China Boom CMS

<p>I was stunned to see the poverty in the countryside of China, and such a low standard of living. And the agricultural technology was not so different from what I saw in the museum. The tools they used were so backward...the economy, and the farmers barely made enough to keep their family going. It's just so poor. Their families and their village, and the area, so under-developed, it's really an education. And Mao Zedong sent us to the countryside to receive reeducation from the farmers, and I think that is a very valuable education for me, but at a very heavy cost. So, ten years, I didn't study high school. I didn't get a chance to study high school. I just graduated from elementary school and was sent to the countryside, away from my parents, from my sisters, on my own. So, that was an extraordinary experience for me, but I learned a lot about what the real China looked like and how people lived in the small villages. And after that, I went back from time to time to visit my family, friends and their children and grand-children. And just a few months ago, I went back again. Of course, after thirty years of economic reform, the living standard now is much higher than thirty years ago when I lived there. They made tremendous progress. In Yenan, when I was there, no running water, no electricity and people in that village never saw trains or airplanes. They had no idea whatsoever about the modern world. And today there is running water, electricity, school, hospital. Economic reform brought them from a primitive economy into the modern economy. And the rural economy integrated so much with towns and cities. So farmers' income is ten times as high as what they received thirty years ago. And the farmers all use televisions and mobile phones now. But when I was there, there was no phone, no video. So, it's very hard to imagine and the shock[ing] contrast between now and then.</p>

<p>Well, I think it&rsquo;s important to understand that, again, environmental degradation didn&rsquo;t begin with the reform period. In fact, there was a very dramatic ratcheting up of pollution and degradation in China during Mao. Beijing, for example, went from having a few factories to having something like 7000 factories inside the sort of broader city limits. That's really quite extraordinary. Pollution was skyrocketing during the Mao period. You had the backyard steel furnaces, you had the Great Leap Forward, devastating to agriculture. So, all of these things sort of contributed to a very dramatic increase in both environmental pollution and degradation in the pre-reform period. I think, once the reform period hit, what you began to have, first, was the beginnings of a recognition that the environment mattered. So, you had the draft environmental law that started in 1979, came into force by 1989. You had the initial steps for an environmental protection agency within China. So, these were the positive moves. You had the beginning of drafting of more detailed laws and regulations, the formation of an environmental protection committee within the National People's Congress. So, all of these were sort of the positive steps within the Chinese government that said, &ldquo;Whoa, we recognize that this, what would become a pre-reform period, really exerted a very devastating toll on our environment.&rdquo; At the same time, however, you had the drive to develop. And I think it&rsquo;s tempting sometimes to look back over the past 30 years or so, and just think of China&rsquo;s economic reform process as this beautifully orchestrated dance. Somehow it all unfolded just perfectly. But, unfortunately for the environment, it was not so perfect. And the very rapid economic development, the proliferation of the Township and Village Enterprises, in fact, which had absolutely no environmental regulation whatsoever -- simply dump their effluence into the nearest stream or river -- no real laws to govern emissions from factories or from coal-fired power plants, all of this just caused the environmental pollution to skyrocket in the country. So, even as they were taking the steps to develop this environmental infrastructure, this bureaucratic infrastructure, the imperative to grow far exceeded anything they were able to accomplish in terms of trying to balance the environment and development. I remember at one point, when I was looking at the debate or the discussions about the environment, this was in the aftermath of Rio, the first sort of discussions on climate change in 1992, there was a sort of a debate going on within the Chinese media talking about sustainable development, which had become sort of the watchwords, bywords, of the whole environmental movement globally. But, in China, it was translated as &ldquo;sustained development,&rdquo; and what that meant was, &quot;How do we sustain our development?&quot; So, I think that there was sort of a free for all in terms of thinking about the environment, about water in particular, about land, as just this ah renewable, expendable kind of resource. And it&rsquo;s only been within, I think, the past 6-7 years that that notion has truly been challenged in an important respect. I think, certainly, China, in a very pure sense, has derived a lot of economic benefit from its failure to protect the environment over the past 30 years. So, in a short-term, narrow kind of context, I think GDP growth has been faster and greater for much of this period because, in fact, they have allowed factories simply to dump their water downstream and because they didn&rsquo;t pay for the consequences of doing that in some fundamental ways. For example, they don&rsquo;t have a public health system that requires them to treat the people that are made sick by this polluted water. So, it&rsquo;s so hard for them to internalize the cost, in some respects, of this environmentally damaging behavior if you don&rsquo;t feel it in other ways. So, you might feel it in terms of social unrest, which they certainly have, but again, that&rsquo;s not something, necessarily, you put a price tag on immediately. And so, I think there have been clear ways in which economic development has proceeded far more rapidly because they haven&rsquo;t put scrubbers on their coal-fired power plants. You know, scrubbers lower the efficiency of a power plant by maybe 2 to 3 %, so that&rsquo;s a direct economic cost to do something that&rsquo;s right for the environment. Now, maybe that translates, over the long term, into better public health for the people, or to better agricultural productivity because you don&rsquo;t have acid rain that ruins crops. But, then again, those things are hard to sketch out and they&rsquo;re hard to do over the longer term. So, from a short-term perspective, they&rsquo;ve benefited. From the long-term perspective, they&rsquo;re going to pay, and already are paying, a very high price.</p>

