Tuesday, May 13, 2014

China vs neighbhours Japan, Malaysia, India, Vietnam

Firstly, it is the hard landing, because they [the Chinese] have to re-balance their growth from investment to consumption and they may be doing their reforms that lead to re-balancing too slowly. Why too slowly? Because the interest groups that are in favour of the old growth model based on expanding and investment are powerful, whereas those who are all going to be benefiting from labour intensive and consumption-orientated growth are not powerful because it is not a democracy and the country is not politically organised.

Secondly, there is a financial risk in China from rebalancing as they liberalise financial markets and stabilise – for example - their own shadow banking system. They could have a view on the shadow banks and decide to implement market discipline.

Finally, China has tense relations with a number of its own neighbours. Notably, with Japan, Malaysia, India, and Vietnam on a range of territorial issues and all of these countries in China have leaders that are very nationalistic. So, all these countries face challenges of structural economic and full transformation. Suppose they fail to do the right thing in China, Japan or India, what’s the risk that they will blame it on the foreigners and the geo-political tensions are going to become more fierce?