in the coming decades.

Posted by: Richard | July 16, 2010

Thoughts from a trip to China – Urbanization

I recently went to China to research the Chinese economy.    I thought I would describe some of the insights I had from the trip and my discussions with business leaders while there.

I’ll start with the overall economic outlook for China.  In this first post I’ll focus on urbanization

Many of us have seen the recent property boom in the West and the effect on employment.  Building homes is well-paid, relatively stable employment.  Building homes also has a huge knock-on effect throughout the economy, as new homes need new furniture, roads, shops and subways.  In North America, homes in themselves created a tremendous economic boom in both Canada and the USA.

Looking at China, they are at the start of urbanization.  Assuming they follow others countries rates of urbanization,  they have hundreds of millions of people who are still to leave the countryside to live in cities.  This represents tremendous future economic growth.  There are currently over 160 million person cities in China, and this number will rise as urbanization takes hold.  I see a tremendous stimulus to the Chinese economy simply through the natural evolution of a rural to an urban society.

What this implies to me is that I expect a significant minimum level of economic growth simply due to urbanization.  Opportunity is in the cities and I expect Chinese to continue to move to cities and fuel growth.

What I don’t know is the rate of economic growth due to urbanization and the spillover effects.  Specifically, is the economic growth from urbanization going to be enough to keep the Chinese people happy and the political system in China stable?  Will the investment in urbanization lead to over-investment in infrastructure (such as the rumoured high-speed train network extending into Western China)?  The stimulus for moving to the cities is jobs, which are often tied to exports – will there continue to be growing numbers of jobs to draw rural dwellers to cities?  Finally, property is typically susceptible to boom and busts – will this affect China and what are the results of a potential bust?

It is difficult to answer these questions, and I’ll leave them to others to consider.

In coming posts I’ll discuss:

  1. China’s transition from an export economy to one focused on internal demand
  2. China’s goal of moving up the value chain from a manufacturing economy to a service economy
  3. The unique urban environment due to a lack of consumption
  4. Complex relationships between state and business and potential for regional conflict
  5. My view on moving manufacturing to the Western provinces via high-speed rail network
  6. China business moving to the West
  7. Challenges for Western companies moving to China
  8. The effect of a bust on the Chinese population after 2+ decades of a boom
  9. The best looking bar I’ve ever been to
Posted by: Richard | June 4, 2010

The most dangerous sport…Running

Out running on a beautiful day in Regent’s Park a few days ago I stopped paying attention, enjoying a BBC comedy podcast.  Before I knew it, my foot hit a divot and I went tumbling into a romantic picnic for a couple of Eastern European Tourists.  It was a huge spill that included a somersault on my part.  I realized immediately that I was hurt, as my ankle throbbed painfully.

I’m a bit rough and tumble, and have twisted ankles, torn ligaments and broken too many bones, so I knew when I stood up and almost threw up that this was a bad one.  I tried to put a bit of weight on the ankle, and no luck.  I hopped around the corner (too embarrassing to be where I actually fell) and then was down on the ground again trying to recover.  I knew that my summer running season was over, and I was just hoping I would be able to get back to walking to enjoy this great city.

After the longest 100m hop to the street where I lucked out and found a cab, I got home and got some ice on my ankle.  Calling my GP, he said that I should go to Emergency to ensure my ankle wasn’t broken. I didn’t think it was broken, but I wanted some crutches to help me get around and to school.  So off to the hospital we went.

Arriving at the hospital, we were quickly served. I felt a bit embarrassed that I was in hospital with a running injury.  Thankfully, a few minutes later another runner came in (still in his running gear) with a badly broken arm.  He had also had the misfortune of a fall while running, though his injury turned out worse than mine.  The other patient in ER had fallen off of a truck and was bloodied all over and in and out of consciousness.  It seems strange that with all the dangerous sports out there, it is the guys running around that get injured!

Since the injury, I’ve been a good patient, and am compression, raising my ankle, icing it and taking advil.  I have also bought an AirCast on my sisters recommendation, which should substantially increase healing time….At this point, all I’m hoping for is that I can walk around London soon!

Posted by: Richard | May 31, 2010

Paul Donovan – UBS Chief Economist

I was fortunate enough to get to spend a lunch-hour learning from the Chief Economist of UBS – Paul Donovan.  It is rare that I come away from these presentations with more than a thought or two, however after this presentation I have over a page of notes.  This is a testament to the clear thinking of Mr. Donovan and his ability to present ideas.  I thought it would be interesting to share some of my notes and thoughts.