<p>In the 1980s, my impression was that students and intellectuals were still in this mode of looking abroad for inspiration. And I think that&rsquo;s the one thing that, overall in the 20th century, and there were some exceptions, like Liang Shuming and Liang Qichao, but Chinese liberals and Marxists, what they had in common was that they looked to the West for thinking about social and political reform and looked down upon their own traditions. It&rsquo;s like this <em>quanpan xihua</em> (complete Westernization), they&rsquo;re saying complete Westernization is the way to go. It really went on for like a hundred years, and it was very strong in the late 1980s. And the idea of looking to China&rsquo;s own traditions, including Confucianism, for inspiration would have been a very strange idea to put forward. But now, 20 years later, it&rsquo;s really a big change. Of course, they still want to learn from other countries, and that&rsquo;s part of the Chinese boom, a willingness to learn from other countries, a very pragmatic outlook, but also a willingness to learn from China&rsquo;s own traditions and to look to China&rsquo;s own traditions for inspiration for social and political reform. That&rsquo;s been the dramatic change. And why did it happen? I think there are many reasons, but one of them is just this economic boom. In the 20th century, China was the sick man of Asia. Once you have a relatively developed society, people begin to think, &quot;Well, maybe our own traditions contributed to that boom. And maybe, looking at what happened in other East Asian countries, with a kind of Confucian culture, South Korea and Japan and so on. And maybe the sorts of Confucian values that we thought were actually incompatible with economic modernization -- it's not just the Chinese that say that, Max Weber as well -- like the values of education, hard work, savings, stable family values, and concern for social order actually contributed to economic modernization. Maybe those contributed to economic modernization. But also, economic modernization has a downside and makes people more individualistic, and atomistic. So, this boom, it&rsquo;s actually a lot of the businessmen and the intellectuals and the educated people who&rsquo;re saying, &quot;Well, hold on second. Now we make money, what do we do?&quot; And they look around and see there&rsquo;s kind of a problem with excessive individualism in society. And I think the kind of obvious place to look for some sort of remedy is Confucianism, which really emphasizes social responsibility and political commitment. So, I think that&rsquo;s part of the boom as well, part of the reason for why Confucianism is being revived. But, of course, there&rsquo;s also the political issue, which is that the Communist Party has a big problem with ideological legitimacy. I mean, who believes in Marxism anymore as an inspiration for the future? The government says it&rsquo;s a first stage, but who really believes that in 50 years time, we&rsquo;re going to move on to higher stage of communism? Not many people believe that anymore. So, there&rsquo;s a need for a new kind of ideological foundation for the government. And that&rsquo;s where, I think, a lot of the interest in traditions, including Confucianism, comes from, which is that it could help to provide some sort of answer to this need for a new ideological foundation that could provide more legitimacy to the government.</p>

