OVER the last two weeks I had the pleasure of travelling in China on a financial study tour.
A group of 60 Australian financial advisers set off from Sydney with the aim of finding out more about the modernisation of China now under way.
Well aware of China’s importance to the Australian economy, as investors we were also keen to learn the seriousness of the recent slowdown in China and its likely implications for us.
China has a population of around 1,350 million people. Beijing has 23 million and Shanghai 23.5 million, each slightly more than the whole of Australia. The numbers underlie many things.
For instance they explain why the Chinese Government can spend enormous amounts of money on infrastructure. Each taxpayer may not pay much but it totals some massive sums.
The Government has spent around US$35 billion building the high speed rail link that cuts the 1,300 kilometre journey from Beijing to Shanghai to five and a half hours including half a dozen stops at larger towns and cities. The train cruises at 300 kilometres per hour.
The high speed rail network already takes in the main east coast cities and is being extended steadily into the interior.
The city of Shanghai has its own special, much faster train.
The new magnetic levitation train runs the 31 km journey from the city to the airport in seven and a half minutes, at 430km/h. It has no wheels or moving parts and is driven by magnetism. A journey costs around A$9.
The Port of Shanghai was inadequate so the Government turned a group of rocky islands 32 kilometres offshore into a single island by filling in the sea between them and turning the reclaimed land into docks.
It is now the largest port in the world capable of moving 22 million containers annually. A 32 kilometre over-sea bridge was built to provide road access to the port.
In the Taicang economic development zone several hundred major multinational companies have set up fully owned or joint venture factories.
Taxes are nil for the first two years and half normal for another three years. Goods manufactured are low to medium complexity.
Rural populations are being moved up into the air to free up land for productive use. Across the rural areas thousands of new apartment towers are being built.
They are usually about 20 stories high and in groups of 25 to 150 towers.
Toyota and General Motors set up factories in China over 20 years ago to take advantage of the cheap labour costs and market opportunity.
A condition of the ventures was that the companies also provide the skills and technology for the government to set up factories producing Chinese brand cars.
However the Chinese makes aren’t so popular. The Chinese are brand conscious and prefer imported makes, especially prestige brands like BMW, Audi and Mercedes.
The Beijing Rolls Royce dealers said they were experiencing steady demand.
One importer of BMWs, Jaguars, Land Rovers and Volvos said demand is very strong. They have 60 dealerships now and will expand to 130 within two years.
The free enterprise policies, new infrastructure and incentives for foreign companies are lifting Chinese living standards.
The average income in China is now nearly US$9,000 per annum and rising. That’s not peanuts any more.
Sports shoe company Nike recently closed its main Chinese factory and opened a new one in Vietnam because Chinese labour is now too expensive. Other companies have done likewise.
The slowdown is evident in China. Many cranes were idle on building sites and at Shanghai Port.
One building material supplier said their Chinese sales were down over 10 per cent.
Next week I will look at the implications for Australia and the transition to the new Chinese leadership team.