The All China Edition…

I spent the month of March in China, travelling from the deep south to the mid section of Shanghai/Hangzhou/Zhoushan. My economic thoughts are detailed on pages 2 and 3, my reflections on culture and life on page 4. And here is my ‘Lonely Planet Guide’ to the not-miss sights.

1. Wherever you go use the ‘Gaotie’, China’s high-speed trains. They are clean, new and arrive to the minute on schedule. Oh, and did I mention they all go 150-180 mph. Air travel is a hassle whether in the US or China. High-speed trains are comfortable, you get a front row view of the scenery and they are cheap. Shenzhen in the south to Beijing in the north is a 1500 mile trip costing $140.

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2. Climb a mountain. If you want to experience a living, breathing Chinese landscape painting climb the most famous Chinese mountain, Huangshan (Yellow Mountain) about 3 hours from Shanghai (picture above). You can climb the thousands of knee jarring steps to one of the summits or, more conveniently, take a cable car up. Either way the view and the experience is spectacular.

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3. Shanghai is a not miss city. But how do you see a city of 25 million? A great option is the $18 sightseeing bus which circles the major sites. Yes its touristy but a leisurely way to see the highlights. Another option is the modern, cheap, easy to use subway system. Choose a stop, look around and then get back on. Don’t miss the Shanghai Museum. A world class collection of landscape paintings, ceramics, furniture and jade. A real treasure. And finally don’t forget the food. Food follows money as the saying goes and China has money today. A signature dish of Shanghai is ‘Xiaolong Bao’ or soup dumplings (pictured above). These delicate dumplings are filled with pork and injected with soup. Be careful when biting in however, the soup can be hot but the taste is divine.

4. If Shanghai is a bit too bustling for you, take the high-speed train an hour west and you get to Hangzhou and Suzhou. The West Lake in Hangzhou is a gem, an enormous lake with islands, pagodas, temples - - everything you imagine classical China to be. Suzhou is famous for its delicate gardens including the ‘Humble Administrator’s Garden’, which of course begs the question, where does a ‘humble administrator’ get the funds for such a lavish garden? In any case, enjoy the trip - the going is still good.

“China is a Great Country But the People Are Poor…America is a Very Disorganized Country But the People Are Rich”…

This line from a cab driver in Hangzhou, China. The implication is that China is organized and safe and even though the people are still poor, the country is on the march. America on the other hand is wealthy but unorganized and it will suffer because it cannot move as quickly or as efficiently as China.

There is some truth to this idea but also a misconception. A ‘messy’ democracy includes a lot more input and diversity than an autocratic regime where one-man or one-party tries to have all the answers. The future is always unclear so having more options and opinions usually makes for better policy decisions. But autocratic regimes are gaining ground today and China is a development model many are trying to duplicate.

When Deng Xiaoping started the opening process in China in the late 1970s his admonition was “hide your capacities, bide your time.” China should not make waves but should quietly get on with the business of development. Today, Xi Jinping’s rule is very different. China is getting more aggressive and outspoken both militarily and economically. The Belt and Road Initiative has China playing a bigger role in global development and its Made in China 2025 plan (see chart above) envisions the country controlling its own market and much of the world’s in new cutting edge technologies.

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In my one month in China I did not come away with the Holy Grail but I did come away with some observations. Here are a few.

1. Growth is still dynamic, often breathtaking. GDP growth has slowed from 10+% to now 6% (or even lower if you believe some Western observers). But wow, all the new bridges, the new airports, the new subways, and especially the new high-speed trains. You have to be impressed. The country has certainly set itself up infrastructure wise for the 21st century. China now has more than 20,000 miles of high-speed trains which travel between 150 mph and 180 mph and arrive exactly on schedule. And just as importantly, China makes 80% of all high-speed trains in the world today and this dominance will only continue.

