I first visited China in 1991, and travelled over much of the country, from Kashgar in the west to Beijing in the north-east. It was a fascinating experience, as even though I had missed the Mao era it was still ‘old China’. It was a grimy place with unhygienic city centres. Local party despots ruled and talent was wasted in meaningless jobs.
I visited China again in 2007. In the intervening years, entire city centres had been bulldozed. Residents were forcibly relocated to high rise blocks. Mistakes were made. Suzhou, once described as the Venice of the East, had become unrecognisable.
I have read many articles that focus on Western style indicators such as growth, inflation, unemployment and manufacturing. I have also heard that China was building cities that nobody lives in and roads that lead nowhere. So I returned again last month to see China again, and to ascertain whether clients should be increasing their investment in Chinese companies, or in companies that do business with China.
However, I found myself thinking that these investment questions were inextricably linked to much wider economic, political and sociological issues.
Is the West the best?
Western-style capitalism has just created the biggest global financial meltdown in history. Even though some say the worst is over, many Western nations are burdened with massive debts and southern Europe faces record unemployment and social unrest. The population in most developed economies is ageing to such an extent that it is difficult to see how governments will have enough workers paying tax to fund pensions, health and welfare.
The ability of Western economies to solve these massive issues is hamstrung by the fact that governments serve for such short terms. The new Coalition Government in Australia may only have three years in office to make a meaningful contribution, and for the first nine months, it will be saddled with an obstructionist senate. Obviously, no such problem exists in China.
I believe that economists and investment managers view China through 21st century Western spectacles. Is it reasonable to judge a country on the same parameters as a mature economy? China is undergoing an industrial and technological revolution that has not been seen since Britain and America industrialised in the 1800s.
The Chinese are subject to stereotyping – they are rude, they can’t manage people, they’re not innovative … but these stereotypes can obscure the truth.
Think long term
Let’s address the ‘can’t innovate’ stereotype first. Anyone who has travelled on the German-built Maglev train from Pudong Airport to Shanghai cannot fail to be impressed. It could travel the 56 kilometres from Campbelltown to the Sydney CBD in just seven minutes. It runs at up to 430 km per hour using magnetic levitation propulsion.
It strikes me that Chinese city planning and infrastructure strategy is diametrically opposed to Australia’s and much more sensible. Let me give you two examples. First, until recently, Shanghai had separate railway stations serving the north, south and west. Fares were cheap but the trains were crowded and slow. Their solution was to build a station on the outskirts of the city and run super fast trains. The people now have a choice. They can use the old network at low prices or pay more for a faster, more comfortable trip.
This strategy has been amazingly successful. Trains to cities like Nanjing are almost completely full. It’s a similar story with the Pudong Airport link. Either you can catch the super fast Maglev for 40 yuan ($7), which takes seven minutes to reach the outskirts of Shanghai, or you can use the slower metro for just 7 yuan. Contrast that with Sydney Airport where services have been outsourced (sold) to a company that cares more about profit than about providing services. Airport bus services have been stopped and roads diverted or closed. There is a choice between an expensive cab fare and an expensive train fare.
The second example is that the Chinese recognised long ago that they had to expand outwards if they were going to cope with population expansion. They are building new, tasteful buildings; they have planted trees and shrubs and grass. Meanwhile, the NSW government is adopting a ‘medium density’ housing solution based on knocking down houses and building units. It scars our suburbs, exacerbates our road and infrastructure problems and lowers our quality of life.
Obviously, China’s methods are not faultless. Was the 1990s destruction and the forced relocation justified? Was the ‘one child policy’ really necessary? What about the human rights issues and corruption? The Chinese would probably argue that they had no choice. Democracy and unrestrained capitalism in a country with 1.3 billion people was never going to work. Many would starve. If you have any doubts, read about the industrial revolution in Britain. In 1801, only a quarter of the 9 million population of England and Wales could be described as urban. By 1850 the population had nearly doubled and was mostly living in towns. By the 1911 census, the population of England and Wales had exploded to 36 million. Cities grew unabated. Rich people got richer, and the poor had a miserable life.
Imagine an uncontrolled Chinese population rising at the same rate as it did in 19th century England. That would mean four billion people in a country made up in large part by desert and mountains. Imagine uncontrolled growth and pollution in Chinese cities.
China’s system has worked relatively well. Its cities are not as grimy as they once were. Practically no-one spits in the street anymore, and I hardly saw anyone smoking. This is an incredible change in behaviour. Beijing looked polluted in 2008, but I didn’t see much evidence of serious pollution on this trip. The other noticeable factor was that the traffic wasn’t all that bad, and urban planners seemed to have ensured there were still bicycle lanes. I sense a desire to close Sydney CBD bike lanes. If China had as many cars per head as Western nations, the result would be 550 million cars and over 1 billion cars in the future.
What I witnessed on this trip seemed to be responsible government – state-controlled capitalism with centralised planning and social welfare programmes. It doesn’t conform to Western economic theory and political ideology and it can be a ruthless regime, but it seems to be working for the majority. The question is – can they keep it going?
What will the future look like?
Most dictatorships go off the rails eventually. Think Stalin, Hitler, Africa and South America. Also, as economies develop, people become dissatisfied with government intervention. Already, many of the educated Chinese people I spoke to thought the government too intrusive.
And China is a difficult place to do business. Contracts are frequently broken or ignored. Economic statistics are unreliable. Corruption still appears to be a major issue.
In 50 years’ time, will China resemble America, Europe, Japan, Korea or something different? Should you be investing in Chinese companies or in countries and companies that could benefit from China? Or should you stick with companies that you know more about? I was never going to answer all these questions in one trip, but I left with more confidence in the future of China than I expected.
Rick Cosier is a financial adviser with an independent financial planning business, Healthy Finances Pty Ltd.