A Tale of Two Cities

Beijing – capital of the most populous country in the world, host of perhaps the most sensational Olympics to be witnessed and a country with a prodigious manufacturing output. London – capital of Great Britain, the next host of the Olympics and home to the most prestigious Financial Market outside of New York.

They have more than the Olympics in common. As the global financial crisis and economic slowdown takes its fearsome toll, both countries have been profoundly affected and the fall out has yet to really take its toll.

Meltdown?

As the UK financial positions unravel, in a single quarter the current account deficit has doubled to £11bn, adding further woes to its crumbling national finances. Meanwhile in China, with over 70% of its manufacturing output consumed by eager foreigners, the threat of a global financial slowdown means that its exports will simply dry up. The danger is that internal consumption will not compensate and manufacturing will simply have to slowdown and workers will get laid off.
Through the last 10 years, the UK has enjoyed an unprecedented boom fuelled by a 160% growth in average house prices, which has been underpinned by cheap, plentiful and inevitably wreckless lending. China, meanwhile has been the willing recipient of the increase in consumer spending as UK households took advantage of the credit boom and leveraged their rising assets to buy ever more affordable electronics to fill their first and second homes.

Toxic Mixture

The mixture has become as toxic as derivative debts used to raise the money. The UK is over dependent on the finance markets in London, and manufacturing contributes less than 20% to the country’s GDP while in China is it almost exactly the reverse. The threat to each country is equally hideous.

As the UK Government gave ludicrous tax status to Big City Private Equity and Hedge Fund Hitters, the UK markets rose uncontrollably and when the inevitable meltdown occurred, the UK has found that as the money makers pull out, we simply have nothing in terms of exports to fill the vacuum. As more of our money flows out to fund jobs in offshore businesses and our own unemployment figures rise, the country will have to come to terms that the ‘super-boom’ in the last 10 years will have come with an awful time of reckoning.

And so too China. As the Chinese Government opened its mind and capacity to service world demand it has become almost totally dependent on the global financial markets as only ready credit would continue the phenomenal growth it has perceived over the last 10 years.
The Olympics may well also have come with a massive financial burden. China spent over £23bn on their wonderful Games while the UK has budgeted £9.5bn and rising. Ultimately, the Games may well have become vast White Elephants to two economies who thought the good times could not possibly end while a few of us sat around and were aghast that allegedly educated people thought that free lunches were a reality.

Rise in Public Spending

Gordon Brown’s mistake has always been that he took on good finances from the Tories and then began a spending spree that meant over 1 in 4 UK jobs are now in the Public Sector. At the same time, laissez faire immigration policy allowed over 1 million new unskilled people to arrive and do low end jobs. As the UK economy grinds to a halt, teetering on recession, inflation rises to 4.7%, the pound continues to fall and the Government liabilities to fund the financial meltdown rise and let’s not forget two unwanted wars, the pressure on the Welfare State will begin to rise.
Like China, the UK cannot take much more unemployment and it will almost certainly exacerbate an already gloomy economic position. Expect a rough ride in the UK and meanwhile watch over your Far East investments with a very wary eye.