Tuesday, July 7, 2009

• Don’t Believe The Pundits On This Being China’s Century

While countries struggle, muddling their way through stimulus packages and bailouts, China is being touted as everything from, “the best current place to invest,” to being, “the engine that will pull the globe out of its recession.” These entreaties and prognostications are sprinkled with reminders of the power it wields over America, given the huge dollar reserves that it holds. If I may quote Tony Soprano, “forget about it.”

China has asked rather politely, that the U.S. maintain its creditworthiness. No kidding? That plea was less a wish that the U.S. not skip town on its debt (devalue the dollar dramatically), than it was a declaration of a deep desire for a return to excessive U.S. borrowing. When the U.S. borrowed, it bought. When it bought, China prospered. This is rather basic, however, what is not so evident, or obvious to many pundits and experts, it seems, is the fact that China became inebriated through the glory days of consumerism. China now suffers the consequences of its acquiescence to a surety that the intoxicating euphoria enjoyed around the globe for a generation, would never end.

China understood that to become America’s principal provider of goods, it had to manufacture less expensively than anyone else. China excelled at squeezing productivity out of its labor force. It rapidly implemented a sweeping expansion of the necessary infrastructure to manufacture products faster, better (sometimes), and cheaper (always). New plants sprouted at an unprecedented rate. China’s expansion of its machine was based on an enormous assumption - the rate of growth it was enjoying through exports would continue unabated. It is now shutting down plants faster than it opened them. The capacity that was preparing for demand twenty years out, is now shutting down, and the Chinese are not about to ramp up their own consumption to energize reopening of the plants. While China has become a major manufacturer, the majority of its manufacturing is for, and on behalf of foreigners, selling established brands. China’s authoritarian “system” has made the creation and recognition of its own brands, all but impossible.

American consumers are not returning to the binge behavior of the past twenty years, although their ambivalence on trade with Asia persists. As for China, it focused on creating trade surpluses, and it adroitly squeezed its workers, but it did not prepare them, or its industries for broad based consumption. It has not created a self-sustaining, stable economic environment. China will dip into its coffers to stimulate internal employment, spending on infrastructure, or investing in what it knows best - export industries. Endeavoring to attract foreign investments, China will claim improvements in efficiencies, forensics, accountability and accounting practices of its indigenous infrastructure. The claims are beyond its ability to deliver. Until such critical elements as property rights, or a welfare breadbasket are implemented through appropriate taxation, Chinese consumers will be more prone to save, as they must individually concern themselves with how to pay for tomorrow’s meals.

Any cash China spends outside will go to acquiring natural resource producers for pennies on the dollar in the present climate, and countries, including Canada will be happy to sell out. This will do absolutely nothing for the long-term health of the North American economy.

There are currently foreign reserves of around $7.5 trillion held around the world with particular concentration of dollars held in East Asia, where since the late 1990s there was perceived need to protect against currency speculations, and a tendency, no, make that urgency, to feed (finance) the American engine driving China’s growth. We should note that the size of China’s reserve accumulations have, in the past couple of years, attracted the very speculation they sought to themselves protect from, which has further accelerated the bloating imbalance. The size of China's dollar reserves forces a tentative, even precarious, equanimity between the U.S. and China, but it is a potent equilibrium nonetheless. It will be a long road traveled before China finds sustainable balance in savings, consumption, exports, and internally stimulated (broad based) investment. It will also be a long wait before we witness demonstrations of international responsibility emerging out of China. Until then, China will continue to flex its new-found influence to push for such things as an independent currency a few degrees removed from the dollar.

The world’s economic history has been fueled by leaps from one bubble to the next, but the current recession may have a long wait for the next bubble of consequence that will yank the world out of the doldrums. Whatever its form, it is not likely to come out of the less than transparent, state owned, and controlled economy of communist China. China has created a massive middle class in a single generation, but it has yet to empower it. China will not soon be supplanting Americans, or Europeans, in the mall line-ups yearning for China-made-American-invented-branded-and-engineered products. American consumers are unconsciously pushing back the clock on that empowerment of the Chinese middle class through their dramatic behavior modification of the past year. Like it or not, global economic stability will for the foreseeable future depend on the West, and very particularly on America.


