As power shifted to China, are politicians pandering for the "bigot vote" to attack globalization?

Originally Posted Tuesday August 23, 2011. 

While, China is making tremendous progress in the world markets, and is even outpacing the West in many areas (a child born in Shanghai is now expected to outlive a child born in the USA), there is a long journey ahead to position themselves at the front of the line.

There are still many obstacles and increasing growing pains, that will be impediments along this journey that started in 1979, when The People's Republic of China, officially adopted "PINYIN" as it's official Romanization system in the first step towards building business bridges with the West. In 2000 they were granted MFN status in the USA, which paved the way to enter into the WTO. Since then, the growth has been obvious, and I have argued, that their growth wasn't a detriment, but rather a boost, to the Global economy, more directly, a safety net and subsequent savior to the US financial markets during the 2001 - 2008 artificial growth periods that resulted in the collapse of Wall St, and the great heist of Main St. 

It was "chic" to blame China for all of Americas woes. Hogwash I say, and have stated my opinions ad nauseam on these threads. Now, however, it's something worse. It's now hogwash on steroids (perhaps a bit of racism), as the nonsense has been raised to the levels of turning China into the "boogeyman", with a takeover of the US and even talks of war, are imminent.( It is noteworthy to state here that most of these spreaders of fear, probably have never been outside the US unless on vacation, and certainly haven't traveled to China). 

The fact is, that the US and China, are intertwined and need each other. Furthermore, China is suffering from a wide array of domestic issues. We should not worry about them, but we may want to be concerned for them, and all of us.

So lets make a couple of observations and hopefully dispel the myths and fear inducing propaganda.

First, China's GDP , as well as it's military budget, is awfully small compared to the USA. Relative to GDP, China doesn't even rank in the top 75 countries in the world, yet . As a matter of fact, China's GDP isn't even a tenth of that of the US. In 2011, and the yuan accounted for only 0.2% for foreign exchange transactions. With 64 million vacant homes and an economy that will need to be slowed down methodically (or face an uprising) I can assure you that the banks in China are too big to fail, and will soon need to be saved, akin to the bailouts of US banks. The one aircraft carrier a naval threat does not make, and the high speed train, showed more inadequacies, than triumphs. Foreign currency reserves you ask? Well, they will need to account for every penny as the population is aging more rapidly than previously expected.

The Chinese government has promised to provide care for its elderly. Sound like familiar problem? 

But that's not the real concern of mine, nor China's leadership. The concern for China , and the rest of the world, is China's present government not allowing for a crisis of confidence. The out of control inflation may not be easy to slowdown without creating an even larger disparity between urban wealth and rural struggles. 

The rapid growth of China's economy over the past three decades has been greeted with largely unquestioned assumptions that increasing affluence would lead to a happier, wealthier and more equitable society. Of course, such assumptions came with an implicit acceptance that some would get rich faster, but also that these benefits would eventually trickle down. 

The emergence of a middle class, combined with high levels of personal savings and low levels of personal debt, offers tantalizing evidence of China's new-found wealth. Yet, behind these headlines, there is compelling evidence that although economic growth has created vast wealth for some, it has amplified the disparities between rich and poor.

(From a strategic point of view, I for one, just don't see the common sense behind so many corporations and business leaders focusing their attention on the new found wealthy class in China. If you ask me, I will tell you that the real crown jewel of the China trade will be found in servicing its working middle class. At least that is the advice I give to my clients).  

These disparities indicate an often hidden vulnerability in China's rapid growth, but one which is neither unique nor new to China's leadership. 

One of the most fascinating contradictions of China's rapid growth under the auspices of the communist party has been the rapid emergence of private wealth. 

The privatization of state enterprises and the housing and social benefits that accompanied them, the re-zoning of rural land for industry, and a construction boom, created enormous possibilities for personal wealth.

The 2010 Credit Suisse Global Wealth Report noted that these forms of wealth, which accounted for much of the $9,600 in real assets per adult in China, were extremely important forms of wealth creation. But they also came at a cost. 

The report showed that although the average wealth per Chinese citizen was $17,126 - almost double that of other high growth economies such as India - median wealth was just $6,327. The latter suggests that wealth created has not been evenly distributed. 
Such inequalities also highlight a contradiction in that although the monetization of previously state-owned assets undoubtedly benefited many of China's emerging middle class, it ultimately came at a cost to the public who would now have to finance these goods and services out of personal savings. 

Divide between urban and rural The wealth data, although a less rigorous measure of inequality, is also reflected in more conventional measures of inequality. 

In 2010, China's Gini-coefficient - a measure of how wealth is distributed in a society - stood at 0.47 (a value of 0 suggests total equality, a value of 1 extreme inequality). In other words, inequality in China has now surpassed that in the United States, and surged through the 0.4 level in the mid-2000s. 
A Gini-coefficient of 0.4 is generally regarded as the international warning level for dangerous levels of inequality.

Looking only at the data for the whole country, however, conceals the growing disparity between urban and rural areas. Even after three decades of rapid growth China remains a very rural economy. 

"Despite the continued growth in urbanization, some 50.3% of China's mainland population (or 674.15 million people) continue to live in rural areas. 

In 2010, rural residents had an annual average per capita disposable income of 5,900 yuan ($898). That's less than a third of the average per capita disposable income of urban residents, which stood at 19,100 yuan ($2,900). 

Disparities in income data are also reflected in household consumption patterns and the access those households have to basic consumer services. The Engel coefficient, which measures how much of their income households have to spend on food, has been consistently higher for rural households. Many cities, such as Beijing and Shanghai, now have coefficients lower than 30, reflecting the vast differences between these cities and the rest of China. These patterns are hardly surprising, given that rural households must necessarily spend a higher proportion of income on food. 

