I have spent the last few days in China. The stock market has collapsed over the past year by 70 per cent as GDP growth has slowed from 10 per cent to 7 per cent. But the optimism amongst Chinese business people has not diminished and they remain confident that they can continue to generate wealth at a spectacular rate in the coming years.
This optimism looks rather misplaced in the near term as the US and UK stand back from quantitative easing (QE). QE was undoubtedly the right policy in the aftermath of the banking crisis and allowed both economies breathing space for a number of years whilst the banking system repaired itself. Both economies have returned to growth and unemployment has fallen sharply, but a key point for those trying to predict what the future holds for China is that wage increases have been pitifully low in the west and don't look as though they are going to recover anytime soon. So, this suggests that demand for Chinese goods will remain sluggish and this will be exacerbated further by the problems that the Eurozone is experiencing.
Many of the Chinese business people that I met whilst I was there argued that the Chinese economy was developing internal momentum and was becoming less reliant on export markets, but the evidence is not really there to support this argument. I am old enough to remember the frenetic rise of the Japanese market and the moment that its total value surpassed that of the US market.
I vividly recall the long discussions that ensued as our investment team grappled with the idea that Japan potentially had a more exciting future than the US, which was what the markets were telling us. However, we disagreed, believing that the weakness of the Japanese was that they were not innovators. They were exceptionally good at copying and miniaturizing, but they could not innovate in the way that the US could and so we sold all of our Japanese equities, which proved to be the right decision.
At this point, China is facing the same question that Japan faced at the end of the 1980s. Can it innovate? If it cannot, then it will find it difficult to keep up its economic momentum. There is evidence that it can utilize existing technology to innovate and hence the incredible success of Alibaba, but where is the Chinese equivalent of Silicon Valley?
As an aside, the changes that have occurred in China over the last decade are truly incredible to behold. Every time I go to Shanghai and Beijing, the skyline has changed, with towering buildings springing up everywhere. The architecture is glorious in Shanghai and it is a city that is truly international and cosmopolitan. Beijing used to have an air of a boring capital and centre of government, but it his becoming far more hip these days and there are endless shopping malls filled with luxury brand stores.
And that takes me back to the question of whether China can innovate. The days are gone when people flocked to fake markets to buy Louis Vuitton and Chanel handbags and now there are queues outside the real stores when a new collection arrives. Chinese women think nothing of dropping £3,000 on a new handbag. But why are the luxury fashion brands mostly European? The nearest that China gets to luxury brands are Vera Wang and Alexander Wang, who are of Chinese decent, but live in the US.
The same is true of cars. There are now 5 million cars owned by the 20 million residents of Beijing. When I first visited China many years ago, the cars were tiny and mostly domestically produced. Now the streets are lined with Porsche Cayennes, Range Rovers and masses of black Mercedes limos. One of my Beijing friends very kindly sent her assistant to take me to the airport and she arrived in an enormous, spanking new gleaming white Audi with every single extra that you can imagine. The downside of this, alongside China being the manufacturing centre of the world, is the pollution problem. As I wandered around Beijing yesterday, preferring to walk rather than sit in a traffic jam, I had a nasty chemical taste in my mouth, which only went when I brushed my teeth.
One of the ways that the Chinese government is looking to prop up growth is through further infrastructure spending. It has been instrumental in setting up a new infrastructure bank in the region, which will provide further funds for big projects. But this approach avoids the big overriding question that I posed above. Can China innovate? My guess is that after many decades of stifling creativity and with a culture that still leans towards censorship, it will be difficult.
*** These macro-economic arguments have a corollary. If you want an asset class that's not directly related to the gyrations of the stock markets - Chinese, US or UK versions - a loan to a quality, carefully vetted company on Money&Co. (the croed funding platform of which I'm CEO) is surely worth considering.