  1. "China has created a massive middle class in a single generation, but it has yet to empower it."

    And India is doing the same. Middle class consumers needing middle class producers. A cosy symbiosis there perhaps ?

  2. India is a very different animal. It is very inward looking in both production and consumption. 75% of GDP is internal and 70% of import bill is Oil. On one hand this means india misses out on global bubbles and intense periods of growth, while on the other hand indian economy is very very stable with little surprises at a macro level. Its like an investment portfolio with 25% on high risk/high return stocks and the rest in debt instruments.

    India - China trade is doing reasonably well due to the sheer size of the two markets, but I don't see a direct engagement beyond what is normal in the globalized environment, essentially due to the basic fact that China is the biggest threat to indian progress and internal stability, more than pakistan, due to the utter control of PLA in foreign affairs.

  3. I disagree with this article.
    "... less than transparent, state owned, and controlld economy of communist China". If that's your current understanding of China, please spend some time there and do some business ... You are obviously misinformed ...
    "It will be a long road traveled ..." I guess so, maybe 10, maybe 20 years ... maybe even 30 ... a mere blip, in other words.
    What exactly is our, the American, strategy for the future? Well?
    We are slowly going down the drain, and the direction is unlikely to be reversed until there is a rough equilibrium between 1.5 billion people and 400 million people .... Who do you think wins?
    Please also recall, or realize if you have not, that China is not Japan ... and India is not China ...

  4. Anonymous,

    Thanks for the observation, which goes to the root of why India is about the only country not whining about the global recession.

  5. Anonymous,

    To understand your point, ... you are disagreeing because you believe China will be the economic engine that fuels a recovery?

    Nothing going in China now or in the future suggests anything of the kind.

    As for America going down the drain, and the situation not reversing until there is population equality... such a statement is fraught with holes. We can start with: The past twenty year Chinese expansion at the hands of the American consumer. Was there any population equilibrium? .......Not so much.

    I your point is that current government policy is flushing American hopes of recovery, that is a very different argument, which still does not discount the validity of my argument.

    I enjoy debate and haven't cornered the market in reading the future by any means, however, please provide some reasons for your assertion.

  6. I agree with this article. China is not the future. Yeah they have over a billion people. They have always had a billion people. People do not make an economy thrive. You must have wealth creation. People who work in the factories will never be middle class. They will always be poot. How do I know? China's main natural resource is cheap labor. If that labor gets to expensive, demand for chinese made products will decline, hurting the chinese economy and more importantly Communist Leadership. This will make it necessary to keep cheap labor and thus reduce internal economic growth. China is still Communist China even though they try and present themselves as a democracy.

  7. "China's main natural resource is cheap labor".

    Actually, no.

    China's main natural resource is the high quality of its human capital. The Chinese are intelligent and hard working, with an entrepreneurial spirit that perhaps matches the US in the 19th and early 20th century. And yes, there are 4x as many of them, not a minor point ... And they didn't just arrive yesterday ...
    We can't match that any more ... nor can Europe ...

    If we persist in the simplistic error that China's greatest resource is cheap labor, we will go down that drain even faster than we already are ...

    This is not about the petty "recovery" of 2010 ... let's compare notes in 50 years ...

  8. Raider,

    "To understand your point, ... you are disagreeing because you believe China will be the economic engine that fuels a recovery?"

    I am disagreeing with the statements that I had put in quotes.

    I said nothing about the recovery, because I don't take a short term view ...

    Perhaps you should read my response more carefully.

    I also did not say population equality, but I did say rough equilibrium, a very different concept, between 1.5 billion and 400-450 mm in 2050.

    Where is it written that America has a monopoly on the future? "Manifest Destiny", while an inspiring concept, are just words.

    I think "facts on the ground" are more relevant.

  9. Geez, good discussion but misses a couple of things that are going to happen in the next fifty years.

    China is determined to get the resources it needs, even today they are all over the world buying up, leasing and generally doing well and expanding on it each year. But don't think for a minute that they just do it the open legal way. They have been stealing the worlds tech for years and have gotten really good at it. Then they have gotten really, really good at expounding on it and creating even better tech at a almost zero cost in R&D.

