Saturday, July 3, 2010

After the Fireworks – then what?

Some combination of gunpowder and metal was concocted about 1,000 years ago in China to ward off undesirable spirits. One thousand years later, it’s a bit ironic that the same country that gave the world this invention is once again on the verge of reclaiming its role as global economic super-power. Three short days after the last spark vanishes in the night sky over the Potomac River fizzling as it hits the water, the Agriculture Bank of China will finally price its Hong Kong and Shanghai IPO setting the world’s record for the largest IPO in history. It’s notable to realize that the record being broken is also Chinese – the 2006 IPO of the Industrial Commercial Bank of China (ICBC) – where approximately $21 billion was raised.

There are several factors about this IPO that are particularly notable. And I’m not referring to the fact that this record is being set by the bank that has been the iconic legacy of the Communist Party’s half century of countering the notion that capitalism is the only mode for economic prosperity. After all, this bank, established under the auspices of Mao Zedong in 1951, has not made its money through fiscal shenanigans and investment banking fees. A significant amount of its strength comes from the simple fact that there are more customers in AgBank than there ARE Americans. That’s right, this bank’s customer list actually eclipses the entire population of the United States.

More intriguing, however, is the list of investors in this IPO. A significant participation in this watershed event is coming from the Middle East – including reported interest from Qatar as a primary buyer. To be sure, the global interest is diverse including Temasek from Singapore as well as Singapore’s Government Investment Corporation, Standard Chartered PLC, Kuwait and Abu Dhabi Investment Authorities, along with Rabobank, Daiwa Securities and several Chinese household name stalwarts who are coming together to celebrate a clear global message about the bets being placed on the future. This IPO comes on the heels of the unveiling of more evidence that the much-hyped “recovery” in the U.S. and Europe was, as I’ve reported for several months, a façade supported exclusively by excessive government spending. With banking, manufacturing, and building life rafts inflated by careless monetary policy and reckless spending in Washington, the patches on the tires that were supposed to be our “road to recovery” vehicle have come off and we’re now on the side of the road.

For the record, we’re not going to come back. And, for the record, I’m thrilled about that. As Mao’s legacy is toasted in Shanghai and Hong Kong, we now have a moment to sit on the sidelines and take an honest stock of where we are. Ironically, in a desperate effort to evidence matriculation into the market control club, this IPO may be an indicator of hope for an even larger transformation – one that won’t be claimed by any “ism”. You see, the AgBank IPO means that China is following the too-big-to-fail path that led the U.S. and Europe into 2008 calamity. And it’s doing so at the same time that China is going to establish policies to encourage spending rather than savings. The legacy of individual savings – a policy and social phenomenon that helped grow Chinese banks – is going to shift to spending as global export demand weakens. Internal demand is going to expand and internal consumption – supported by recently upwardly adjusted wages – is going to increase. In short, what made the AgBank so successful to date, is a dynamic that was unsustainable.

To be clear – a lot of people are going to make a lot of money on this IPO. And, AgBank is likely to continue to persist as one of the world’s most powerful banks. However, the Chinese economy generally is repeating a systemic risk that contributed to the failure of the U.S. and European banking infrastructure. The Chinese banking environment is well-suited for agriculture and manufacturing businesses where hard assets are the core of productivity. However, as China has shown from its decade-long failure to effectively deploy its compulsory technology transfer assets (required from multi-national corporations seeking to sell technology to the Chinese government), it is ill-equipped to transition to an innovation-based economy. China holds more of the world’s cutting edge technology rights than any other country. However, the National Development and Reform Commission still has no clear visibility on what it has and how to put it to use. In fact, in the 11th Five Year Strategic Plan of the Communist Party of China, they officially promote “independent innovation” as a core objective in a world where collaboration has been proven to out-perform proprietary impulses at every turn.

So, on this July 4, 2010, we can watch our tribute to China flash against the darkening skies. We can puzzle over the irony that we picked a Chinese invention to mark our self-proclaimed but never fully actualized “independence”. And then we can wake up tomorrow and realize that an era has ended. And as with every end, this merely means that there’s a new beginning. Not only will the AgBank IPO possibly set the largest record – it may also be one of the last of its kind. Like world-records when the world went from yards to meters, some records aren’t broken because the measurement changes rendering the old metrics irrelevant. And that’s the time we’re in right now. The measurement which allows a Mao legacy bank to eclipse all capitalist-generated IPOs is comic, ironic, and evidence that change is upon us. The real challenge for us is to have the courage to walk away from the pointless metrics of value that led to vast wealth disparity and begin constituting reciprocal knowledge networks that perpetually benefit whole communities. And when we begin that journey, we’ll be less interested in independence and more tuned into interdependence. We’ll be less motivated to burn gunpowder and metals and we’ll be more motivated to see an unpolluted sky. Maybe when it’s done setting capitalist records, China will become a land that fosters a new experiment – one that collaborates on a more integrated future where people and their ecosystem can thrive.


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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave