China: Inhibited Growth, But Too Early To Short

I have a seven year old daughter. Despite her Chinese heritage I am not in a huge rush to enroll her in the Chinese Mandarin classes as many of the other parents have enrolled her peers. There are two reasons for this. First, Chinese is a difficult language (no alphabet, all characters must be learned by rote memorization) that is learned best in an immersion environment. Second, I believe that by the time she is ready to move into the working world China will no longer be ascendant the way it is now. The Chinese language courses that parents are rushing to put their children into now will turn out to be as useful as the Japanese courses in the late 1980s (anyone remember Theory Z?).

A bearish call with a very long term horizon

Before you start flaming me, note that I am talking about a very long term time horizon. While I believe that China will grow at very high rates in the next five to ten years, there are two main long-term problems with China which will limit her growth path:

• China is a nation of small business entrepreneurs but the small business model is not scalable
• Chinese age demographics are getting more unfavorable

First, some good news and bad news about China’s growth: From personal observation I have found the Chinese tend to be very entrepreneurial. This effect is demonstrated by the business dominance of the overseas Chinese in much of Southeast Asia, which has created friction in the past in countries such as Malaysia, Indonesia and the Philippines. This entrepreneurial spirit has created a nation of small businesses and an enormous dynamism which is fueling much the growth in China.

However, Chinese business culture has not fully developed a professional manager class (with some limited exception in Hong Kong and Singapore). The business model of much of these small businesses consists of a single person at the top with managers and workers below, most of whom have little or no authority. Small businesses are not scalable into large businesses if there are no professional managers. Such a culture can create a nation of shopkeepers but not a nation of industrialists. This will create barriers to further growth at some point in the future.

Demographics another headwind

China has undergone over a generation of the one-child policy, which has served to restrict her population growth. The law of unintended consequences raised its head along the way.

The population is aging rapidly. The accompanying chart shows that the UN projects the proportion of China’s elderly population, which is defined as those over age 65, will rise from 6.8% of the population in 2000 to an astounding 22.9% in 2050. China’s dependency ratio (ratio of non-working to working population) will rise from 10 per 100 workers in 2000 (19 for US in 2000) to 37 in 2050 (vs. 32 for US). The demographic bonus of a rising young, productive, working population will have been spent in the next 20-30 years.

Source: US GAO, The Future Sustainability of Social Insurance Programs

A nation of little emperors

Beyond the mere numbers of age demographics, the cultural effects of the one-child male-preferred policy may further inhibit the growth dynamism of China’s economy. The family pyramid has become inverted, with parents and grandparents doting on the single child. This has created a nation of spoiled “little emperors” many of whom have grown up with a sense of entitlement and may not have the same work ethic as older generations. Many of these “little emperors” are now in their 20s. Can we really expect the same entrepreneurial drive from this age cohort as from older cohorts? Culturally, this will further inhibit China’s growth potential in the future.

Too early to short China

I began this post by referring to my seven year old daughter. It is with that time horizon in mind that I refer to China’s longer term challenges. In the meantime, China remains a powerhouse of economic growth for the next 5-10 years. Shorting it now would be like standing in front of a speeding freight train.

Comments

[city]

I like to remind readers here; Mr Petti worked for Bear Stearns and also he is working in a State Chinese Communist run school at the moment. Details please visit seekingalpha.com/autho...

China has many problems on its own; but it's very ironic the red communists do not mind Mr Petti (who is paid salary by the Chinese communist run school) being so critical of everything in China even the air he breathes every day.
All Mr Petti's pupils and seeking alpha readers here; the story about Mr Petti just does not add up! According to Mr Petti's views (you can read all his articles about China on this site ; strangely he only wrote about China), everything in China is in crisis even the air is filthy so why he is making a living there; getting paid from the red Communist school; why not go back to Wall street to work for Bear Stearns ? Bear Stearns is not dead yet.

It is time for Mr Petti and his loyal pupils to disclose his relationship with the red Chinese government now!!! And all readers on this site should also make such a demand; otherwise it's an insult to the intelligence of all seekingalpha readers!

[city]

Mr Cui; what are you talking about long time? 50 or 60 Years? I am 45 yrs and I suppose you might be 50, in 50 year time we are all dead then who cares anymore? how silly your prediction is!

[scrog]

While agreeing with the obvious, that China is on a roll for now, what is wrong with pointing out that China's unique population policy may have long-term demographic consequences?

[nickgogerty]

things must change in order for them to stay the same. When is the correct question. China has seen significant shifts about every 15-20 years. Any investor vs. trader should consider the when question. Equities down 45%. Housing price declines and sharp rises in food stuffs and the central govt's desire for price controls will strain an economy. The promise of the iron rice bowl may be broken in the near future with strong political and economic shifts to follow.

[city]

Short China and Long Bear Stearns! So Mr petti can get his old job back.

[sherwin]

Mr. Cam Hui, your opinion or view that Chinese businesses "are not scalable into large businesses if there are no professional managers. Such a culture can create a nation of shopkeepers but not a nation of industrialists." is very short-sighted and doesn't hold ground at all....you are neglecting the fact that more and more Chinese managers are being trained in the best business schools in the West. You're also neglecting the fact that there have been already a number of successful listed public companies that have started as small businesses.

You are assuming that China's status quo will not change...and that the Chinese people will remain the same the way they are now...which is grave underestimation of what the Chinese people aspire to become.

If you live in and are really in tune with what's happening in China, you will know that many existing business managers (big and small) and aspiring young entrepreneurs are so tuned into the learning the most effective management methods.

Lastly, China is slowly easing its one-child policy by allowing couples who have come from single-child families to have 2 children. The gov't is also mulling the possibility of allowing families that can prove financial capability to have more than one child as well. Again, if you are in tune with what's really happening in China, you would know this.

I feel sorry that you have decided to not let your child study Chinese. Eventhough she might not reap the financial benefits of it in her adult life, but that is not the only weighing factor in learning a language. You are depriving her of something that would enrich her cultural experience and heritage. By your decision, you are already closing that door for her.