Talking about the recession, he made an interesting point that 70% of the drop in GDP in recessions is caused by inventory reduction / tightening.  This is what can make a small business cycle more dramatic, potentially becoming a major recession.  He discussed how the 1982 recession saw a dramatic drop in inventories held by big business coming out of the recession.  Pre-recession inventory levels never returned, as companies had developed tools (software, relationships with vendors) to keep lower inventory levels.

This recent recession is very different in that it is small business that is taking most of the pain.  This is important, as a majority of the economy is small business.  We can see this looking at the stock market, where big companies are bringing in strong profits.  What is happening is that liquidity has dried up for small business.  Banks are getting tighter on financing small business, making cash flow more important.  At the same time, suppliers (often big business) are tightening their financing of small business, reducing terms from net 90 to net 30.  All in all, cash is getting hard to come by, and one of the only ways to save on cash is to reduce inventory.  There is now a tremendous incentive to invest in technology that can better manage inventory.  Even where technology doesn’t exist, management can take a more active role in managing inventory to reduce cash tied up in the business.

What this means is that coming out of this recession, we may not see an inventory bounce back to pre-recession levels.  Much like big business never went back to their high-inventory levels post-1982, smaller business may also run leaner as a result of this recession.

Separate from the above, we looked at unemployment, which is good and bad news.  The good news is that confidence is improving, largely as a result of the fact that many unemployed are structurally unemployed. In Spain (which has 20% unemployed), the remaining 80% are quite confident, as they view unemployed as unemployable.  This obviously is a simplification, however the psychology is that growing unemployed cause fear (as it is happening and affecting you regularly), however the effect of long-term unemployed diminishes over time.

Further to this, demographics plays a role in the changing Western World, which is increasingly focusing on services and needs high quality labour.  As an example, in America 20% of the workforce has third world reading and 30% have third world arithmetic skills.  This contrasts with roughly 10% of European workers having third world reading and arithmetic skills. This semi-skilled part of the work force is finding it harder and harder to compete in labour markets where unskilled and semi-skilled labour has been outsourced to developing countries.

This leads to a frightening future for Western Societies, which start to develop into an active labour community and a disaffected long-term unemployed community.  Not only does this fracturing of a population into haves and have-nots reflect the failure of a country and a society to be inclusive and prosperous, but it also creates huge social tensions that will likely lead to significant long-term costs.  It is obviously critical to find the root causes in structural unemployment and build incentives for these marginalized groups to gain the skills required to rejoin the working class.  What these incentives are and how they are administered is far beyond my expertise, however I’m sure a good discussion could be had over several beers on a patio.

Ultimately, this presentation engaged me with new ideas and has me thinking of the implications of what is happening today on the future of our economy and society.

Posted by: Richard | May 16, 2010

Thames Path Day 5: Staines – Windsor – Maidenhead

Another beautiful day rambling along the river with friends, enjoying the sun and lovely scenery.

We met at 8.30 at Waterloo, and with coffee’s in hand we boarded the 08.50 for Staines.  Alarmingly, our cabin was full of teenagers.  I was once a teenager, and was amazed to see 60 teenagers awake this early.  Unfortunately, these kids were manic and I suspect had been chugging red bull prior to the journey.  What is usually a quiet early weekend ride was instead a 40 minute endurance test of teenager screams!  yikes.  As we exited at Staines we were happy to see the teens go right as we went left down to the Thames.

The route is lovely at this stretch, and our friend Eric kept the conversation interesting while we plodded our 16 miles.  We passed increasingly grand riverbank mansions (the most grand being Windsor Castle).  Arriving in Maidenhead, I was reminded of the tv show ‘The Office’, which was based in Slough (a few miles away), but the general feel was mimicked in Maidenhead.

Our route is here:

Posted by: Richard | May 14, 2010

Thames Path Day 4: Kingston to Staines

Day 4 on the Thames Path was a dicey affair.  Heavy rain showers were predicted for later in the afternoon, and we were tempting fate by trying to squeeze 15+ miles in before the showers came.  I was joined by Valeri, a Sloan classmate and my lovely wife.

The route for this walk was not as dramatic or pretty as Day 3.  Rather, it probably was as pretty, but not as dramatic of a change coming out from Central London to the countrywide.

The route is here:

Posted by: Richard | May 2, 2010

IMF – New World Economic Outlook Lecture

A great part of the Sloan Fellowship is the involvement of the community of the London Business School.  A great example of access to thought leadership was a presentation last week by Prakash Kannan and Ravi Balakrishnan of the IMF.  Ravi and Prakash are the authors of the New World Economic Outlook, an analysis of what is going on in the world.  Over the course of an hour, Ravi and Prakash took us through their view of the global economic outlook and some of the concepts that lead to their viewpoint.