    They are really worried now about India, so much that they are beefing up their Navy and Air Force. No it's not for the U.S. It is for India with shades of concern toward Russia.

    India is more afraid of China than they are of the Paks, they hate the Paks, but they fear China.

    Each country is expanding their offensive and defensive face and it is costing them billions upon billions each year.

    Meanwhile the engine that was once the U.S. is now in idle and there are serious doubts around the world if America will ever return to it's past economic status and world economic force.

    China has many problems as stated but one they don't have is a worry about the U.S. or the E.U. calling bankruptcy and not paying what they owe to China.

    China can and will be a world power but it won't just be economic means that get them there. They are ruthless and care very little about world opinion or reactions to their long road to world domination.

    Especially now that they have seen that America will be dominated by progressives for the next several years.

    Papa Ray
    West Texas

  10. An economist would postulate that China's ascendence does not neccesarily mean that the US will suffer a parallel decline. Trade still does, in theory, make both sides better off in most ways. If the US does decline in wealth and stature as a nation it will be because of our own poor choices and poor leadership. Yes, China has given the US more rope to hang ourselves by extending trillions in credit to finance our bubble. It was the US consumer and politician that took that rope and fashioned the noose.

    We control our own destiny and need to stop looking at China as a threat and start looking at it as an opportunity.

  11. I agree. Chinese PEOPLE are surprisingly capitalist in their mindset. Chinese GOVERNMENT is something different.

    Don't for a second, make the mistake that the chinese people are the same as the chinese government.

    Chinese people don't universally adore and follow the rules of their government. In fact, I think most chinese view "laws and rules" as guidelines.

    The chinese economy as already returned to over 8% growth, and all the infrastructure investments taking place now will only serve as a lubricant to future growth, as infrastructure is still sorely needed.

    That being said, this century is not China's century. It's the century of the rest, and the fading of the west. Hm, that sounded more poetic than I planned. :/

  12. I actually agree with James and think the argument is very neatly put, echoing my own comments on a similar topic on Harvard Business Review more broadly reviewing the Asian region and coming out with similar positive forecasts.

    In this context a comment on the quality of the PRC labour forces/ Human Capital and their ability to assist in putting the PRC on the world stage is appropriate.

    In my opinion, based on regular discussions on this topic with ethnic Chinese, there is a very simple reason why people don't understand Chinese people, a pattern I observed when I used to teach hotel staff in a Phnom Penh hotel how to use Jif and toilet brushes, echoed by my driver in Latvia who told me the general population didn't know how to use tooth brushes after Communism.

    We are not necessarily dealing with Chinese culture and a population as it is portrayed in books or magazines, including references to Taoism, Confucian beliefs and so forth. Most of the intelligentsia high tailed it to Taiwan in 1949, thereby becoming a major repository of values, ethics and standards, regardless of the exceptions we may note from time to time.

    The rosy glasses brigade has studied Chinese cultural history ad nauseam and doesn't understand they are not dealing with real Chinese culture as it used to be. Those hallowed ideals have been usurped by a cynical Polit Bureau which is more than happy to pander to starry eyed idealists like Premier Rudd in Australia. (not unlike the way the US Founding Father's hallowed ideals have been usurped cynically by the likes of Goldman Sachs and US Big Business).

    The current Chinese masses have been carefully weeded out to get rid of any of the values and ethics (read: new brain baggage), in about the same crude manner as the trains to Siberia that took 200,000 Latvians intellectuals off to their early and desperate demise.

    Stalinism is nothing if not effective in doing this, and we are now dealing with the left overs of that process, including famines in the 1950's which would necessarily kill off the weaker (read, anyone with any ounce of altruism which is a bad thing when you are trying to survive on cockroaches), Cultural Revolution (same result) and Tiananmen (exodus of rudimentary intelligentsia overseas).

    The "real" chinese, those of Taoism, 5000 years old culture, first medical books (Yellow book), I Ching, Yin and Yang, you name it, do not reside in PRC, with exceptions.

