For years, specialist China-watchers have been predicting that the wider world would one day wake up to the country’s global economic influence and superpower potential.
2004 was the year when it happened.
The world focused on China’s new-found economic strength as never before.
Its thirst for oil, outpouring of cheap exports and status as the world’s most energetic economy – with growth topping 9% – all grabbed attention.
China has moved into the mainstream this year, no longer seen as a remote place, but the next big thing.
A sub-titled Mandarin movie – Zhang Yimou’s ‘Hero’ – grossed $49m (£25m) at US box offices in its opening month. And Shanghai hosted its first Grand Prix on a circuit that stunned even the glamorous world of Formula One.
Meanwhile Britain’s Silverstone nearly dropped quietly out of F1, too strapped for cash to stay a contender. Events like these confirmed China’s arrival on the contemporary cultural stage.
Information industry
One growth industry springing up as a result of China’s rip-roaring economy is China forecasting. Economists are churning out China research as never before. Demand is overwhelming.
Everywhere we went, we found that our customers had questions about China,” says Carl Weinberg, chief economist at High Frequency Economics in New York.
“Some even suggested that we drop Australia from our research and substitute China.”
As a result, Mr Weinberg, who has never been to China, launched into a year of hard study, and began issuing a weekly research bulletin in 2004.
“Bond traders, banks, fund-managers – all sides of the financial community are interested,” he says.
His experience is not an isolated one. Justin Urquhart Stewart is a director of Seven Investment Management, a London-based firm advising wealthy private clients.
“These days I feel I have to read the business news, and then I turn and read the Chinese business news,” he says.
“I would say almost every discussion I have with a client includes some discussion of China,” agrees Bob Parker, vice-chairman of Credit Suisse Asset Management. CAM operates a clutch of China-related investment funds.
Exports and oil
When and how did China move from marginal to mainstream in conversations on Wall Street and in the City of London?
The US presidential election campaign got the ball rolling, as the Bush Administration launched a high-profile assault on China’s fixed exchange rate, accusing Chinese factories of undercutting US manufacturing jobs.
Meetings of the IMF and G7 in late 2003 endorsed US complaints.
But perhaps the biggest contributor to pumping up China’s profile has been the rising price of oil.
Crude oil prices repeatedly broke records, ending 2004 about 35% higher.
China’s appetite for oil raised its imports by more than 100 million tonnes – 34% – over 2003 levels. Other factors pushed up crude prices too – instability in Iraq, hurricanes in the Caribbean and politics in Russia all played a part.
But rising oil prices struck home with Western consumers.
Prices of other raw materials also climbed, such as minerals, cement and steel.
In Mozambique, for instance, sugar farmers complained that China’s demand for transport was pushing up their shipping costs and hurting their exports.
There was no single moment that made China an essential topic economists. Rather, they say awareness has snowballed over the last couple of years as China’s impact keeps surfacing.
Mr Weinberg’s own moment of revelation came at a conference of the North Carolina World Trade Association in 2002.
“I thought I’d find two dozen hog farmers frustrated at trying to sell pork bellies to euro land,” he admits.
Instead, China’s growing domination of world textile markets brought together an audience of 2000 people “all with an interest in China”.
“People from the ports in Norfolk, Virginia, all the way down around the Florida panhandle…wanted to be the gateway city” for imports of Chinese textiles, he says.
Stocks Shanghai-ed
But anyone who thought the world’s fastest growing economy was a good place to make a fast buck on the stock market this year was wrong.
China’s financial markets have not roared ahead in tandem with its economy.
The Shanghai Composite Index dropped 12% in 2004. In a ranking of 60 stock indexes, only Thailand did worse.
Investors could have got a better return on Cairo’s CASE 30, which rose 116%, or Peru’s Lima General Index – up 44% – or even in Indonesia, so often viewed as an Asian giant woefully under fulfilling its potential.
The year’s solid performers were Eastern European stocks and funds, bolstered by EU enlargement. Stock markets in Prague and Budapest gained roughly 50%.
“Emerging markets have outperformed developed markets by a very large margin, but Asia has underperformed and China has underperformed,” says Mr Parker.
“There’s a disconnect between the hype and the reality.”
Even stocks in industries stretched by China’s growth did not produce gains.
Shares in the giant Baoshan Iron & Steel Co did poorly, while the Shanghai Composite’s best performing stock was a liquor company, Kweichou Moutai, from the poverty-stricken Guizhou region.
China’s markets have been depressed by worries about whether Beijing could engineer a soft-landing for the overheating economy, and more attractive prospects in Shanghai’s property sector.
Some investment analysts argue that the smart money lies in avoiding direct investment in Chinese stocks, in favour of the commodity producers feeding China’s economic juggernaut.
Others – like CAM – predict that China-linked funds will do better next year. But despite China’s poor return on equity investment, plenty are watching closely, feeling they should be there.
“One feature of world capital markets is the amount of money sitting on the sidelines”, says Mr Parker. Much of it, he thinks, is earmarked for China.
And that does nothing to harm the market for China research.
“The quality of research has slowly improved, which is logical because people are putting more resources in,” says Mr Parker, a regular visitor to China for a decade.
In his view, even the disappointments of 2004 have been “a bit of a wake-up call for investors” by forcing China-watchers to be less gung-ho and more specific.