Everything you know about China is wrong

If this demands a login, just use cypherpunk/cypherpunk.

But what if they’re wrong? Look closely at the Chinese economy, and you’ll find a far less rosy situation than that portrayed in most of the business press. The country’s growth rates are vastly overstated, the result of cooked books and massive deficit spending. Companies selling to the Chinese market-- foreign and domestic alike–are struggling just to break even. The economy is plagued by persistent deflation and a useless banking system. “Businesspeople have created a lemming effect,” says Graeme Maxton, a specialist on China’s auto industry. “They have convinced themselves they have to be in China or their competitors will overtake them, so they ignore economic fundamentals.” The Chinese economic miracle, in other words, is largely a house of cards. And, when it falls, the consequences could be catastrophic.

Thomas Rawski, a groundbreaking economist at the University of Pittsburgh, notes that over the past five years–a time of supposed breakneck growth–China has been plagued by deflation, rising unemployment, and declining energy use, trends normally associated with low growth if not outright recession. Take falling energy use: China’s coal- based industries are not known for conservation–on a summer day in the industrial city of Urumqi, I could not see a building across the street–so it is nearly impossible that the country could grow swiftly while using less energy. Looking at energy data, independently compiled GDP figures, and other statistics, Rawski concludes that, between 1998 and 2001, China grew by approximately 4 percent rather than the 7 percent to 10 percent claimed by the government–decent results, but no better than some other developing economies. By comparison, Bangladesh, not a country anyone associates with economic dynamism, grew an average of 5 percent per year during the late '90s. Four percent growth, moreover, is not enough to mitigate the socioeconomic problems that could accompany China’s transition from an agrarian economy. According to several Chinese economists, China needs to maintain more than 7 percent annual growth to keep unemployment rates below 15 percent to 20 percent in rural areas.

Actually, according to this article, everything I (and everyone except the pinko beatniks on campus) knew about China was right. China sucks.

Chicom sympathizer!

I’ve seen this “lemming” effect first hand and saw the effect it had on a company.

In the late 90’s, the company I work for signed a contract with the Chinese government to create and process a national credit card. First Data (the company I work for) jumped at the chance and started what eventually became a project whose costs spread into the $250 mil range. The company was so desperate to sign a contract with China, tapping into a billion new customers, that they agreed to terms that no sane company should.

The biggest problem, and the source of most of the cost, was that the Chinese government insisted that they must be able to change any requirement at any time for any reason…and that these changes could not effect the agreed on completion date. The Chinese government dicked around with the design and requirements documents, changing them constantly. Every time we were close to completing the project and fulfilling the contract, another round of changes would show up causing us to start from scratch. Eventually the agreed on completion date came and we were not ready.

The Chinese government claimed that we were in violaton of the contract (which we technically were) and severed the deal. This forced First Data to take an additional one time charge of $120 million and leave China.

Now, several years later, we have another contract with the Chinese, but it’s much more strict and well thought out. The problem is it appears that credit cards just aren’t needed in China outside of a few cities. Our market penetration is next to nothing when compared to the population of the country.

I don’t know whose bright idea it was to try to introduce a credit card into a communist system where a person in debt can be thrown into prison for life.

Anyway, this doesn’t really have much to do with the original article, hehe. But it does go to show that companies are willing to do anything to get into this supposed “ripe” market. And even after China bends them over a barrel, they’re still so entranced with this magic “over 1 billion new customers” that they keep coming back for more.

Didn’t countries at the beginning of the 1900’s also fall over themselves trying to get into China*? I think that most companies that go anywhere “just to be there” probably aren’t going there for the right reasons. Also, if I were a for-profit company’s CEO, I would have a hard time justifiying my expansion into a communist country without some very hard, independantly verifiable data about the economic condidtions in that country.

*I know the political circumstances were vastly different, but I think that companies economic expectations of growth in China were just as overstated then as they are now.

‘nyway, this doesn’t really have much to do with the original article, hehe. But it does go to show that companies are willing to do anything to get into this supposed “ripe” market. And even after China bends them over a barrel, they’re still so entranced with this magic “over 1 billion new customers” that they keep coming back for more.’

Well, it does, actually. If companies were actually focusing on the impossibility of making profits, China wouldn’t be able to funnel off capital to keep itself afloat.

China’s massive population is what gets the headlines, and that’s what skewers the perception. Everyone is bending over backwards about China being the next superpower, but make no mistake: China still has a long way to go before it becomes a hegemon.

The Economist’ yearly annual just came out, and they made an interesting observation. Assuming China’s economy grows at a torrid 9-percent a year, and the U.S. grows at less than half of that rate, in 20 years, the U.S. will have a $21 trillion economy while China’s economy will be less than half of that.

Also consider that China’s been trying to slow down its population growth rate for decades, while the US growth rate has taken off over the past decade. Demographic projections show 500 million Americans by the middle of the century. Assuming the US can maintain economic growth, that makes for a pretty massive economy.

One thing that is going to be potentially destabilizing in China is the fact that due to the one-child law and the cultural preference for male children over female children, there has been a large and growing disparity between the ratio of male:female babies. A lot of female babies are aborted in the womb, so to allow the couple the chance to try again for a male heir. As it is, in about 15-20 years, there is going to be a huge inbalance available young men and available young women. There’s going to be a lot of pressure on their society on what to do about that.

Even the Communist regime went public with the country’s economic roadblocks at the recent Party Congress. The new president declared war on corruption – not capitalism, corruption.

In China, you have to go stand in line to pay your bills, because there is no guarantee that the check you mail will ever arrive at its intended destination.

Still a way to go over in the Middle Kingdom…

There’s another major factor, however. Many companies are not looking at China so much as a customer as a manufacturing base.

One of the major fundamental changes in American companies and their ability to stay afloat (and how to do that) came when the world economy opened up, i.e. the globalization of supply. Suddenly, huge American companies that were able to make money because they were the biggest and the resulting scale of economy were no longer competing with other Western companies with the same environment: they were trying to sell products and compete with companies that could make and sell them for ten (western) cents on the dollar. For example, an American company used to be the world leader in magnesium - unchallenged. Russia starting building mag plants, and they could not only build a plant for much less than an American company, and pay their workers much less, they were also so happy to get Western currencies they could sell it for much less and be happy. The American company couldn’t compete, in any way, so they dropped the business (and were forced to fire a lot of people.) The same goes for most products that don’t require some type of special (unique) technology to produce. This manufacturing globalization in countries like Russia is what forced many American companies to downsize in the early 90’s.

When you look at China, you see a location where you can build plants, make and sell many commodities much, much cheaper than you can in the West. Who cares if the Chinese buy them: you can ship and sell them to all of Asia and the rest of the world for that matter. So, for example, if you’re GE and you’re making and selling polycarbonate into the CD market (including CDs, CDROMS, DVDs, etc.) for $1.00 a pound, and your rival Bayer builds a plant in China and sells it into the market for 0.35 per pound, you’re in big trouble.

FWIW

That’s mentioned in the article; plenty of export businesses are making a bundle. In general, though, the stuff about how China is going to be the next superpower is hooey; they’re too poor, and probably going to stay that way compared to the US.