    They reside more likely amongst the diaspora, which includes the cognoscenti in Taiwan and those residing in the USA and elsewhere around the world, safe from harassment and intimidation by the PRC government apparatus.

    Heretic is a dirty word in any language but especially in the PRC where it is pronounced yì jiào tú or (異教徒) as taught to me by my Taiwanese teacher long ago. It means Disciple of strange or unusual teaching or religion. I guess those enjoying the writings on and contributing to this blog would qualify.

    One needs only to take note of a small advert appearing in China last year exhorting the citizenry to remember 4 June 1989, which resulted in the author being dragged off to jail.

    There is indeed a possibility that Chinese Human Capital will make a contribution to the future of the PRC and its aspirations to become a world player. Whether that contribution will be effective is another question, as it will be hampered by a general lack of ethical and moral frameworks underpinning all that brainpower, not a formula for success.

    Besides this we haven't even talked about the fact that the members of the current Chinese generations are often the products of the one child policy, creating a potential sociological time bomb and the likelihood that the PRC will be on the world stage led by little emperors without an understanding of right and wrong.

    I don't think that is a good formula for success.


  13. Ferdinand,

    Thank you for the insight. Ethical and moral frameworks have been at the heart of many articles on The Pacific Gate Post. Unfortunately, we have watched a very serious disintegration of both in Washington and on Wall Street. .... A harbinger of things to come?

  14. China is just a bit player; the world economic super power is really India. I am Chinese and an under-deserved Anglophile as well. To us Chinese, we prefer not to exaggerate our role in world affairs and we think you should look to India instead and please spare us. To us Chinese, India is already the world's No.1 Superpower, transending the best traditions of the British Empire every day. No dispute here, and much admired. In PPP terms, India is already the world's No.1 economy, not even the US comes close. India has a super high-tech economy with InfoSys, Wipro, Nano, Slumdog, and much more that the average Chinese never even heard about, in whose unfit minds, they only know about BYD, Hauwei, ZTE, and Lenovo; never mind, how limited horizons. In the democratic guidance of Gandhi, Nehru, Indira, Rajeev, and Singh super human politicians, India shines while the world declines. India has a huge population dividend, and as time advances and the multiplier labours forth the advantage will become much more pronounced, just imagine millions more Singhs all equalled by only the Oxford Sheldonian debate chamber forged speakers. With her close to 1.1 Billion Software Engineers, they are making this profession obselete; literacy is not even worthy of men's will as these boys and gals can all express themselves in the languages of their laptops. In the next 100 years, India with her super effective democracy will prevail mightily; as we Chinese just pray that India will also have mercy to leave a bit of room for us to earn a modest living in our corner of the planet. India just needs to sleep walk through the next 30 years, or better yet with their superior intellectual powers they can make an galactical contribution to worthy human endeavours like whether the black cats are superior to white cats, or white ones to black ones, or what the hell, maybe even both, whereas us poor Chinese will have to continue to slave under the Sun, rain, and snow just to keep us fed and our kids in school. Oh, I take it back, I may have to skip my meals so my kids can stay for one more lesson. With the current economic crisis, my salary here in Beijing is shrinking by 8% each year, together with the overall economy; oh maybe I am confused with the sign of this figure as you see I am not that educated with numbers. All I know is that all that necessity is becoming harder day-by-day, yet these crazy people, like my wife, are clamouring for those fake Gucci bags. In 30 years, I suspect my salary would march on to zero, with how many ... I really do not know now, but then I would also be dead and need not to care. Oh, by the way whatever you hear from the foreign press, if it is good news, just ignore it, it is not quite right, shall we just say. Cheers to India! Cheers to India!

  15. Anonymous,

    Thanks for the helpful comment. Is it not really supportive of democracy?

    ... Perhaps also presents a good argument for an internally supportive and supported economy, rather than one dependent in majority on other countries or outside influences and forces.

  16. Anonymous at July 19,2009 11:58 AM
    that is the chinese and self-professed "under-deserved" anglophilic gentleman, of course.

