As the year comes to a close, and we look forward to 2011, it’s worth taking a brief look back at the top stories that shaped China’s business and economic climate in 2010:
1. Google Quits China. Google’s (NASDAQ:GOOG) sudden announcement, last January, that it had been the target of a major cyber attack originating in China, and that it would subsequently either stop censoring its search engine or withdraw from China entirely, sent shockwaves through the business world. Would a top global firm seriously walk away from the world’s largest and fastest growing market? Was it a courageous act of principle, or the stupidest business decision ever? The Chinese government was so stunned it took two full weeks to respond, before lambasting the company as a tool of meddlesome American foreign policy. Eventually, Google came to a compromise — sort of — shifting its China portal to Hong Kong while keeping its R&D facility on the Mainland. But the shock – and the issues raised – with regard to China, and those who do business there, will be felt for a long time to come.
2. Real Estate Bubble. Fears that China’s real estate boom may have turned into a bubble were a recurrent theme throughout 2010. In many cities, apartment prices have doubled over the past two years, even as many purchased units stand empty. With famous investors like Jim Chanos calling China “another Dubai,” and a growing number of urban residents angry at unaffordable housing prices, the government decided, in April, to step in with a series of “cooling measures” intended to restrict speculative buying. But with property development generating a large part of China’s impressive GDP growth, as well as a big chunk of local governments’ revenues, many in the market doubted whether authorities would stay the course. While buyers and sellers backed off for a while, they came rushing back in the second half of the year, forcing Premier Wen to admit that, so far, efforts to rein in runaway real estate prices have not succeeded.
3. Rare Earth Embargo. In the midst of a heated diplomatic quarrel, this September, over a contested chain of islands in the East China Sea, Chinese customs authorities quietly but effectively halted all exports of rare earth oxides to Japan. Over the past two decades, production of these little-known minerals – critical ingredients for a wide range of advanced electronics, including defense applications like smart bombs and guidance systems – has migrated to China, which now controls more than 96% of global supply. The unofficial embargo – which the Chinese denied, but which lasted over a month – drove home, for many, just how vulnerable not only Japan, but also the U.S. and Europe, may have become, should China ever decide to use its growing economic leverage as a weapon.
4. Labor Unrest and Rising Wages. A spate of 14 employee suicides at Foxconn — China’s largest contract manufacturer of electronic goods for top-name brands like Apple (NASDAQ:AAPL), HP (NYSE:HPQ), and Nokia (NYSE:NOK) – focused nationwide attention on the country’s high-stress, low-pay working conditions. The attention coincided with a series of independently organized strikes at several factories across China, including Toyota (NYSE:TM) and Honda (NYSE:HMC) car plants. Local governments in many parts of China responded by raising minimum wage rates, while observers debated whether rising labor unrest and demands for higher wages signaled an end to China’s role in the global supply chain as a reliable source of cheap labor.
5. Currency Tensions. Throughout 2010, a growing chorus of American critics, led most vociferously by Nobel-winning economist and New York Times columnist Paul Krugman, has lashed out at China for manipulating its currency in order to gain unfair trade advantage. By keeping the Renminbi artificially weak, they argue, China has been aggravating global imbalances and stealing American jobs. Earlier in the year, it looked like the Chinese might be willing to cooperate and allow the yuan to appreciate, but the Eurozone debt crisis – and the threat of a double-dip recession – gave them cold feet. China’s currency rose slightly, but a frustrated Congress has threatened to impose harsh trade sanctions on China should it fail to move more quickly. As the year comes to close, the two sides have dug in their heels for what looks like a brewing “currency war.”
6. Indigenous Innovation. U.S. pressure on China focused initially on currency, but that began to shift later in the year as American companies told lawmakers they were far more concerned about new barriers being erected to wall them off from the Chinese market. In particular, they pointed to China’s proposed “indigenous innovation” catalog, designed to encourage purchasing managers in the country’s vast state-owned sector to buy “homegrown” rather than foreign-supplied products. Officials agreed to reconsider the policy, but it sparked worries – on a whole range of fronts – that the business climate had shifted, and that the Chinese were more interested in favoring the success of local, often state-run, firms over ensuring the “level playing field” promised by WTO. Chinese leaders, for their part, insisted that China remains “open for business.”
7. Rising Inflation. China’s consumer price index (CPI) inched steadily higher throughout the year, reaching a year-on-year increase of 5.1% by November – far exceeding the country’s target rate of 3%. Many felt that the actual price gains, especially in urban areas, were much higher than official figures. The fastest rising item was food, which some analysts attributed to weather and transportation. But others blamed the rapid expansion of China’s money supply, due to its stimulus policies. Rapidly rising prices for labor and food put significant pressure on the profit margins of companies like Yum! Brands and McDonald’s, and sparked worries (so far unrealized) over social unrest. The government’s initial response has been to set price controls and crack down on speculators, but many believe further interest rate hikes or even tougher measures may be in the cards, if inflation continues its advance.
8. Geely Buys Volvo. In August, privately-owned Chinese carmaker Geely closed a long-awaited deal to buy Swedish auto brand Volvo from its previous owner, Ford. The $1.5 billion purchase was the Chinese auto industry’s largest overseas acquisition to date. Critics say Geely’s management is taking a huge risk, and point to other, smaller acquisitions of overseas car brands by Chinese companies that haven’t worked out so well. If they can pull it off, though, the Volvo buyout will mark a major milestone in the push by Chinese companies to “go global,” and help bring China one step closer to dominating what it considers a key strategic industry.
9. Bank Balance Sheets. This July, the Agricultural Bank of China (AgBank) set a new record for the world’s largest IPO, raising over $22 billion on the Hong Kong and Shanghai stock markets. One would think that such a stunning accomplishment – the last of China’s “big four” banks to list overseas – would signal the strength of China’s banking sector. In fact, it indicates the pressure Chinese banks have been under to raise additional capital into order to shore up balance sheets weakened by last year’s lending boom. A study by Chinese regulators, completed this spring, suggests that as many as three-quarters of the loans made to stimulus projects via so-called LGFVs (Local Government Financing Vehicles) may have trouble being repaid. Hence the urgency to build a buffer against future losses.
10. Cross-Straits Trade Agreement. In June, Mainland China and Taiwan signed a landmark agreement to gradually eliminate trade and investment barriers between the two Cold War rivals. Made possible by President Ma Ying-jeou’s 2008 election victory over the island’s more pro-independence party — and approved only after a historic public debate on Taiwanese TV – the pact is the most significant of a series of recent moves towards warmer cross-strait relations. Whether or not stronger commercial ties will lead to political reunification is unclear, but they are certain to draw Taiwan’s business interests – which crave access to the huge Mainland market — ever closer into Beijing’s economic orbit.