Q&A: Setting the Record Straight on China
From time to time in these Daily Prophecies I address questions from my readers.
Feel free to leave any thoughts/questions/comments by clicking here.
Ashby Foote of Jackson, Mississippi, is one of the sharpest of observers and he pointed me to a Wall Street Journal article on China. I intersperse my comments in italics below…
Great piece by John Lee in today’s WSJ points out that Xi could use some key advice from Peter Drucker, “Don’t solve problems pursue opportunities!”
Xi Jinping prefers to exaggerate China’s economic strengths and conceal its vulnerabilities.
My Response: Like all governmental figures, Xi stresses the bright side. However, my time-prices, measuring GDP over hours worked according to calculations from Gale Pooley and Marian Tupy, show that China has been growing at nearly 11% since 1980, which is far higher than the government claims and nearly two times as fast as second place South Korea. Time-prices register the hours and minutes it takes a worker to purchase goods and services and captures in one number the rise in incomes and the drop in costs resulting from innovation. Governments can print money but they cannot print time.
The rise in Chinese corporate debt since the 2008-2009 financial crisis has been one of the largest and most rapid — in relative and absolute terms — for any 10-year period in peacetime economic history.
My Response: This is also true of the US which has been growing at one third of the pace (measured by the time-prices model). Because of its huge savings rates, China was able to step in and help keep the world economy growing after the Western banks and governments brought it down in 2008.
China cannot significantly deleverage without drastic changes to its political economy. The model involves offering state-owned enterprises and national champions such as Huawei, cheap finance and privileged domestic-market access at the expense of an independent private sector.
My Response: Part of the private sector, Huawei rose to the top by outperforming all the state-owned enterprises, such as ZTE, that previously dominated China’s telecom sector.
Its accountants at Price Waterhouse show no exceptional debt or government subsidies. Under staunch entrepreneurial leadership from Ren Zhengfei, son of a “capitalist roader,” Huawei is probably more independent than most. It is a multinational with operations in 170 countries and about a third of its executives are non-Chinese.
China showers state businesses with subsidies and stolen intellectual property, and shields them from foreign competition.
My Response: Chinese state businesses have so drastically underperformed its private sector that government spending in China sunk to 17% of GDP in 2016.
The Chinese domestic economy is slowing because of chronic over-investment. This provides the economic rationale behind plans such as the Belt and Road Initiative and Made in China 2025.
My Response: This is true, but it fails to acknowledge that its domestic economy has been growing since 1980 at a time-priced true rate unprecedented in economic history. In other words, most of the investment has been private and successful.
The current Chinese model is self-defeating. Less-deserving companies continue to receive the bulk of finance and opportunity. The staggering misallocation of capital is worsening.
My Response: The misallocation of capital in the US is far greater. We are subsidizing useless wind mills across the country in a demented King Canute campaign against delusions of climate change. We have devastated and paralyzed our chemical companies with lawsuits (36 firms went down in the asbestos potlatch alone). We suppress manufacturing with lawyers and luddites. We harass companies pursuing carbon nanotubes and GMOs. We are now moving on to cripple our social networks and high-tech goliaths with regulatory kudzu.
By contrast, the Chinese built 106 new cities, most of them viable. They continue to open new “free zones,” such as the 13 thousand square mile island of Hainan in the South. They are favoring an efflorescence of high-tech ventures and promoting new industries such as AI and blockchain.
Unlike in China, where IPOs and high technology startups have boomed, the government sector in the US has been growing far faster than has the private sector. US politicians and journalists should halt their increasingly outlandish efforts to blame China for the effects of our own mistaken socialism, mercantilist trade war, educational debauch, and monetary manipulations.
Editor, Gilder’s Daily Prophecy