On China and What the World Won’t See During the Olympics

We love to worry, don’t we? In the 1970s, it was the fear that Russia (well, back then, the USSR) was going to bury us as we decayed morally and depended dearly upon easily-interrupted foreign oil -- of which the Russians had supposedly unlimited quantities.

In the 1980s it was Japan, Inc. Japan was buying America. The Chicken Littles in the US ran around squawking that the sky was falling because Japan’s inherently organized society, its keiretsu, its cooperation between government, industry, and banks, and its automaton workforce were so much better than the US. Why, it was an unstoppable juggernaut. (Living in Hawaii at the time, I remember rubbing my hands in glee that Japanese investors were stupid enough to buy a hotel they had to get $600 per room per night for -- in 1980s dollars -- and have 88% occupancy just to break even. I predicted back then they’d sell it back to Americans at 50 cents on the dollar. I was wrong -- they sold it back to Americans at 28 cents on the dollar...)

With the silly certainty of hindsight, many scoff at both notions as if we’ve learned so much since then. No, we haven’t. The same people scoffing now were buying up copies of Japan, Inc.-titled books just a few years ago. And the new bogeyman is China. If you believe the press, China, with over a trillion US dollars in their coffers, is going to buy up all our oil companies (indeed, has already bought many Canadian ones), will be a peer military rival, will be the economic leader of the 21st century, and will eclipse America as a world leader.

Hold the phone.

China, like every nation, has prospects – and problems. Too many people, and way too many investment advisers, are putting the cart before the horse, looking only at China’s potential and none of the pitfalls and pratfalls. This will never be more evident than the media picture that is likely to emerge during the 2008 Olympic Games. I recently received a spam-mail from an investment newsletter that blared, among other things, the following:

China's pre-emptive grab recently for Unocal is an object lesson in China's strategy to dominate the world's energy supplies... If it ain't nailed to the floor, China will scoop it up. The reports I receive from Brazil, Venezuela and the Northwest territories [sic] of Australia are dense and many inches thick, but the bottom line in each case can be summarized as follows: There's not a ship leaving these 3 areas that isn't headed for a Chinese port... here at (name omitted to protect the guilty) we see what's going on--and we are making money hand-over fist from China's determined attempt to ransack the world for energy... Brazil is turning 60% of its sugar crop into ethanol for the China market. Venezuela is breaking ties with the US and diverting its tankers to the East...

To all of which I say: Horsefeathers. China’s prospects are trumpeted daily. But let’s take a look at what else might happen along the way. History is never pre-ordained. Every battle, every scourge, every advance, every strategic retreat, is subject to a myriad of factors that can radically change the outcome.

China has 1/5 of the world's population. If life were fair, it would have 1/5 of the world’s water. It doesn’t -- China has just 1/14 of the world’s water supplies, and much of that is rank, dank, and polluted. Increasing population will not help... You think oil is important? Try living without water. Or with water too polluted to drink. Thanks to EarthTrends Country Profiles, we can compare the amount of Internal Renewable Water Resources [IRWR] on a per person basis from country to country. Even with some of the world’s most powerful rivers, China has just 2,173 cubic meters IRWR per person. By contrast, Japan, also a rather densely populated nation, has 3,372 cu M per capita, and Vietnam has 4,568.

Russia has a surfeit of riches with 30,001 (with much of this concentrated in Siberia just north of an expansionist China...) The US has nearly 10,000 -- not bad, considering we are ransacking the aquifers that took millions of years to fill in order to create false oases in the desert so this generation can have swimming pools in Las Vegas and Phoenix. With this kind of developer-fueled profligacy, our grandchildren will reap the dust-bowl rewards. But, for now, we are whistling past the graveyard.

Water is essential to life -- and China walks a thin line keeping enough of it flowing. In order to grow, it also needs oil -- and most estimates say China’s currently-known fields, all in decline, will run dry in the next 15 years, meaning they will have to import somewhere close to 100% of their oil. China produces the most coal of any country, mitigating its imports of oil and gas -- but it is a distant third to the US and Russia in terms of coal reserves. It’s burning reserves at an incredible rate -- and that leads to another major problem in China: massive environmental degradation. Add to this the crushing burden of over-population I have discussed in previous issues, the wrenching rural poverty, the flight to cities unprepared to provide basic services, and the massive unemployment, which leads to political unrest and political corruption as all jockey for guangxi (connections).

Now a clearer picture emerges. China is a nation with great potential -- and equally great pitfalls in terms of water, oil, coal, the environment, population displacement, health care and a host of others. To navigate a course to the future will require skill, intellect, and a massive infusion of good luck and foreign capital. Many companies headquartered in the US and other markets will benefit. For starters, look with hungry eyes at some of the beaten-down infrastructure giants that have the wherewithal to provide the massive engineering efforts that China will need to engage in as they repatriate some of those US dollars...

Comments

[huangthomas:]

Comparison of China and the United States is inherently difficult. They are two entirely different countries in terms of cultural, political, and economic systems. American systems have evolved over centuries of Western culture, but Chinese system has been put together and experimented with only for the last 30 years for so. Remember communism has been experimented for almost 100 years before it was a proven human disaster. How about Chinese systems of politic and economy? Well, they may have a better chance then Red Russian Empire, but the success is hardly assured.
Chinese, with a few favorable statistics, are more anxious to do comparison with the United States in the Olympic year to show that they are an emerging "superpower", which Russian has done before. Chinese did accomplish a lot through their reform and development policy, but it takes more, a lot more, to be a superpower. I wish them well, but it is too early to make any conclusion. I'll consider any of the favorable comparison with the United States aired by Chinese partisan as an Olympic year hype.

2008 Jul 16 10:21 AM

[Paul Denli...:]

Thanks for talking about the very real challenges which China faces. Some Chinese officials have a saying: "If China reforms too fast, China will become chaotic. If it reforms too slow, it will die."
The reforms have created huge wealth, but there are severe prices for this prosperity. Now they are becoming more apparent.

2008 Jul 16 11:02 AM

[huangthomas:]

I have always encouraged everyone to challenge the supremacy of the USA. It is always beneficial to us in the long run. USA is not always beyond criticism. But the Chinese hype of their acomplishment over the current world development is obviously highly inflated!

2008 Jul 16 04:29 PM

[Dragon Master:]

<<How about Chinese systems of politic and economy? Well, they may have a better chance then Red Russian Empire, but the success is hardly assured.>>
Idiot! You need to go back 3000-5000 years to understand the Chinese systems.
<<communism>&... is western $hit brought into China and caused disasater for about 35+ years but both China and USSR were never truely communism countries. Switzerland, German and USA have some elements of that such social welfare, nationalized banking and F&F mortgage.
Only last 30 years, Chine goes back its own root/way run the country and shows the world works. This is the reason China can eist 5000 years. When China ran current systems with open trading 800-2000 years ago. USA does not exists and European still live in the hole and wore animal skins.
There is no need to prove Chinese own systems and culture based on 5000 history.

2008 Jul 18 08:00 AM

[newyorkdude:]

This business about 5000 year history is unimpressive. Indians boast about their 5000 year history too. Yet both countries have unspeakable poverty. And in neither country for their 5000 year histories did rulers care about anything but exploiting the people and keeping the wealth to themselves. If China and India hope to advance economically they have to rethink the value of their dismal pasts.

2008 Jul 20 07:53 PM