In addition China’s urban build out is historic. Apartment complexes are going up everywhere. It is not just in one town, but apartment clusters of 10-20 buildings each 20 plus stories high are everywhere. Xiongan the brand new city between Beijing and Tianjin announced in 2017, is projected to have a population of 3-5 million within just a few years. The joke is, the national bird of China is the construction crane.

I realize that the apartment build out could very well be China’s 2008 Housing Bubble. Some argue that one third of all cities in China are actually shrinking not growing so additional apartments are just adding fuel to the fire. And I did see evidence that in many cases apartment blocks are 50% or more vacant as owners buy with the idea of flipping in a year.

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2. Work still means work in China. The mantra everywhere is grow sales, make as much money as you can and when the orders are there, you work. It is common to hear that if orders come in on Friday then you work over the weekend. The exception is if you produce for a Western brand name. In these cases stronger overtime rules and restrictions are in effect. Otherwise, if the work phone rings regardless if you are relaxing or at a family dinner, you take it and do business. Work-life balance is still very much a work in progress.

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3. Pollution is getting better. There are many more blue sky days in bigger cities. It is still hit or miss especially in industrial towns but things are better than ten years ago. The government is not going to give people more personal freedom but it can and is achieving some better results in air quality.

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4. Consumer spending is evident everywhere. Consumption is a smaller percentage of GDP in China than in the US but this is primarily because of past outsize investment in infrastructure. Expensive SUVs have arrived in China today, there are enormous shopping centers in every city, the restaurants are full and food choices endless. You wonder, however, how many high-end cosmetic stores the economy can support. The answer I guess is a lot more than I imagine!

Having said all this, China has its problems. The debt that has accumulated to fuel the 6% to 12% growth the past twenty or thirty years is now enormous. The increase in official non-financial sector debt relative to GDP has gone from 100% to 300% over the past twenty-five years. This is one of most extreme increases of all time. If China is constrained from borrowing in the future and/or the housing market deteriorates there will be major problems.

China is also seeing the loss of low end jobs to lower cost SE Asian nations (especially Vietnam) and also the loss of some higher end jobs, even to America, as wages rise and trade conflicts mount. Part of the job shift is a good thing as the country moves up the value added curve but there is a delicate balance between rising wages and job losses. The one thing the government is deathly afraid of is public unrest and unemployment can trigger this.

China is still a place everyone has to see. It is such a large part of the world economy today (and will be even more so in the future) that everyone has to have some understanding of it. Can its 40-year unblemished record of economic growth continue? Is China’s model of one-party rule sustainable? There is evidence on both sides here unfortunately. Rod MacFarquhar, the Harvard professor and author of several seminal books on the Cultural Revolution predicted before his recent death that the Communist party will not last forever. The idea that one-party or one-man knows best is not sustainable. I guess we will have to wait and see about this…. but see it you must.





Piecing it Together, Understanding the New China …

A month in China gave me plenty of time to see the sights but also time to see some of the unique and yes, quirky aspects of Chinese culture. Here are a few.

1. A great place to go both early morning and at dusk is a public square or park. Older Chinese congregate in the morning to do group exercise and in the evening there are pop up dance groups. You will be surprised to see twenty or more couples performing the fox trot, waltz and even the tango. I guess “Socialism with Chinese Characteristics” also includes “reactionary” Western dance.

Younger people are adopting even more interesting dance moves. There are many. Try googling “China school principal dance” or “Chinese dance craze”. It is wonderful free entertainment and uniquely Chinese. I just wish I could do this stuff.

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2. Lipstick. The color of choice today among the young is bright red lipstick. But what amazed me was how young women’s lipstick looked so perfect, no mess, no smears just perfect. Well there’s a secret. The answer is that some Chinese women are getting ‘permanent’ make up injections to get the perfect red lips. Ah yes, the cult of beauty knows no borders!

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3. Sanya on the island of Hainan is considered the Hawaii of China. Beautiful beaches, clear water, many hotels and…..wall to wall Russians. It is not known as “Moscow on the South China Sea” for nothing. Where else in the world can you see signs in just Cyrillic and Chinese!

