DiligenceChina

Just when I thought I was out, they pulled me back in. I’ve been gone for a while, so let’s just skip till right now…

Chaos, despair and terror. I’ll confess it – I’m all about the Bear. Bull markets piss me off – swarms of smarmy little day traders, all glib & smug. Give me blood and wonder. Give me awe and faith in that which is mighty enough to destroy. Give me terror and flint. Give me the strength to see my enemies fall before you take me.

Make no mistake about it – something big is in the offing. You look at Drudge or the NYTimes, and they’re going on about who is OD-ing and who is going to be next. They talk about the debates and the carbon in the air. They’re frantic about the flotsam – ignorant of the tectonic shifts dragging the world into some new shape.

China and the US are having it out right now. The circling & staring part of the event are over. Someone’s gonna walk out of this standing tall — the other is going to have to wait for his day. Maybe for a while. It’s not about who crashes first. It’s partially about who crashes harder – but it’s REALLY about who recovers first.

Here are a few scenarios that may play out over the next few months.

China Inc may dodge the worst of a global downturn by focusing on its own large & notoriously weird domestic market while Japanese and Western industries stumble and fade. China could leapfrog the US on the value chain in specific industries (small-screen computers/smart-phones seem a good bet, but I hear green technology is also interesting). If they ever learn to brand and market they stand a chance of penetrating western markets towards the top of the food chain – and then exploiting the toehold for some big market impact. (You listening FoxConn & Shinco?)

US and Western corporates may take advantage of a global downturn to leverage their presence in China and other emerging Asian markets — and dominate 2nd & 3rd tier cities up and down the coast. Shanghai and Beijing will always have too many places to shop – the outskirts of 2nd cities and smaller villages (sub 5 million residents) tend to have fewer options. I’ve been noticing that some of the new industrial zones have sprouted malls and commercial districts that look a lot like Long Island. The really scary part is that if the numbers work in one anonymous commercial or industrial city then the numbers will work pretty much the same in all of them. If the western economies go dark for a couple of years there may not be any other growth options – and Beijing would welcome any move that brings jobs and development to the regular folks in the sticks.

Chinese entrepreneurial class may get their first real shot at the big time, as State Owned Enterprises crumble under the weight of skyrocketing fuel & material costs. Mainlanders With Money (MWMs) have grown into senior management positions and they have a completely different agenda from their fifty-something bureaucrat bosses. Private enterprises get all the headlines in the western business press, but government policy has always treated SOEs like the favorite son. It’s going to take a pretty big shock, but if Beijing & the bureau banks ever start letting private businesses borrow money and expand their operations like their competitors do, then it may be a whole new ball game – for everyone.

China’s policymakers have probably noticed that their economy and that of the US are heading in opposite directions. I don’t want to get all dismal and economystical here, but China’s dirty rmb float is going to have to give. Fine. No one will be sorry or surprised to see the rumba dance free. But where exactly is that going to leave HK? If the rmb appreciates against the US$ by 25% in the next year (not a crazy notion – particularly as China raises interest rates to control inflation and the US drops rates to stave off stagflation) then the rmb ALSO appreciates by 25% against the HKD. Beijing may swallow that for a while – but it’s just a matter of time before we start hearing whispers about switching the HK peg from the dollar to the rmb. Good thing China doesn’t have a developed banking system, or people might someday start talking about the Chinese currency as the Asian standard. Can you say “Renmenbi Zone”?

China’s pampered business class has long been willing to sacrifice democratic freedoms for nice apartments and a Santana – but that may be changing. No, the Chinese middle class haven’t had backbones implanted. (Ok, that would have been funnier if some intern from the Bush administration wasn’t reading my mail right now.) China has either banned or restricted Wikopedia, various blogging platforms, Flickr, the BBC, technoratti, and Youtube (banned by the end of this month, according to unreliable third-party rumor). Chinese yuppies have needs – and if those needs are of a fashion or entertainment variety, I pity whoever gets in their way. China’s middle class expectations have never been higher and media & press restrictions are starting to cramp their style.

Other possibilities? Drop me a line with your thoughts. This globalization thing is starting to get interesting.