China: Economy 101

If you want to break things down into impossibly simple models, there are two competing views of where China's economy is going. The first, and one I give a bit of credit to, is presented in Ted Fishman's book China, Inc. In it he lays out how and why China is providing the proverbial Perot suction cup noise of industry fleeing not just America, but everywhere, to find a new home in China. A seemingly endless supply of docile unskilled laborers, infrastructure to move the goods, a government that's only talking of putting the breaks on uncontrolled growth at any environmental cost, a knack for copying coupled with laughable copyright enforcement, and a legal transfer of technology on a scale never before seen all conspire to give China an edge over any other country on the planet.

The first issue is the biggest. The sheer population of China is mind boggling. Fishman points out that the discrepancy between the official population of China [1.3b] and the unofficial estimates [1.5b] constitutes 2/3's the population of America. With that you have the largest migration in human history of people leaving the countryside in the interior to work in the coastal boomtowns, often trailed by a trail of savings from the villages to start small businesses. Labor is cheap and plentiful. College graduates work for less than $250 a month. Chinese companies don't need expensive machines to make cheap products more efficiently... it's easier to the labor. Fisher sites an example of an automobile company in Shanghai building luxory Jeep knockoff's for $8000 - with hand tools.

Eating lunch the other day my friends and I watched for half an hour as barrows of thrown out electronics dished out of the trash were brought to small workshop where the wires, casings, and other components were neatly shredded off and dropped into massive piles. Without a single any sort of Think Green-style motivation, China is probably the largest recycler on the planet. No task is too small or menial because no wage is too small.

Fisher sends out the warning over and over again that no business is safe from China's growing economy, especially as they move into more and more advanced technology like wide-body airplanes and their first indigenous jet fighter.

And then there's the other fear...

Economically, "too much of a good thing" really means something. Too much low interest money typically leads to inflation. Rising living standards in China mean rising costs of living, which means higher wages, which again adds inflationary pressures.

That's clearly dawning on Chinese leaders. `China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced,'' Chinese Premier Wen Jiabao said on March 16 at a Beijing press conference. He added that energy efficiency and environmental-protection issues haven't been properly resolved.

When even China's No. 2 official uses words like `unstable,' `imbalanced,' `uncoordinated' and `unsustainable' to describe the economy, you have to wonder why investors aren't paying more attention to the risks and are still buying ever more Chinese stocks.
-William Pesek

In the same article Pesek goes on to address longer term deflationary fears with business costs rising because of environmental degregation, volatility, and rising labor costs. Even the Asian Development Bank is saying that, "Should investment continue to run at more than 20 percent a year, what has been a source of growth for many years could turn out to be a curse."

My own thoughts side more with Fisher. I've been to Manila, I've lived in America during a recession, and I know what a growing economy feels like. I see the cranes on every street building new high rises, thousands of kids at my school getting a solid Western-style education. Though there are plenty of BMW's running around, most of the growth is building a budding middle class. It's no bubble that people hoping to get wages commensurate with their skills and beginning to get suckered into the consumerist game one cell phone, one DVD player, and one computer at a time. It looks and feels like almost everyone is getting a piece of the pie, even if only relatively more from starting point of worse squalor. On a street level, what else would you look for to check for a healthy economy?

Economists and market-types always like to talk about "market corrections." Well, folks, this is the biggie here. 1.3 billion consumers. 1.3 billion producers. All moving from the idle slack of horrific misrule dating from Qing Dynasty on through the wonderfully inventive ideas of Mao Zedong [it was only fifty years ago Chinese were melting their farm tools in useless backyard steel furnaces]. Here they are, arriving by the train load to work, buy, and join modernity.