Paradoxes in China’s Miracle

Cash rich Chinese companies are on the prowl for acquisitions overseas, going by a headline in a British daily. The move is significant given the fact that the economy is guided, goaded and controlled by the State, which has married its overseas economic policies with diplomacy and needs of strategic thrust. It will strengthen the Chinese economic footprint.

For companies like Fosun International of Guo Guangchang, it is a win-win situation. Firstly, building a brand is a costly venture. Secondly global brands owned by American or French MNCs are available for picking in these days of dollar meltdown. More over local market is no longer hot for them though Chinese companies in China are much sought after by the American MNCs still keen on making forays into China.

Guo’s acquisition in France through his Fosun International illustrates the point. He acquired a 9.5 percent stake in Club Mediterranee, the French resort company, which is also known as Club Med. The company has set up a ski village in Yabuli, a resort town frequented by the wealthy in northeast China.

There is a flip-side to the China miracle. It is ‘investment immigration’. More than half of Chinese ‘new rich’ want to leave the country and are considering buying citizenship in Canada, UK, America, or even Australia. Amongst the first to depart are some of China’s most famous stars, like the actors Gong Li and Zhang Ziyi, director Chen Kaige (maker of Farewell My Concubine) and the pianist Lang Lang.

For the western economies in a spin, the new immigration route has become a cash cow. For instance, in the UK, anyone depositing Pounds 1 million in a bank account is welcomed to stay with bouquets. This year the number of Chinese boasting disposable assets of more than Pounds 1 million is expected to reach 585,000, which is nearly double the number three years ago in 2008.

One of the reasons cited for the ‘shifting’ is good education overseas, according to a management consultancy firm. An estimated 230,000 Chinese students are already enrolled in foreign schools. Their number is seeing a 20 per cent growth rate. Another reason for migration is the desire to ‘spend old age enjoying a high quality’ of life. Both factors reflect poorly on the achievements of Communist China.

Chinese super rich are also spending liberally and freely at home these days. This is a class that was not only unheard but also beyond imagination during the Mao era. For them price is no longer a barrier. The spurt in high life styles should make the Chinese leadership to squirm. Price of luxury has risen despite the recession that has hit the real estate market in particular. Result is a boom in luxury car sales, and upswing in the prices of upmarket products and services. The price inflation is ranges from 15 per cent to 32 5per cent. Wine price has seen a 31 per cent hike.

The demand for luxury goods clearly shows China’s confidence, according to analysts. Last year the Communist Capitalist overtook the United States to become the second biggest market for the luxury sector; by 2015 it will have overtaken Japan, with a market projected to be worth Pounds 11 billion annually.

The Chinese neo-rich are on shopping expeditions these days to the delight of high-end stores in the western metros. A study shows Chinese consumers now out-spend Russians in Mayfair shops.

Two factors have contributed to the development. One Beijing’s decision to let the yuan appreciate against Western currencies. Two a purchase tax rate of around 20 per cent on luxuries bought in China as a part of drive to check inflation.

The Chinese government is also turning to the Laffer curve theory to manage supply-side economics. To begin with the income tax rates will be cut to reduce the tax burden on the middle class who are already suffering from fuel and food price spiral. The income base for the tax will be raised from $315 a month to $450. The official news agency Xinhua called the proposal “good news for consumers amid rising inflation.”

Laffer effect did not benefit the poor in low income countries where it was tried. The situation is unlikely to be different in China. Because China has one of the largest gaps between rich and poor in the world. A large section of Chinese society is outside the tax bracket with their minimum earnings put at around $184 a month. There are reportedly about 26 million income-tax payers in the country, and most of them are high earners.

(This article appeared on POREG,