Made For China: The New Normal

Opening up 2.0: The Second Coming

China is the talk of the town, it has gone from the globe’s overlooked understudy, to the unignorable, unstoppable economic hype train that everyone wants a ticket on. China is the world’s largest market and if its current upward trajectory isn’t derailed by the gauntlet of threats it presently contends with, it will, in the next decade or so, supplant the United States as the world’s largest economy.

Most commentators trace the etiology of China's success to the “opening up” reforms of the 1980s, accession to the WTO, and China’s savvy economic strategies over the last 3 decades. However it is my contention that the events of the last decade (circa 2009 to present day), eclipse these milestones in overall significance and represent the most important period in China’s recent history. For this reason unlike the standard “understanding China” commentary, I will forgo any detailed excavation of China’s more distant history and instead focus solely on recent events, status quo and a look towards the horizon for things to come. The importance of the metamorphosis the country is currently undergoing cannot be overstated.

Consensus on China emerging from its current economic cocoon as either a beautiful butterfly or an ugly moth has never been reached. On one hand there are vocal proponents of its guaranteed success and on the other there are equally vocal detractors soothsaying the foregone conclusion of China’s impending failure. I choose the verb soothsaying very carefully because if history has taught me anything it’s that the accuracy of most commentators prognostications about China’s economic fate have been tantamount to divining the nature of future events from the entrails of dead animals, in other words.... their predictions tend to be a load of tripe.

The polarization of commentator’s opinions and the variability of their predictions is probably better understood as an indicator that on a macro level nobody really knows how to dissect China’s unfathomable complexity. Nevertheless it is fair to say China is teetering (more precariously than many realize) on a knife edge without any reliable indicators pointing to ensured success. On the domestic front it must balance hugely powerful social, economic and environmental pressures, while on an international front it must contend with its competitors and also become accustomed to the heavy mantle of responsibility that comes with the title of world leader.

Emerging from the Cocoon: China’s metamorphosis

The multifactorial nature of the disparate forces currently shaping modern China makes offering a comprehensive explanation a daunting task. Many choose to focus on the purely economic and attempt to encapsulate key issues using the concept of China’s “new normal” growth, which explains the slowdown in China’s economy from the breakneck double digits of the nineties and noughties to the more modest but still commendable 6-7% of present day. However this forgoes an explanation of some of the more profound social, environmental and global challenges China faces.

Out with the Old and In with the New: The Circle of Life

Indeed it is more approachable to consider China’s problem in a more philosophical light. Much of China’s problems are archetypal and inherent to the human condition at both an individual and a societal/civilization level. The vigor and invincibility which defined China’s youth are now giving way to maturity and its need to establish its place in the world amongst its peers.

The unrelenting forward march of global progress has spawned new challengers in the form of emerging economies which are biting at the heels of old China, forcing its reinvention and its transition to full adulthood and ultimately precipitating the emergence of new China. The invisible hand of entropy is guiding the waning fortunes of current world leaders, having already reached their zenith and now undergoing the inevitable downward spiral that is the inescapable fate of all civilizations. The rumblings of the impending tectonic shift in world order are impossible to ignore and China is poised in the gaping cracks left behind in the wake of the change.. but...it’s got a lot of work to do.

“High Volume, Low Quality, Made for Export” – The Foundation of China’s Success

It is my assertion that the primary driver of China’s success was the economic paradigm adopted during its “youth” (eighties to noughties). China’s early role as “workshop of the world” saw it undercut and outcompete its global counterparts. Cheap and cheerful was the world’s order of the day and China was more than happy to fulfill these requirements, giving rise to the “made in China” meme, a ubiquitously understood synonym for low price, low quality, mass produced goods. Pay peanuts and you get monkeys. Pay less and you got “made in China”…or something like that. Cheap labor, plentiful workforce, smart domestic investment in infrastructure, “permissible” standards and a host of other "advantages" allowed China to cement itself as manufacturer for a world. The resounding and consistently positive trade balance borne from this strategy allowed China to amass great wealth in an extremely short period of time.

The Double Edged Sword: Success and Wealth

As China matured from precocious upstart to established economic powerhouse, the edges of the image of the Chinese dream began to get a little frayed. Elevating vast, hundreds-of-millions strong segments of a population from abject poverty to relative opulence and massively improving standards of living by all standard metrics in a short period of time is not without its drawbacks.

Despite China championing a “different” political and economic system known as “communism with capitalistic features” it has nevertheless fallen victim to what is now almost a rite of passage for all developing capitalist economies and is currently in the throes of something akin to the middle income traps further complicated by the sheer size of its population, inflationary pressures, huge regional economic disparities, rapid urbanization, demographics shifting towards senescence, healthcare crisis and a host of other social issues.

Middle Income Trap with Chinese Characteristics

The sheer speed at which China developed entails problems in and above the normal trappings of economic success and those mentioned in the paragraph above. Unlike many of its western counterparts China has not had the luxury of gradual development. The breakneck speed of its success has come at a price exacted in the integrity of its environment, health of its citizens and the safety and quality of products and goods circulating in its supply chain.