    I like your sarcasm , the articulation part that is. it is rather rare in the chinese people today to put forward their "candid" views so adeptly, as it were.
    However beyond all the west centric analysis of India-China trends , let me tell you something that I know.

    your government has made it a policy of late to invite people from my country ( yes I am an Indian) for the usual tours of your fantastic eastern seaboard infrastructure ( I have no qualms in attesting to that) and then ask them as to precisely how India manages to churn out world acclaimed artistes in all the disciplines.

    The Indian delegation usually smiles enigmatically and politely declines to answer.

    for accompanying this question is also a reference to the numerous accolades and awards that have been showered of late on these people.

    the focus clearly is on "the winning part" . not on the art itself.

    I don't think a civilisation which prides over all else - in "winning" is sustainable. However intimidating it may try to be to the outsider.

    India too is beginning to show the competitive streak in itself. Indeed, Americans here would know just how much some Indian parents drive their kids to win the National spelling bee for instance. its shameful really .

    But still, owing to historical legacy and the constant assimilation of new ideas brought in by invaders or travellers alongside a re-affirmation of ancient wisdom , India continues to still think about its Karma and has not become a country driven by its political class to "win" all the time.

    Yeah there are some who would say this is gob and you need to run just as fast as to stay where you are. they are the ones probably getting ahead in "life" . Just like china is getting ahead of India in the "world".

    Remember no matter who wins this so called race between nations , it will be a phyrric victory.

  17. Anonymous, ... from India,

    "Winning," is inherent in each ego regardless how you define it.

    It exists in each and every corner of civilization, and America certainly hasn't cornered the market on it.

  18. yes and it is the ego that must be effaced if the world has to survive.

    to say that aah these guys have 2500 dollahs as their average whereas those guys have 300 is meaningless.
    and this is very much a western fixation. that the chinese people have bought hook line and sinker. At least their establishment has.
    In fact even economists realized the meaningless of such comparisons which is why they came up with the idea of PPP anyway.

    See the little understood ( or is it acknowledged) fact is that India is somewhat Anglophonic and not necessarily anglophilic in its outlook.

    of course like you say " the concept of winning" exists in every civilisation but it never used to be prided over all else in mine.

    In fact my civilisation was about giving up things when you had it all.

    Noted examples include

    1. Buddha
    2. Mahavir
    3. Bharata
    4. Gandhi to an extent only

    A fellow asian with a beard who is now known as Jesus did it too.

    China on the other hand has embraced the western paradigm pretty much and prides "material achievement" over all else.

    what I am saying is from the point of view of anyone , anywhere it is whether he gets a decent existence or not that counts not some sparring over statistical bragging rights between the so called comity of nations.

    when an average american making the national average is unemployed his per capita income may as well be a big zero for sometime to come. give him the average as succour I suppose.

    It is time for all of us Indian , American , Chinese what have you to move on. the world is just not big enough anymore for so called superpower games.

  19. Anonymous, ... from India,

    "yes and it is the ego that must be effaced if the world has to survive."

    You cannot efface the ego, IMHO, since it is the ego/mind that Soul is here to experience. The demonstrations of insecurities that we are all subjected to in some form, may be tempered somewhat, and behavior modification is possible.

    Changing that very human nature is not so likely, however.

    Pervasive media, TV & Film, are very powerful influencers of behavior, perception and thinking, obviously, but it remains that it is a natural tendency to be self-centered.

  20. Well raider,

    It is true that it will be impossible for the soul to occupy a mortal state if the ego is completely effaced. it is only because we self -identify with at least some of our actions that we continue to exist on the mortal plane.

    However , I too am referring to some kind of tempering. At the very least we msut stop being downright nasty to each other and the self-centredness that you refer to should be kept in check.

    and yes consemerism being beamed via various media is not helping. its only leading to

    more wannabeness and there are "pundits" out there who are even justifying that sort of thing by saying :

    "hey , why the hell not?"

    Fine , but moderation and co-operation is also required . we must not forget that.

    consumerism => scramble for resources => collective identification/groupism => self centred organisations => nationalism/ terrorism/ what have you.


    hey we can all do with a little less=> co-operation => co-ordination of transnational efforts => world peace and human development.

    A pipedream , I know.

    Honey, where the hell is my Ak-47?