Now, this is a great opportunity to hear thought leaders talk.  Even better is the involvement of LBS Economics Profs – Andrew Scott, Paolo Surico, Richard Portes and Nicolas Coeurdacier, all of whom grilled the IMF economists after their presentation.  Finally, an open floor allowed for the group of students to ask questions about the lecture.

As background to the lecture, the basic premise is that the world economy is improving, however the trend is uneven.  Asia is responding rapidly, whereas Western nations are still quite sluggish.  The outlook then is that Western countries will have a slower return to normal and the global economy will be driven by the Asian / Developing nations who are currently experiencing GDP growth of up to 10%!

This begged my question: What is the stimulus for Asian GDP growth in the future?  In the past their robust growth was based on Western demand (fuelled by credit) for consumer durables. Over the past year, tremendous stimulus been extremely successful (so much so that there are fears of inflation, asset bubbles and over-built capacity).  How is growth generated in the future?  This is a real question, with indebted Western consumers who have to pay off personal and governmental debt plus a reduction in Asian stimulus spending.  Thankfully, this question wasn’t dodged (though a further question from another classmate about overbuilt infrastructure (factories) in Asia specifically was not answered).

The answer: While Western demand has dropped, there still is demand that is resulting in Asian growth.  Added to this is more robust government spending in Developing economies. Finally, internal demand will start to cause developing economies to grow.   So while the past had two extremes, the future sees a mix of these extremes and increasing internal demand.

I’m sceptical about this option for several reasons.

1. We have gone through a technology boom with dramatic changes in computers, electronics, televisions and monitors.  At this point, the degree of change from new products is diminishing.  People can get by with their existing LCD monitors, 2008 computers and 42″ flat screen TV. With debt repayment comes compromises, and I think the technology fuel of the past decade is now producing products with less marginal utility over current products.  Does this mean that consumers will dry up?  By no means, but I see a drop in spending while people get their finances in order.

2. I am unsure about the growth in internal demand within developing economies.  It seems very fortunate that internal demand will pick up precisely when foreign demand drops.  Perhaps too fortunate, and this timing may not be realized.

3. Projected rises in developing nations currencies will hurt competitiveness and potentially reduce growth.  This will be compounded by increasing commodity prices that will help to reduce the labour cost gains in outsourcing production to developing countries.

4. Uncertainty as to how long governments can keep on spending to continue growth.  As governments withdraw stimulus spending there is a lot of  hope that Western and local businesses pick up the slack to keep economies growing.  Obviously this timing issue could result a drop in growth.

My final conclusion is that there is a lot of hope that the timing of aspects of growth will match opposing drops in growth.  Developing nations are on great paths to growth, however they haven’t experienced a significant dip in a long time.  Unfortunately, there are enough issues that lead me to believe that a drop in growth (perhaps only down to 5%, perhaps lower) are on the horizon.

What a great day for a ride…last weekend.  This weekend has been rainy and cold (though we still got 15 miles in yesterday on the Thames Path).

I met up my friend Eric at Liverpool Street early.  His special lady decided to ride out to Chingford as she wanted to do 80kms, and our route was only 50kms.  Very impressive stuff.

Fortified with a hot americano, we boarded the train and squeezed our bikes between seats and enjoyed lively discussion for 8am as we sped out of London.

The start of this ride is horrible.  In cities, on roads with traffic.  The first 10km or so had me discouraged that Eric didn’t know what he was doing in choosing this route.  I was very completely wrong though, as Eric’s route delivered!  The next 40 km’s had some exquisite country lanes, downhill speedy curves and a heck of a lot of fun. Best of all, almost no traffic!

I felt great, and had a ton of energy and could have gone for another 20km or more as we pulled into Sawbridgeworth.  I can only attribute this to the fact that I had eaten a big bowl of steel cut oats which were slow to release their energy.  Eric on the other hand was exhausted, and with good reason.  His rear tire was at about 50 psi instead of 105.  He hadn’t complained once all day and had kept up the pace – a very tiring and impressive ride!

The route can be seen here:

Posted by: Richard | April 29, 2010

Thames Path: Day 3

Well, the walk gets prettier every day, and I might hazard that the increase is logarithmic.  Day 3 was exquisite, walking along the river in glorious sunshine from Putney to Kingston (past Kew and Richmond).  The route finding is getting very easy, and this route is the first time it feels like being in the countryside.  The Thames is much more sedate here, and I feel like I’m seeing views that I have seen in paintings at the Tate Britain.

While this route is great, there are also some great opportunities to stop for a coffee or a pint, and we did both.  At the start of the walk we filled up at Carluccio’s for a fine Americano.  Near the end we stopped for a pint on a patio overlooking the Thames.

The route is here:

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