“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.