The dragon enters itself

Andrew Pegler – 20 August 2010

With the US consumer crippled by debt and Europe going pear shaped, the Chinese have been looking for new markets. And they’re finding them in their own backyard.

It’s part of the arc of economic maturity that eventually a nation goes from being a cheap destination for making stuff for richer countries, to having enough internal wealth to support an aspirational middle class that can afford overseas imports. Think Tawain, Singapore etc. Anyway, McKinsey & Co predicts China will add 400 million to its urban population by 2025 and quadruple “middle class” households to 280 million. That’s a lot of wallets that will want emptying and will take China from being the world’s widget factory to its next big consumer market.

China is also starting to buy overseas assets to keep up with internal demand. Legendary Harvard economist Niall Ferguson wrote in his book Empire that empires really begin when a nation has enough internal demand to find it cheaper and safer to own factories and food production facilities overseas than to continue buying from them. The commodity spike of 2007-08 scared China into buying mineral resources across Africa in earnest and it’s now turning its steely gaze onto the lucky country. But it’s not just mines, it’s also our food production assets i.e. farms and prime land. Liberal Senator Bill Heffernan is now worried Australian farmers could become tenants in their own country. Probably a slight exaggeration, but you get the picture.

All this movement will bring foreign ownership laws and regulations into sharp focus. Somehow we need to strike a balance between being a liberal economy and maintaining our national interest. Not surprisingly Bill Heffernan has plenty to say on that too.

Speeding up this shift in China is the decline of the US. At present the US is being crushed by national debt and its interest payments will exceed its defence budget by 2020. As Niall Ferguson also points out, when an empire starts paying more to service its debts that to maintain its borders it’s on the way out the door. My advice is get your kids to learn Mandarin.

And in other news…. Japan’s latest GDP figures are less than China’s and suggests that this year China will pass Japan once and for all to hook the mantle of the world’s second biggest economy. The rise of the dragon continues. Roar!