4. High tech is everywhere. A decade or two ago it was thought China would never develop much of an advanced consumer sector. They had no credit cards, their financial system was backward and they had no logistics, no FedEx and no UPS. Well the Chinese are improvisers. Today they have the biggest messaging app in the world (WeChat), the largest online seller (Alibaba) and two very sophisticated payment systems (Alipay and Tencent pay). And for delivery they have cobbled together a motorcycle/small van system that rivals FedEx/UPS.

5. U.S. consumer companies in China: This is how I handicap things. KFC is the definite winner. Their stores are always busy, they offer Chinese options for breakfast and their chicken is much higher quality than in America. You get the distinct impression KFC is a Chinese brand. McDonald’s is also popular but not like KFC. I used to fear Starbucks would fail in China due to high prices but with rising urban incomes and an increased taste for coffee, Starbucks is gaining ground.

The one company I am worried about is Apple. They are the face of American commerce in China today. Huawei’s phones are getting very competitive and if there is a major trade war and anti-Americanism rears it head, Apple could be the fall guy.

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6. The downside to China’s rise is that tourists and crowds are everywhere. Don’t expect a quiet, pristine experience. Even on distant mountain tops there are crowds and noise (Chinese are loud talkers) and selfie sticks. We are going to have to get used to the fact that Chinese tourism both domestic and abroad is the new reality. Just as Americans mobbed the world in the 1950s and 1960s now its China’s turn. Adapt we must.



Technologies That Will Change the World in 2019...

By all accounts we are living in a period of robust technological improvement. Innovations from smart phones to artificial intelligence are fundamentally changing lives and altering the way business is done across a wide range of industries. Historically, technological innovation has been the “secret sauce” that has fueled economic growth and the rising living standards that come along with it. But a strange thing has occurred over the last decade. Since 2007, productivity growth in the U.S. has averaged just 1.3% a year. This rate is less than half the gain recorded from 2000-2007 and well below the 2.1% annual average since 1941.

Economists have been scratching their heads trying to figure out what is behind these weak results. Some, like Martin Feldstein from Harvard, think we simply have a measurement problem. He argues that the way we measure productivity - - generally the amount of goods and services produced per hour worked - - does not capture the value associated with qualitative improvements. Google Maps, for example, does not provide a much different output than physical maps do, but it is a lot easier to use. Others, such as Northwestern University’s Robert Gordon, are less optimistic. He contends that today’s innovations do not have as much of an economic impact as blockbuster innovations of the past, like the electric light bulb. A third group argues that technological innovation occurs in waves. The wave begins with the introduction of a “general purpose” technology such as artificial intelligence. The real economic impact, however, is only felt once it is widely adopted and commercialized.

My guess is that all three of these theories play a part in the recent anemic productivity statistics. Artificial intelligence may not be the next “electric lightbulb” -- Siri dialing a phone number for me is certainly convenient but it is hardly a groundbreaking innovation. But this technology is still in its infancy and may yet prove disruptive in a number of ways.

Each year, the MIT Technology Review prints a list of the technological developments expected to have the most impact on human life. The author of this year’s list is none other than Contributing Editor and Microsoft founder Bill Gates. Mr. Gates’ emphasis this year is in keeping with Martin Feldstein’s more optimistic view of the world. Many of the developments on his list focus on improving the human condition. Just over half involve healthcare. The gut probe in a pill and wearable health monitor, for example, both are aimed at improving patient outcomes, while the self-contained toilet is focused on reducing disease in the developing world. Innovations that focus on cleaning up the environment also feature prominently on the list.

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Mr. Gates, one of the world’s leading technologists, is optimistic about the future, and his selections reflect that view. While he still thinks that much can be done to extend life, especially in some of the world’s most disadvantaged areas, he believes strongly that new technologies can help enhance personal fulfillment. This shift would represent quite an achievement if viewed from a longer term historical perspective.