Could Egypt's Events Impact China?

 |  Includes: FXI, PGJ
by: Cam Hui, CFA

First Tunisia and now Egypt - the protests, which began as food riots, have spread across North Africa and into the Middle East such as Yemen.

At first glance, China must be watching the unrest with some trepidation. After all, Africa is a huge source of natural resource (though not North Africa), but any disruption to Suez Canal traffic could be a concern as it would interrupt the supply chain. At a different level, the Chinese leadership may be thinking: "This is what happens when economic growth slows."

China's challenges
In the intermediate term, China faces a number of challenges. Firstly, it is said that China needs GDP growth of roughly 8% to accommodate the millions of migrants from the villages and therefore growth needs to continue. However, the current strategy of focusing on export-driven growth is untenable in the long-term - it is causing trade tensions, an overvalued currency and the importation of inflation from the Fed's QE2 policy.

China's leadership recognizes these issues. I pointed out before that the latest five year plan calls for more balanced growth - a shift away from investment to domestic consumption. Part of this strategy has been to upgrade the Chinese workforce through education, but unemployment among the educated is rising and creating social tension.

Crouching tiger, hidden rabbits?
Already the discontent is showing itself. Consider this viral video about the oppressed rabbits rising against the tigers. How things have changed! Not so long ago, e.g. the Cultural Revolution, any hint of less than full support for the leadership would have been viewed as a direct challenge to the government and dealt with in the harshest possible fashion. What's more, some have suggested that Vietnam, which is on China's southern border, is next.

This brings us back to the Tunisian and Egyptian protests. Consider this CNN story entitled Young, educated and underemployed: the face of the Arab world's protesters. Don't forget that the spark for the Tunisian riots was the incident where a young university graduate forced to sell vegetables on the streets set himself on fire in protest.

The unrest in Tunisia has toppled the government there and the Egyptian ones are threatening to topple another. Given the level of discontent from economic pressures, is this a lesson for China? Are the revolutions of 1848 which swept Europe repeating itself in 2011? Could China's leadership be re-thinking about the tradeoffs between the risks of an asset bubble compared to the imperative of continued growth?

If they tilt towards the latter, does that mean that the property bubble continues? We know that when bubbles blow up, they end very badly. Note that a recent poll indicates that 45% of investors will face a financial crisis in the next five years.

For investors, these developments mean greater market volatility.