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The China Miracle

I have worked in emerging markets for over 20 years and I have been fascinated by the China story as the massive growth of that economy has lead to many serious issues within China that need to be resolved in order for that economy to continue to grow. Given the worldwide economic slowdown, the world needs China more than ever.

chinadragonMost economists and market participants believe the next century will belong to China just as the last century belonged to the U.S.

In order to understand how China has grown over the last 30 years, it is is important to understand how the U.S first became the dominant player in the global market.

A big component, and less understood success, of the U.S economy has been the influence of England upon our culture which installed a firm belief in property rights and rule of law. The fact is we are a former colony of the U.K and benefited from their political and economic systems as our country was formed. We are also a Judaeo-Christian culture which underpins the governing principles in all of our dealings. The main tenants of don’t “lie, cheat or steal” are taught to our children at an early age. The adage of “do onto others as you would have them do unto you” is also a commonly understood refrain in the business community.

The point is that in Western Culture there is an explicit understanding that in order to make money a service has to be provided that benefits the customer. This culture has been nurtured and reinforced for hundreds of years, and it is on this rock that our Nation was built.

Although China is a much older culture then ours, it’s guiding principle is “To be rich is glorious.” This was articulated by Deng Xiaoping, a Chinese communist leader, who led China after the Cultural Revolution and implemented the “socialist market economy.”

The Cultural Revolution occurred between 1958-1976 and was a movement to purge capitalism from China. The campaign was aimed at rapidly transforming the country from an agrarian economy into a socialist society through rapid industrialization and collectivization.

Chinese citizens went through a mandatory agricultural collectivization while prohibiting private farming. This campaign caused famine and revolution and ended in catastrophe, resulting in tens of millions of deaths.  Estimates of the death toll range from 18 million to 45 million.

Deng Xiaoping’s simple statement which he uttered in 1976 on wealth, sent a massive signal to the Chinese masses that the cultural revolution was over and that China was in business.  So, the population went to work as quickly as possible to make as much money as possible. China’s growth has been outstanding as China’s GDP has grown at a 9% clip since 1989. To put that in context, the U.S. is ecstatic when growth rates are above 3%.

Because China is still a Socialist State, there is a collective push in everything they do. Part of this collective push has been to limit the population growth. Currently, the population in China is around 1.3 billion. In addition all actions, goals and desires are subject to the collective goals of the State which include, but are not limited to, restricting religious affiliation. The Chinese government’s belief is that  religion discourages loyalty to the State and encourages independence of thought which is anathema to the State.

Which leads to the problems in China. Given that there is no cultural institutions that foster cultural norms, and principles such as truth and honesty, Deng Xiaoping’s directive of becoming rich has been the driving principle behind all of China’s dealings.

This tenant getting rich at all costs has become a problem for China and has led to societal erosion. Here are a few examples:

  • In the early 2000’s a woman became famous for suing a stranger who found her lying on the sidewalk and took her to a hospital. She claimed that he had pushed her to the ground in an attempt to catch a bus. Her injuries cost thousands of dollars and the courts convicted him, without any evidence, because the judge ruled no ordinary person would help somebody unless he had caused the injury.
  • In 2008, thousands of babies became sick from tainted milk powder. The company responsible for this had paid off government regulators for inspection-free privileges.
  • Mengniu, a milk company in China operating under declining profit margins, started to add water and a chemical called melamine to hide the dilution which led to dozens of deaths and thousands of hospitalizations.
  • It is common knowledge that cooking oil in China  is often laced with oil and food waste gathered from the gutters. Anyone with economic means avoids these products.

These are a just a small sample of some of the legal and business practices in China. As a result, the Chinese prefer multi-national food products over domestic products for safety reasons. You know things are bad when the Chinese themselves prefer to buy products from foreigners because they have no faith in the ethics of their Chinese brethren.

Another example of the belief in results over principles has led to China building massive “phantom” cities as this construction has improved their GDP numbers. Go on YouTube and search for phantom cities to see these remarkable monstrosities that exist but have no private or commercial inhabitants.!

Given the global slowdown taking place throughout the world, economist’s wait with baited breath for the China miracle to continue. But, Americans need to be astute about what is happening in the world and realize the critical importance of cultural norms and values. They are the basis from which economic growth proceeds and is ultimately measured.

For the U.S. economy to continue to grow, we must inspire and nurture the national virtues that have sustained us since the founding of our  country lest we morph into “a China,” where its own citizen have no faith in the products they themselves produce. The hope is that Chinese will  foster sound virtues and business practices which will allow them to take the lead in a new and robust economic world order.

Should they fail in taking that necessary next step… we are all doomed.

This article was inspired by these two great books on China:

Tiger Woman On Wall Street

Mr. China

Steve

sleeclark@gmail.com

 

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