by Damon de Laszlo, ERC Chairman

Damon de Laszlo

Damon de Laszlo

As many of you know, I have always been fascinated by China, a country that in the Middle Ages led the world in technology and then became paralysed by bureaucracy until the 20th century when the established bureaucracy and system of government was destroyed by invasions.  The aftermath lead to a communist state under Mao Zedong, which polished off any remaining vestiges of freedom and prosperity.

Out of this catastrophe came a surprising government under Deng Xiaoping (1978– 1992), a man brought up under the destructiveness of the communist dictatorship and who studied Lee Kuan Yew’s method of government in Singapore. Fundamentally a one party system, but one that was primarily meritocratic, where the concept of a legal system and competition in business and politics created a flourishing microstate.

From Deng Xiaoping to President Xi there has been the most dramatic change ever seen in economic history.  An economy has been created where hundreds of millions of people have moved out of abject poverty and reoccurring starvation into an advanced industrial economy in which individuals can hold personal wealth, be housed in modern conditions, and have an extraordinarily high degree of freedom, all totally new, and all achieved in the last 30-odd years.

There are still areas of primitive agriculture and primitive industry, along with appalling living and working conditions, but these areas are well documented and being actively addressed under the current 5-Year Government Plan.

On a business trip in the last couple of weeks, starting just inside China at DG, then to Shenzhen, to Xiamen, to Dalian ending up in Beijing, I visited ten SME industrial companies.  Two where the working conditions were appalling,  equivalent to UK factories in the 1950s; the rest ranged from better,  to top-of-the-range and on a par or better than you see in the West.  The enthusiasm of the management and, as far as one could see from walking around, the contentedness of the workforce was high.  Chinese airports and roads are better than Europe’s.  The economic reports are basically bullish, there are problems with debt, both personal and local government, which are acknowledged and being addressed by the central bank.  As a generality, none are worse than the problems facing Europe or the US.

The level of training and the output from universities is startlingly high.  In one of the companies I visited, 70% of the engineers were women; this is not considered peculiar!  There is a shortage of labour and wages are rising, to the extent that over the last few years Chinese businesses have been starting up outside China and this is having an impact on the whole ASEAN region.  Chinese investment is having a beneficial impact and is encouraging growth in the whole region.  The anecdotal evidence was backed up by meetings with Singapore-based investors who are now looking at opportunities in Indonesia, Malaysia and Thailand, countries where the governments are less reliable but businesses command a lower premium.

 

We are seeing, as I mentioned before, an historic coordination of economic growth across the northern hemisphere.  The USA is remarkable, it would appear to be enjoying accelerating economic growth fuelled/propelled by the tax cuts and active dismantling of regulation.  The possible danger being that the economy will overheat in the next one to two years.

Even Europe is picking up momentum and starting to expand faster than it has done in the last ten years, recently overhauling Britain’s faster growth.  In the case of the UK, the Brexit negotiations and the constant press coverage of announcements by the establishment Remainers is, unsurprisingly, having an unnerving effect on British business.  Trying to run a company is difficult enough without a constant stream of gloomy prognostications, the surprising thing is the economy is holding up as well as it has done in the face of the promoted uncertainty.  At the end of the day, while we could see disruption in the ports while Customs and Revenue authorities have difficulty generating and implementing new rules, the confusion is unlikely to last very long.

The difficulty at the moment is mainly coming from the Brussels bureaucracy that is enjoying the limelight and, being unelected, has little incentive to get on with agreeing new terms and regulations.  European industry, however, is growing more alarmed by the lack of progress and will in due course start to create greater pressure on Brussels to get on with their job of negotiating and give up political grandstanding.

On the British side, the lack of political cohesion and vision in our parliamentary government can only really be described as a disgrace and a failure of our Members of Parliament.

Economic growth in Asia and America is creating prosperity.  It can only be hoped that in the UK and Europe, a way can be found to  shed the increasingly bureaucratic straightjackets and counter the lack of political vision and cohesion in the near future.  The West is losing the argument that democracy is the best form of government. As the ASEAN economies, led by China, continue their rapid growth the consequences of losing this argument become more and more serious.

After a long run of historically-unusual steady rise in stock markets and steady decline in interest rates, we have arrived at a predictable turning point.  With the global economy growing, interest rates had to rise as central banks reduce and reverse their economic stimulation and interest rates start on an upward trend.  The return of volatility is not surprising to older hands but might cause alarm to the younger managers. The scene, however, is not set for other than a return to volatility, exacerbated by derivative and programme trading.  However, a market crash is unlikely as underlying economics are good and profitability of businesses rises dramatically as they get to full capacity.  One can expect increased capital investment, leading to productivity improvements and a trend rise in commodity prices.

Barring political accident, economic growth is on course, for certainly one to two years.

 

Damon de Laszlo
15th February 2018

 

Posted by Aimée Allam