<p>So we see, we estimate, about 250 million emerging middle class, people who make between 6000 and 15000 US Dollars per capita per year. These are the people that businesses need to be targeting, because they&rsquo;re going to keep growing. And so, because China&rsquo;s becoming not export-led, it&rsquo;s now becoming more consumption-led, it&rsquo;s just going to keep growing. And I see 2-3 decades of pretty stable growth. You see, a lot of economists say that China&rsquo;s household savings rate is very high, 40-50%. I actually completely disagree. I think that&rsquo;s a very high school-ish way of analyzing the markets. If you go to people older than 50, absolutely, it&rsquo;s probably 50-60% savings because they&rsquo;re concerned about their social security, they&rsquo;re concerned about their rising medical costs. But when we go out and we talk to youth, we find that they have an effective savings rate of 0. You know, they&rsquo;re very similar to Americans. They go out, they buy on credit, there&rsquo;s huge revolvers, these are people who...the girl who massages my feet, she makes about $120 a month, but she has a $300 phone which she changes every 6 to 9 months. So there is that optimism, there is that type of buying on credit, there is very low savings in that age group, which I think is going to continue to fuel economic growth here. So, if you were a multinational, or if you were a private equity firm, or a hedge fund, anybody that&rsquo;s trying to invest in the China market, we really look at Chinese youth as that major driver for growth. And it's a very exciting community. If you look at the American baby-boomers, when they were 30 years old, they fueled the go-go 80s on Wall Street. They were the ones buying the Ferraris, the nice pens, the nice watches and now that they&rsquo;re 60, they&rsquo;re looking at medical care and everything about them. You&rsquo;re finding the exact same type of culture, the exact same type of spending habits in China&rsquo;s baby boomers now, who are about 30 years old. And they&rsquo;re just going to keep on spending.</p>

<p>So, the real problem in economy is trying to work out, if you wish, &quot;Is that society, that economy, producing the means for sustained growth over long periods of time?&quot; Surprisingly, it isn't too hard to produce really good growth rates for five years; almost any sensible government can plough resources in a manner to do that. The question is: Can you sustain that over 20 years or 25 years? That's the really difficult part. And that's where the India and China model are interesting, because China's been able to sustain this for almost 30 years. India's reforms began a little later, but we're now looking at about 20 years. And both of them have been able to sustain their growth rates at the way they're doing, but you can start looking at the fact that India is now looking at China and saying that, &quot;Well, our domestic-driven internal consumption model, maybe if we can add one more engine to the driver, by adding an export-led, investment-driven model, like China does, then our economy will grow that much faster.&quot; And China is basically saying the same thing, &quot;If we can add an Indian engine, which would be domestic consumption-driven, to our export, investment-driven model, then our economy will also move a little faster as well. And in a more stable, long-term manner.&quot; So, what I think you're starting to see is these two economies starting to get closer and closer together, because they will take a bit of each other's economic growth model and absorb it into their system. And when you talk to economists and say, &quot;Well, which one got it right?&quot; They say, &quot;Well, they're both getting it right; there's no particular law that says you have to start with an investment, export model, and then switch to a domestic consumption model.&quot; You could do it either way, there's no reason that you should have it one way only and then they will do it another way and so on.</p>

<p>Since I watched Chinese leaders close by, I saw Mao, Zhou Enlai, Deng Xiaoping, Jiang Zemin and Hu Jintao. In 1971, when I came to New York, I went to a supermarket. I was overwhelmed. It was such an affluent society. At the time, China was living under very strict rationing. If you bought anything, you needed a coupon. Rice, cooking oil, meats, textiles, this was a huge difference, a huge gap. I told myself that never in my life time would I see Chinese supermarkets that were as good as America&rsquo;s. More than 30 years later, I realized I was wrong. At that time, I was pretty convinced that Chinese supermarkets would never, in my lifetime, look like American supermarkets. I thought that because we have a very large population, the American population is relatively much smaller and, also, America started industrialization much earlier and China was catching up. Today, when you are in Chinese supermarket, you do not feel much difference.</p>

<p>Look, I think the endgame is pretty clear. The question is: When? The day will come when China is a truly market-based, increasingly privately owned system. And it's very difficult to believe that a system like that could exist in a one-party political structure. I think as China evolves, especially as it brings that &quot;consumer piece&quot; into the equation -- and associated with that will be expanded aspirations of its population: more personal freedom to buy goods and services made and provided at home, as well as those provided through off-shore producers and vendors. With that personal freedom that comes with more of a consumer-led model, I think the political reform process will, most likely, accelerate. So in these first 30 years, where there's been a lot of state-owned enterprise reform, but the growth model has been focused so much on exports and export-led investment, that's not the strain of growth that necessarily requires a different political model. The next phase though, certainly suggests that adjustments in the political system would be increasingly inevitable.</p>