It’s axiomatic that in any system rapid acceleration and sustained high speed bring with it the inevitable expectation of:

• meeting an immovable object i.e. a crash
• requiring a change of course to avoid that object and
• Obviously an eventual deceleration.

China’s economy is no different and its rapid growth has always implied the inevitable need for a slowdown or realignment.

Enter the Consumer: Realigning Economic Growth towards Consumption

So China's solution to its economic problems is to drive economic growth through domestic consumption. Central to this is China's consumers. How would I describe a typical Chinese consumer? Wealthy, globalized, and with access to the most convenient retail environment in the world. Born in a culture which prioritizes material wealth and external appearance. Born in a world which adopts, optimizes and scales up new technologies (particularly digitizing retail and payment infrastructure) at breakneck speed. High expectations - born as an only child and given the best of everything growing up. Directly or indirectly exposed to domestic supply chains full of counterfeit, expired or toxic products and thus having a mistrust for domestically manufactured goods and a demand for high quality safe imports. Possessing both a conservative upbringing based on traditional Chinese values combined with the influence of globalist media and culture.

The Crux of the China Conundrum: Technical Capacity Shortcomings

At this juncture I want to take the opportunity to underscore my core message and something which I will emphasize and reiterate throughout this book. A key assertion and maybe the central theme of my thesis is that technical capacities underlie much of the struggles China currently faces as it attempts to transition from the “Made in China” economy fueled by domestic manufacturing and exports, to a “Made for China” economy driven by domestic consumption. Despite much of the rhetoric expounded by China’s State Council on opening up (CBEC, Belt and Road initiative) and welcoming foreign investment, this sentiment is borne not out of an overriding need to facilitate global commerce or strengthen the bonds of international relations but instead borne from simple necessity (a reaction to trade pressures, global power dynamics etc.).

Indeed it would be naive for us to think that China has suddenly flip-flopped on its traditionally protectionist foreign trade policy without good reason. For most industry sectors with the exceptions of maybe consumer tech and some heavy industry China simply does not have the technical capacity to manufacture the high quality and safe goods demanded by its newly rich populace.

Indeed it is only logical that an export orientated manufacturing economy, mass producing high-volume, low quality, low price products would take the path of least resistance both in terms its development of an internal regulatory system and the development of technical proficiencies in its industries. This strategy is great for mass producing hardware, textiles, spare parts and all manner of man made goods for global export, but applying the same strategy and trying to make high quality and safe goods not so good.

Compounding these technical capacity shortcomings, China has also traditionally lacked a robust and efficient system of administrative and regulatory checks and balances to effectively police its vast supply chains. Combining technical inadequacies with a weak and inconsistent enforcement is a recipe for disaster and the consequences of this situation has and continues to irrevocably shape China’s markets, trade policy and domestic administration.

Addressing the Elephant in the Room: China’s Litany of Safety, Quality and Authentication Scandals

Considering the technical issues and supervisory problems facing China’s industry and regulatory authorities, product quality and safety scandals were almost an inevitability and indeed it would be impossible to properly understand the context of developments in China without mentioning the proverbial elephant in China’s domestic markets i.e. the looming specter of supply chain scandal. China has been plagued by a litany of scandals which were ultimately caused by its technical inadequacies.

In the backdrop of the increasing influence of globalization and numerous high profile scandals China’s consumers began to look overseas to source their goods from countries with exemplary quality and safety histories and flawless environmental track records. Clean, green, safe and luxury were all the shopping lists of Chinese consumers. Through both official and unofficial trade channels, trade of imported goods has grown at an alarming rate and threatened to derail China’s economic development plans going forward.

Facing the ultimately futile battle of trying to block the flow of imports we have instead seen China respond in a more tactful and pragmatic matter with its “opening up 2.0” policies which attempt to harness the forces driving these demands (crossborder ecommerce and new administrative rules for imported finished products) and also address international power dynamics with its policies of foreign investment and the Belt and Road initiative. 

Walking a Tightrope: China's Great Balancing Act

So at this key inflexion point in China's history we see China struggling with a number of key issues. It is playing a game of catchup with its global competitors and attempting to develop the key technical capacities that will allow it to compete on a global level and more importantly counter increasingly strong inward trade pressures which are an unfortunate side effect of its move towards increased openness and multilateral trade.

It must slowly phase out its reliance on primary and secondary industries, particurly the ones which have devastated its environment, but it must do so in careful increments. Just enough to realize its key environmental goals but not so much as to impact GDP and growth. Similarly it must increase the stringency of national legislation, administrative rules, regulation, standards, inspection and enforcement on multiple industries at a domestic level.

It must keep the cogs of its vast housing and construction sector moving and avoid the crashes which hit both Europe and the US market and it must also figure out how to restore social equality in a country that is not just socially but also geographically divided by the haves and have nots.

Chinese people are living longer, healthcare costs are rising. Increased living standards and opulence and a change towards globalist dietary patterns have bought with it an explosion in cardiovascular disease, diabetes and cancers. China's got a lot on its plate (no pun intended) and as naive as the Chinaphiles and cynical as the Chinaphobes want to be it is far too complicated to figure where this one is going. For international stakeholders the growth potential is mouthwatering, the market data enticing and the opportunities endless but are offset by a massive barrier....China.