China The Impressive: A Personal View

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by: John M. Mason

Last year I visited Italy and came away discouraged. I was discouraged by what I saw physically and what I felt personally. Buildings under construction had been abandoned. Young people as well as older persons were just loitering around. Businesses were closing and there were empty stores. The businesses that were staying open were cutting back their hiring. Italians expressed frustration at all this because there was no real leadership being exhibited in their country.

The words used to describe Italy: depressed, beaten down, and pessimistic.

Well, I have just returned from China and I could not have come away with a more different picture. I know... there is massive poverty in China. I know… that political freedoms are not what we might like to be the case. I know… that political leadership is more absolute than desired. And, so on and so forth. But, what is going on in China is truly amazing. I read about what was happening in China, but seeing it and experiencing it and feeling it confirmed what I had read.

The words I would use to describe China today are upbeat, energetic, and optimistic!

China is happening and it is a place to be. This is exhibited not only in many of the Chinese people, but also in others that I spoke with who are working in China. I flew on a plane with a young entrepreneur from the Netherlands. His company is a manufacturing company that has plants in several other countries around the world. He started the plant in China and has overseen its growth over the past five years or so. This young entrepreneur could not contain his optimism about the opportunities that exist within this country.

I met with a family from the United States; the husband was with an American company partnering with a Chinese company. What they were experiencing in terms of acceptance and cooperation could not have been better. They only see this getting better as people get to know each other better.

How do we combine the two seeming extremes-- the centralized political control and the growing economic position? First, I have had a friend explain to me that the Chinese are fully committed to a market system and that this commitment will only grow in the future. They have seen that the market system works and that it is creating wealth all around them. They see that the way for China to play a major role in the world is to be one of the major economic powers. And, that is just what is happening.

However, the Chinese government will not stand for a chaotic movement into the greater freedoms that go with a market system. They saw what happened to the Russian situation. They saw what happened in Eastern Europe and they will not tolerate the breakdowns that occurred there. They will open up-- and they are opening up, but not all at once. To those that would like to see it happen faster, all one can do is recommend patience. We would like to see things happen faster, but that may not be our option in the short run.

And, that gets us to another point. The Chinese think in terms of decades, not in terms of years. The United States, and many other countries in the western world, have spent the last fifty years injecting its economy with short-run economic "fixes" to keep employment at a high level and have created a credit inflation that has resulted in a labor market that does not match current job needs-- as can be seen with the falling labor market participation rate, a capacity utilization rate that has fallen below 80 percent, and a decline in the value of the dollar by about 45 percent since the middle of the 1980s. The United States infrastructure seems to be falling apart and the education system appears to be lagging the advancements made in many other countries in the world.

When China moves, it tends to over-shoot in the short-run. Of course, one is constantly overwhelmed when one talks about population and movements of people in China. But, in terms of major construction activity, the Chinese seem to be over-building apartment buildings, airport size, and new cities, but they are seeing massive movements in population over the next decade or so. They cannot think in terms of the next two years or so.

The leaders of China seem to be constantly "opening up"--first here, and then there, as the situation calls for it. The leaders of China are very pragmatic in their way. It is the Confucian way to do things. And, we see, "China Plans to Reduce State's Role in the Economy." As quoted in the NY Times article:

"In a speech to party cadres containing some of the boldest pro-market rhetoric they have heard in more than a decade, the country's new prime minister, Li Keqiang, said this month that the central government would reduce the state's role in economic matters in the hope of unleashing the creative energies of a nation with the world's second-largest economy after that of the United States."

Premier Li told business leaders yesterday in Germany "that the Chinese government will move forward with market-driven reforms to generate stable growth after the economy unexpectedly slowed in the first quarter." Li added "industrialization and urbanization will give 'huge' potential for expansion during the rest of the decade." This is reported on Bloomberg. Li said China's economy is 'entering a range of reasonable growth." This reasonable growth rate is 7.0 percent per year for through 2020.

When is the Chinese economy to pass the size of the United States in economic output? Some, like Arvind Subramanian-- a senior fellow at the Peterson Institute for International Economics-- argues in his book "Eclipse" (Peterson Institute for International Economics, 2011) that China will out-produce the United States in the next few years. Income per capita is about one-fourth of that in the United States but China has four times the population. And, the Chinese economy is supposed to growth at 7.0 percent, whereas the United States is expected to grow at a rate of about 2.5 percent.

Will China become more and more of a capitalistic society? Ronald Coase, the Nobel prize winner, along with Ning Wang answer that in the past tense. To them the question is captured in the title of their new book, "How China Became Capitalist." (Palgrave Macmillan, 2013).

To Subramanian the question about economic dominance ends up being a question about discipline. Great Britain became a financially "deficit" country to the rest of the world, especially during and after World War I, before it lost its position to the United States. The United States has become a financially "deficit" country because of its fifty years of credit inflation. China now seems to have an economic discipline that the United States lacks.

Is this the case? Stay tuned. I will be writing more about this in the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.