We still see the glass as half full, given likely decent global economic growth, healthy corporate p...
Seeing China's Next Challenge Up Close
07/15/2010 2:43 pm EST
The first thing you notice in China is the people, the sheer number of them, and it’s the last thing you see when you leave.
Everybody knows China is the most populous country on earth, with some 1.4 billion souls expected to live there by 2014. It has more than four times the population of the US (the world’s third biggest) in about the same geographical area.
But until you go there, you can’t grasp its enormity and how it affects everything, from traffic to employment to the way people see the world.
That huge population and the need to keep it employed and content are what drive the Chinese government’s obsession with economic growth and its intense search for resources all over the world. It will define China’s economic and foreign policy for years, and Western policy makers would do well not to underestimate it.
We arrived on our family trip to China just as the government, responding to intense international pressure, announced it would let China’s currency, the renminbi (or yuan), float within a controlled band. That ended two years of it being pegged to the US dollar.
So far, there’s been little appreciation. And in May, the US trade deficit with China widened again, to $22.3 billion (it was $227 billion in all of 2009), giving more fodder to politicians looking for easy scapegoats for high unemployment and inadequate economic policies.
Of course, when you visit China, you see first hand that things are more complex than that. We spent over two weeks there, mostly in its three biggest cities—Shanghai, Beijing, and Guangzhou (formerly Canton), where my wife attended university. We met many family members, old friends who had lived in the States and moved back several years ago, and even my wife’s former classmates in an impromptu reunion.
Though I don’t speak Chinese, I did get translations and accounts of conversations. I also recalled vividly my first trip to Hong Kong and Shanghai ten years ago, just before the Internet bubble burst. Back then, as I walked through Hong Kong’s gleaming new airport (it’s still sparkling clean) and saw crowded terminals and departure boards with flights to cities like Dalian and Chengdu, I had the sense that a giant was emerging.
A decade later, it has emerged. People in Shanghai are dressed much better, as the shabby Communist-era garb I saw then has given way to smart designer apparel and huge boutiques with the most luxurious names—Prada, Bulgari, Louis Vutton. Audis and BMWs are ubiquitous on smooth, newly paved roads.
But the traffic is beyond horrendous: Traffic jams in US cities like New York, Washington DC, and Seattle don’t approach this. Throughout the day, it took forever to get anywhere, and pollution scarred every skyline. Meanwhile, I heard that people are buying 500 new cars a day in Guangzhou. Where are they going to put them?
Still, the infrastructure has been upgraded dramatically, usually tied to a signature event, like the Beijing 2008 Olympic Games or Expo 2010 in Shanghai. The airport in Beijing was magnificent—efficient, architecturally appealing, even green. All three cities had state-of-the-art subways that put New York’s and London’s to shame.
In fact, coming home to New York’s decrepit LaGuardia Airport and hitting pothole after pothole on the taxi ride home, I wondered which was the advanced economy and which one was “emerging.”
Of course, New York’s infrastructure was built by Robert Moses in the 1930s through the 1950s, when the US’s interstate highway system was the envy of the world. China has unlimited government funds and more than a half-century of technological advances to make theirs even better.
Each city had brand-new business and residential areas—Chaoyang in Beijing, Pudong in Shanghai, the Pearl River New City in Guangzhou—that were farms or slums 20 years ago. The government works hand in hand with private developers, many of whom get rich, but everyone knows corruption is pervasive.
Next: Pride and Anxiety|pagebreak|
The Chinese we met are very proud of what their country had accomplished, and they appeared to live pretty well, if not quite in the relative opulence to which the American middle class has become accustomed.
But there was an underlying sense of anxiety about the future, although apparently not as deep as many Americans feel now. Can the good times continue? Will their children have opportunities, too? And what is life about, beyond the pursuit of money?
That’s why the government has quite a balancing act. It must continue to promote economic growth above 8% a year (China’s official GDP growth was 10.3% in the second quarter, sharply lower than in the first quarter) while staving off inflation and speculation.
That cat, however, is out of the bag already: We heard about someone who had bought a flat in Beijing for 800 yuan a square meter (about $11 a square foot at current exchange rates) several years ago that was now worth 40,000 yuan, or nearly $550 a square foot. That’s a staggering 50-fold increase, and at such nosebleed levels a big correction looks inevitable.
But the biggest issue is jobs. Our new hotel in Beijing was staffed like an army with likeable young people who fell all over themselves to help us. The government has been promoting tourism since the days of Deng Xiaoping, and in 2008 China tied Spain as the world’s third most visited country (behind France and the US).
Besides being a good source of jobs, tourism helps “rebalance” the economy towards domestic consumption, about which Western leaders have been hectoring the Chinese. Everywhere we went, from Beijing’s Forbidden City to the Expo 2010 in Shanghai to Hangzhou’s West Lake we saw a huge number of Chinese tourists—often whole families with grandparents, parents, and their one child in tow (a stark contrast to the big American families we see on holiday). Roads, rest stops, and other facilities have been greatly upgraded.
The emphasis on domestic consumption has gone hand in hand with a big move from the coastal areas that have led the boom. After contract electronics manufacturer Foxconn experienced several suicides in its workforce in Shenzhen, it announced it would move much of its production to Hebei in the north of China.
A wave of strikes in mostly foreign-owned factories has gotten favorable coverage in the government-controlled media as officials appear ready to forego some of the low-end manufacturing that has fueled China’s boom to improve the standard of living of Chinese, especially in the interior, so they can spend more.
“A virtuous cycle is accelerating the shift to the country’s next development phase,” J.C. deSwaan, a lecturer at Princeton University, wrote in The Wall Street Journal. “...Wage hikes pave the way for the migration of low value-added jobs to the less developed areas of the country and for higher value-added sectors to develop in the wealthier, traditionally manufacturing-oriented coastal areas.”
“Wage increases...also facilitate the shift toward greater consumption growth,” he continued. “China’s central government is finally setting the stage for tangible gains in household purchasing power...”
That’s the plan, but will it work? And what does it mean for us? I’ll go into that next week.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own.
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