FE Trustnet News and Research

China unrest myth? Ashmore
 
Rob Mackinlay
By Rob Mackinlay  04 Dec 2008

Unrest in China will not develop into a serious threat to stability and emerging markets influence on global economics will increase, according to Ashmore, the FTSE 250 emerging markets asset manager.
As negative media coverage of China’s social stability increases - including warnings from China’s President, Prime Minister and chief economic planner - Ashmore’s head of research, doubts that unrest will translate into a significant political threat.

Shares in £754m Ashmore have dropped by nearly 60 per cent since the beginning of September.

Unemployment threat


Jerome Booth, Ashmore's head of research, said: "The point is that there are social protests in China everyday. If you look at the history of China over 2000 years what is remarkable is how it hasn’t translated into political activity. You can have a huge amount of unemployment in China and it’s not going to destabilise the government or the economy. The traditional fear was the regionalisation or balkanisation and that risk is now tiny. Mao’s great achievement was unifying the country."

Booth said: "China is still very much an agricultural economy. If you have a bad agricultural season you get a flow of migrants to the cities and less wage inflation. If you have a fall off in industry you get the opposite and workers return to the country."

He said that unemployment in China had been as high as 100m and was now "probably down to 40m" adding: "Don’t look at it like a recession in the UK. There’s a huge number of under employed people in the rural areas."

Asked to explain the Chinese President’s claims that the Communist party now faces its greatest challenge in 59 years, Booth suggested that this was a political response for the people of China. He said that the main short-term issue was the extent of the contraction "whether it falls to 8 per cent or 5 per cent growth but there’s no question of negative growth", but said that none of these scenarios posed serious threats to stability.

Other commentators have said that if Chinese growth falls below 8 per cent it could face unrest on a grand scale.

In October Dr Kerry Brown, senior fellow at Chatham House told Investegate that outsiders are "surprisingly complacent" about China's social and political stability.

He said: "If there is a steep downturn, we are into unknown territory. China has not known of an economic recession for 30 years. Two generations have grown up with year-on-year growth. To see that growth slow down, and perhaps even stop, would cause big problems." For more on Brown's views on China's instability

The stability of China has been questioned for some time. In 2006 a research report for the US Government said: "Although political observers have described social unrest among farmers and workers since the early 1990s, recent protest activities have been broader in scope, larger in average size, greater in frequency, and more brash than those of a decade ago.

Fears of greater unrest have triggered debates with the Communist Party leadership about the pace of economic reforms and the proper way to respond to protesters."

Yesterday it was reported that hundreds of policemen laid siege to a regional Communist Party headquarters in Hunan Province. This came from the Hong Kong-based Information Centre for Human Rights and Democracy which provides up dates on unrest including action by retired soldiers and increased concern amongst serving soldiers and police, last month. More bullish views on China: "China asset managers respond to threat of peasant unrest"

Threats to investors


Booth said that social unrest would not have a broad-brush impact on investors or the country as a whole. He said that investors in specific areas like property or those invested in businesses affected by labour market issues might be.

But he said that, in his view, the country was far from collapse. Booth said the consequences of social inequalities were two fold for investors: "These could lead to certain government policies that may, or may not affect the investor. There was the huge issue about land and the privatisation of state assets that affected investors in the market. A deep recession today might have an impact on your prospects in these areas."

Booth made a link between the likelihood of a change in government and the degree to which the state embraced the market. He said the greater the influence of capitalism, the easier any changes would be and the safer investors would be: "The thing about one party rule in China is that it is a fight against time. As we see the greater use of the market system, any change in government is less likely to affect the economy. The more time spent evolving a larger and larger private sector, the easier a transition will be."

Recovery will be "V-shaped"

Asked if current events were part of the process of decoupling, Booth said: "Decoupling is an objectionable word. It’s a complete nonsense, an equity driven word. At the back of the decoupling model is that you have a core and a periphery, with developed markets as the core. Why do you think there are now G20 heads of states meeting? Its because they’ve got the money. They need to be on the inside of the tent if the US is going to come through this. You’ve got a real increase in the bargaining position. Booth said that the long-term outlook post credit crunch was heavily weighed in favour of emerging markets. He said that leveraged economies had the credit crunch "disease" and said that those which had a banking crisis were likely to make the slowest recoveries. This puts emerging markets in a good position."

Booth told Investegate that he expected the emerging market recovery to be "V-shaped" and to take place "sooner rather than later". In a written statement, published yesterday, Booth said: "I suspect that the credit crunch may have the following effects:

a) a speeding up of the shift of economic power to China and emerging markets in general;

b) greater inclusion of emerging policy-making as the G20 rises in importance relative to the G7;

c) a major shift in risk perception as investors realise that the binary approach of denoting some countries and investments as risky and others as safe is illegitimate – all countries are risky;

d) a big shift in asset allocation to emerging markets, with the home-country and equity biases coming under strain;

e) a major shift in (EM) central bank reserve management towards lower reserve levels and a significant diversification out of Treasuries and Dollar assets into emerging markets; and

f) the start of consequent long term decline in the dollar."

The statement also said: 1) EM countries could recover much faster in 2009 than the developed world as there is less de-leveraging necessary and EM does not suffer from the banking sector crisis afflicting the developed world. Historically recovery is much slower where there has been a banking crisis.

2) The prospect is thus for global recovery in 2009 being led by growth recovery in EM.

3) Inflation may return as a risk as first the broad definition of US$ money supply may increase rapidly when banks resume lending and the banking multiplier kicks in again; and also should commodities recover on strong EM growth recovery in H2 09.

4) Those EM countries which manage to pass through the credit crunch in good shape (the vast majority) and which then credibly control inflation (the majority) could see currency appreciation followed by major investment booms starting in late 09 and 2010.

Some of last night's press coverage: Telegraph 1930s beggar-thy-neighbour fears as China devalues: "Hans Redeker, currency head at BNP Paribas, said China's policy switch could set off a dangerous chain of events.

"If they play this beggar-thy-neighbour game, it will cause a deflationary shock for the whole world," he said.

USA Today
Factory closures, layoffs stir unrest in China: A political commentator said:"All politics are local here, and so are all the protests, thus far."

And the protests will remain local, he predicts, unless the central government in Beijing overreacts, hits gridlock with local authorities over a major incident, or faces coordinated sabotage." China update: concern and evidence of problems grow