China Boom CMS

<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>

<p>In this particular instance, China&rsquo;s opacity, lack of transparency, and lack of openness, worked to its advantage. These are banks that are, to this day, heavily controlled by the government. They might have foreign partners, some of them might have spun off shares, but they are basically still, and they certainly were back in '96-'97, dominated by national government policy. So, it was really not a betting against them, there was really not a breaking of the banks or of the currency. Now, the government did something else that turned out to be quite memorable for the rest of Asia, which was that in the face of these torrents working their way through the financial system, there was a temptation to devalue your currency as a way of continuing to be competitive in global markets through your exports. And China, for a lot of different reasons, did not do so. I think it was seen as a position of strength, or a move by China to try to forestall further devaluations that might have happened by other countries to remain competitive with China were it to have devalued. I think to a certain part, this was really just realpolitik.&nbsp;To alter the value of your currency is a traumatic event, particularly in economies with profoundly rickety financial systems. And, even today, China has a rickety financial system. And back in '96-'97, the shocks and aftershocks that it might have caused, and the dislocations in the banking system, or in the export market, if it were to have taken a sort of radical step with its currency, might have been highly counterproductive, so it chose not to. But that was seen as a bulwark in Asia and something that China got some good PR points for.</p>

<p>So, at that time, the Chinese government made a big move, and that was to announce that people who fall behind will be beaten. This slogan was posted everywhere, it was an acknowledgement that China was behind, to awaken the Chinese people to the enormous economic development and technology gap between China and the West, to face a hard reality, that China was still being beaten. Because China was beaten, for 100 years, beaten by the Eight Allied Forces, beaten by Japan, beaten so badly that a lot of people embraced socialism. Because, finally, we could rule our own country, the country was peaceful, there was no foreign troops living inside this country. Whenever we look at Japan, we think its economy is well developed, but there are still American forces stationed there, and the same was true of Taiwan. So, Chinese people were very proud of this point. So, for the government to announce this distance between China's technological and economic development in this manner, using the slogan &quot;people who fall behind will be beaten,&quot; was something that really woke up a lot of ordinary people in China.</p>

<p>I think that changed the entire generation. It also changed the thinking mode. It changed the way you think, the way you look at life, the way you look at doing things, everything has changed. Also, because of their background, because these people had been blocked out for a long time, they desperately wanted to learn, they observe things very quickly and they apply it immediately and they work very hard because there had been a terrible lack of opportunity. If you look at the class of '77 until '80, these three years of students now occupy all the major positions in China. Anywhere, in government, private enterprise, they all occupied the key positions in China. I've discussed the effectiveness of the Cultural Revolution with my friend many times. I would say what happened with the Cultural Revolution is that it smashed down all the existing system or at least gave us an opportunity to question the whole existing system. Then, you are making your own judgment and since we observed so much information, different way of treating life, different way of looking, different way of doing, you try to figure out what&rsquo;s the best for yourself, for your country, or whatever. So, that somehow related to today's economic boom. I would say that the Chinese people have never been as free thinking in the entire history as today. Before, you followed the king, you followed the authority. You have never questioned authority because the system made you that way.</p>