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The China supremacy

By China Economic Review

Japan is increasingly aware of the rise of China, and both paranoid about its implications and determined to participate in and benefit from the trend.

The Japanese economic turnaround of the past year is attributed to a significant extent to stimulation provided by China’s fast economic growth. The latest example: Itochu, Japan’s third-largest trading company, in mid-November reported a doubling in its profits for the first half of the year as a result of increases in commodities prices due to demand from China.

Public listings of China companies in Hong Kong attract a high level of interest from Japanese investors, and the listing of Xinhua Finance Ltd shares on the Tokyo Stock Exchange’s Mothers Board (a Nasdaq-like exchange) in late October was 13 times oversubscribed.

Xinhua Finance, which is headquartered in Hong Kong, was the first China company to list in Japan and the Tokyo Stock Exchange is eager to see more Chinese companies come to Tokyo to raise money.

The appetite for China investments among Japanese investors is clearly large, and an advantage of a listing in Tokyo is that it does not rule out a secondary listing somewhere else. That gives companies the opportunity to take two bites at the global investment apple, in that there is little overlap between the Japan and ex-Japan equity markets in terms of investors.

There are signs that the restrictions on the rules for QFII (Qualified Foreign Institutional Investor) investments will be eased early in 2005 to encourage more cash injections by foreign investors into the sagging A-share markets, badly in need of a boost from some direction or other.

It is said that the eligibility requirements on institutions will be lowered and the lock-up period for shares bought – currently a year – will be reduced to three months, making investments much more liquid and attractive.

A shift in the QFII rules is also necessary sooner or later to allow for the impending inclusion of China A shares into global stock index tracking funds. Something like seven trillion dollars track global index funds, mirroring the balance of all major equity markets around the world.

China’s A shares are not currently included in these global indices, and so China’s position on the global index equity country chart is 30. When the A share markets are fully reflected in the global indices, something like 65 billion dollars will have shifted into the China markets from other markets, and China will jump to something like number 6 on the global index table.

When it happens, it will not be a matter of choice for the fund managers – they will have to rebalance their portfolios, probably by shifting money out of other markets such as Hong Kong, Taiwan and Japan in order to meet the re-balanced requirements of the global indices.

This process, of course, will take several years. A sudden rebalancing of the global indices to the extent required by the addition of the A shares would be highly destabilizing to markets around the world, and would also mean that the foreign funds would be largely buying into A-share companies at disadvantageous prices.

The practical implication? Baosteel is probably a wise long-term buy.

A recent article in the IHT looked at the ignorance of young people in former Eastern European countries such as Bulgaria with regard to their country’s recent history. The same can be said of China, of course.

For Chinese people below an arbitrary cutoff point of, say, 28, there is at best a vague understanding about events of the past 30 years. There are serious info gaps due to the highly selective approach to history by the education system and the media, combined with a lack of interest in anything political among ordinary people.

The impact of this history disconnect is to slow the inevitable rise in the confidence and pride Chinese people have in their culture and “Chineseness” .
Which is a shame, because China is destined during the 21st century to be a major force in shaping global culture – but only after it has appropriately processed the past.

Even so, there are already signs of a growing awareness among younger people of the rich legacy of the country’s more distant past. Calligraphy and Buddhism, classical art and music are being selectively sampled by younger people in Shanghai and other cities, with elements being integrated into their 21st century middle-class online hipster cool gadget-oriented, increasingly affluent lifestyles.

The choices they make and the old-new fusions they fix upon will impact on the rest of the world in the future in a more subtle way than the shift of jobs from Michigan to Minhang, but with an impact that could be more significant in the longer term.

Taxi update: The Shanghai taxi driver refrain that business is only so-so is getting harder and harder to accept at face value. Whereas a year ago, a taxi could be had at virtually any intersection in the city within a minute or two regardless of time of day or season, today there are growing stretches of the day when the red “Taxi vacant” light shines not.

There are a couple of reasons for this shift in the fortunes of Shanghai’s 45,000 to 50,000 taxis. First is the growing number of local residents who feel affluent enough to take a taxi rather than waiting for a bus. A taxi ride was once something resorted to only on special occasions, such as Chinese New Year. The second, and balancing, issue is that as traffic congestion worsens with the increase in the numbers of private cars on the roads, the duration of the average taxi ride is increasing, for no particular increase in income for the driver.

Affluence and traffic congestion are the results of strong economic growth. The miracle booms on.

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