<p>I think it's too early to tell, but the main effect is very clearly going to be a slowdown in export demand, and this is something over which they have no control. And it's going to be difficult, because they relied on export demand quite substantially, not just to obtain foreign exchange and exchange for the imports, but to create employment. The big weakness of the Chinese economy, as I see it, is the investment system, which channels resources through the state banks to the state sector, which invests in projects which are often not very well-planned, but rarely create employment. And China has a big employment problem. Employment growth has been slow in the last 15 years, and slow employment growth just ratchets up a whole range of social tensions in China. And so, now what's happening is that the exports have dropped, demand has shifted from the market sector to the state sector, the government stimulus goes to the state banks and to state projects, which don't create very much employment, so employment creation per dollar of GDP growth is going to be low, and now you have these problems at every level. People graduating from schools are looking for employment and not finding employment, and this creates a lot of difficulties for the government at every level. And I think, for example, the race riots in Xinjiang this year, in 2009, who goes out looking for people to kill? I suspect that there's a very strong correlation between no fixed employment; people with steady employment, I think, are less likely in any society to participate in these sorts of activities, so it's not just employment, it's not just income distribution, but going beyond that to all kinds of social tensions that these labor market difficulties are linked to.</p>

<p>Look, I think China's really had the right strategy and if you've studied economic development, and I've studied it for a number of years if not decades. Export-led growth has long been viewed as the key to economic development and the theory is that, at some point, you reach a critical mass in terms of the employment and income-generating capacity of your export sector that you establish a solid foundation for consumer purchasing power that can then be directed at supporting internal, private consumption. Now, I think China recognized, probably 5 years ago, that they were at that point in their development journey where they had to make that transition. And when the 11th 5-year plan was enacted, in March, or February, of 2006, it had the broad outlines of a huge transition from export, and investment-led export, to a pro-consumption growth model. The Chinese correctly identified high-levels of precautionary saving as a major impediment to this transition and they also identified correctly the lack of a social safety net as being one of the most significant headwinds that kept precautionary savings high and restrained internal consumption. So, they knew it was coming, they knew they had to do it, but they didn't execute. And this is sort of unlike the Chinese because usually, when they identify a clear set of goals and objectives, they're pretty darn good at execution. And, it's hard to know why, I think the reason that I'm most comfortable with is that this is a period from 2005, 2006 and 2007 where global trade was booming, the Chinese export business was just unstoppable, it was increasing every year as a share of GDP. In the year 2000, exports were 20% of Chinese GDP, by 2007 they were 36%. I mean, this sector was getting levered up at just the right time. It was delivering growth beyond their wildest dreams. 3 years of 12% growth ending in 2007, 2007 itself was 13% growth. So, if it ain't broke, why fix it? And they just stayed the course. Did they stay the course too long? It's hard to say. They got hit like any other export economy by a massive external shock late last year after the crisis, it was a big jolt. They knew that they didn't really have a plan B. So, they went into their typical pro-active fiscal stimulus mode where they immediately jump-start infrastructure spending through state-directed bank lending and they did it on a scale they had never done before. And they increase some export incentives under the premise, which I think will turn out to be wrong, that once the investment stimulus wears off, the export sector will kick in courtesy of a snap back in external demand. And so, I think they're going to be in for a bit of a shock at some point next year when the impetus for infrastructure investment does wear off, there's no kick to the export business, and they have another sort of growth alert at some point in 2010. I think they'll adapt, I think they'll, at that point, really focus much more on consumption than they have. They've waited a little bit too long. I think over the broad sweep of history, if you're a couple of years late, or even 5 years late, you won't get penalized, but they can't afford to wait much longer. If they stay on the path they're doing, where all they do is grow their GDP through investment and exports, it's a model that ultimately is driven by supply and it creates a huge imbalance with internal demand. So that's not sustainable for any economy, China doesn't get special dispensation from the rules of economics.</p>