An Urban's Rural View

Deepening Pessimism About China

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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Where a pessimist sees disaster, an optimist sees opportunity. An old yarn on this theme has two shoe salesmen landing in a desperately poor, primitive country. "This is awful," the pessimist whines. "Nobody here wears shoes." To which the optimist replies, "This is great. Nobody here wears shoes."

In America's dealings with an increasingly rich and far-from-primitive country, China, the pessimist for many years has been the Pentagon. That's not because war with China is imminent or likely; it's because military leaders must be prepared for any possible war, and history teaches that armed conflict between an entrenched power, like, the U.S., and a rising power, like China, is possible, however unlikely. Generals and admirals are paid to be pessimists.

America's China-optimists have always been the merchants. Their upbeat attitude about the Middle Kingdom is as understandable as the generals' pessimism. It's all about the enormous potential market, more than a billion customers strong -- shrewd, industrious people who are increasingly able to afford almost anything companies sell. As the deodorant makers put it, "two billion armpits."

Now the views of both optimists and pessimists are changing, and not for the better.

The pessimists have watched an increasingly truculent China build up its navy and press disputed territorial claims to islands and atolls in the East and South China Seas, then claim the surrounding waters and airspace as its own. Near-collisions between Chinese fighter jets and American reconnaissance planes -- and angry exchanges of words -- have ensued.

Equally striking, America's optimists have a less rosy view of China. When the American Chamber of Commerce in China surveyed its members earlier this year, 77% said they felt less welcome in China than they did a year earlier (http://tiny.cc/…). The previous year, in response to the same question, only 47% had felt less welcome.

Most American companies doing business in China plan to keep investing there, the survey indicated. But 10% have moved or plan to move some of their business outside China. Only 64% turned a profit in 2015, down from 73% the year before.

And it's not just American merchants who are unhappy. In the latest survey by the European Union Chamber of Commerce in China, 70% of the companies said they felt significantly less welcome, up 7 percentage points from 2015 (http://tiny.cc/…).

Tensions between China and the West over trade and investment have been building up for years, to be sure, but the EU group says the business environment in China is "'increasingly hostile' toward foreign companies and 'perpetually tilted' in favor of domestic players."

The reasons for this growing pessimism are numerous and complex, but the underlying cause is the slowdown in China's economic growth.

China's government has always been "tilted" toward Chinese companies. But when the economy was growing at double-digit annual rates it didn't feel as much political pressure to constantly intervene on their behalf and at the expense of foreign competitors. For their part, foreign companies in China complained less about receiving smaller pieces of the economic pie when the pie was expanding rapidly.

This may sound touchy-feely, but the downturn also has a hard edge. With the economy growing at roughly half the boom years' pace, China's massive overinvestment in industrial capacity hurts foreign competitors more because there's less domestic demand to soak up the flood of manufactured goods. In the American Chamber survey, respondents listed industrial overcapacity as a concern for the first time in 18 years.

The slowdown has also delayed economic reforms that would have helped foreign firms by reducing the government's role in the economy. And it tempted an ill-advised intervention in the stock market last year that scared foreign and Chinese businesses alike.

China's financial authorities have mostly botched their response to the slowdown. Foreigners are right to complain about currency manipulation, but what some of them don't realize is that China's central bank has in fact manipulated the yuan every which way. Sometimes it has driven the currency down to help exporters. Other times it has pushed it up to head off capital flight.

American farmers have their own reasons for nervousness about China. China is still the biggest market for U.S. food and agricultural products, and the slowdown hasn't dulled the country's appetite for ag imports. But the strong dollar has had the Chinese buying more from Brazil and the Ukraine. What if China's economy should sag further? At what point would the Chinese have to stop imports and tighten their belts?

It would be comforting if China would at least approve the biotech traits U.S. companies have been waiting on. Some of the eight traits were submitted to China's agriculture department as early as 2011, my DTN colleague Chris Clayton writes (http://tiny.cc/…). Seed companies and growers are rightly leery of selling and planting traits that can't be exported to China.

In agriculture, as in other industries, China's market is "tilted" in favor of Chinese companies. In recent years Chinese companies have acquired big-name foreign companies like Smithfield Foods and Syngenta. Yet foreigners aren't allowed to buy Chinese ag and food companies.

There's no sign this lack of reciprocity will change any time soon. And as long as the Chinese economy keeps stumbling, foreign-business pessimism is likely to deepen.

Urban Lehner

urbanity@hotmail.com

(CZ)

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