It is also unsurprising, given that even as late as 2009 three of China's poorest provinces - Tibet, Yunnan and Sichuan - were identified by China's banking regulator as having more than 50 unbanked counties. This meant that they lacked even basic access to financial services. 

What is surprising is how different urban and rural households are when it comes to durable goods such as cars, washing machines and fridges, considered normal essentials for households in the developed world. The disparity is worrisome. More worrying is that the above trends may conceal an emerging rural divide. 

The rural Gini-coefficient increased from 0.35 to 0.38 between 2000 and 2010, suggesting growing inequality within rural areas. Of particular concern is the large pool of migrant labor. At the end of 2009, China had an estimated 229.8 million rural migrant workers, of which about 149 million are thought to work outside their registered home area. 

The official average monthly wage for these workers, many of whom work in manufacturing and assembly, amounted to 1,417 yuan, though unofficial reports suggest many earn less that 1,000 yuan a month. Moreover, because these migrants work outside their registered area, the low wage rates conceal enormous personal sacrifices, which include long working hours, poor housing conditions, and, most significantly, a loss in welfare benefits associated with the household registration system known as Hukou.

The question for China is whether the scale of such inequalities is a tolerable price of growth. It is not a new question. 

Even by 1978, urban per capita incomes were already growing at more than double the rate of rural farm incomes, and the post-1978 reforms appear to have further widened this gap. It is clear that China's leadership has recognized how damaging such disparities can become in what is now the world's second-largest economy. The government wants to lift some 40 million or so rural residents out of poverty; since 2004 it has worked to raise minimum wages for migrant workers, improve rural incomes through tax cuts and enforce labour contract law. 

"The Chinese leadership also tries to force labour-intensive and low-value added industries to move to rural areas.Although such reforms have been described as a return to central planning or supply-side management, they suggest a recognition that the benefits of growth have not necessarily trickled down to Chinese society's poorest" 

I can't say it any better than I read it in The Economist: 

"That is one of at least three flies in the Schadenfreude. The West’s economic woes are also Asia’s. Even if renewed global financial upheaval is averted, slow growth in America, Europe and Japan will dent economic prospects across the region. Asia, too, is addicted to American debt, in so far as this finances imports from Asia, which then invests some of the proceeds back in America. Singapore’s Straits Times argued in an editorial this month that all the talk about Asian economies “decoupling from the West remains a pipe dream.” 

The second consideration dampening the regional celebrations is that many Asian countries are suffering from serious problems of their own. Of the three biggest, both Indonesia and, more acutely, India, are facing crises of confidence over their government’s failure to deal with corruption at the heart of their political systems. Even China is facing a rash of political protests. In particular, the fury caused by the high-speed train crash at Wenzhou in July, in which at least 40 people died, has raised troubling questions about the railways’ safety and, more broadly, about the political system itself. 

Commenting on the debt-ceiling fiasco in Washington, DC, Xinhua took American politicians to task, and asked: “How can Washington shake off electoral politics and get difficult jobs done more efficiently?” But it is hard now for even the most nationalist Chinese commentators to go to town about the superiority of the “Beijing model”. One of its supposed advantages is precisely that it “gets difficult jobs done more efficiently”. And one example it used to point to as a source of pride was the world-beating high-speed train system."

Whoops. 

"Premature adjudication - The third problem with Asian triumphalism is that it is—as Asian leaders well know—premature. Western consumers remain big contributors to Asian growth. American defence spending continues to dwarf China’s, and it will be years before that first aircraft-carrier outing translates into a serious carrier-group capability. A recent study by the Asian Development Bank projected that, on optimistic assumptions, China would by 2050 account for 22% of the global economy, compared with 14% for America (and India). In another plausible, if less rosy, scenario, in which China and India find themselves caught in a “middle-income trap”, the proportions would be 11% for China, 21% for America and 6% for India. But even on the optimistic projection, China would still be, per head, less than half as rich as America." 

Let's embrace the globalization of the world, and all of it's participants. They are all potential trade partners, and future buyers of US manufactured products. Now, that, is what the US economy needs, buyers, not more fear. 

I'd like to live and do business in a world that both John Lennon and John Adams would be proud.  

And to those who are lauding China's rise over the poverty line, and beating the drums over a few misrepresented reports and politically skewed propaganda claiming China to have less poor than the UK and the USA, I offer this: https://www.economist.com/blogs/analects/2013/02/chinas-poor  which shows how China's sudden climb above the poverty line is all smoke and mirrors (and an almost inhumane lowering of the bar).

So before we make  China and its sudden rise from epic poverty and inhumane suppressions, the poster child for progress, lets not forget about the value of freedom and the ability to tweet!    

About Me –I am a retired international trader that has spent 25 plus years in the global markets. At the time of my first (early) retirement I was the CEO of a business with offices in more than 20 countries. I have represented several State entities, traveled to China with several government officials and acted as a trade consultant for many Fortune 100 Companies. Check out my profile here on LinkedIn for more. 

I now spend most of my time as an independent consultant as well as chief development officer, business architect, advisory board chair and investment officer for many clients of AUTUS Advisory Partners (www.autuspartners.com).

Questions about international trade, commodities, globalization, foreign business development? Please feel free to contact me as I am available to act as independent consultant and adviser.  

James Vena

Twitter - https://twitter.com/JamesAVena 
LinkedIn Profile - https://www.dhirubhai.net/in/javena 

"May you always have Enough - Enough of the things that you need for yourself and Enough of the things that you'd like to share with others. I wish you Enough, so that your hand will always be extended in friendship and never in want."