Don’t Bet on China

China is widely viewed as a "threat" to the US because of its perceived rapid and unstoppable economic growth. This is, in my view, doubly confused. First: if the premise were true, this would be good, not bad. Second: I don't think China is in such great shape. Unfortunately. Some free market economists think otherwise. Peter Schiff "predicts that China will overtake the U.S in terms of Gross Domestic Product before 2020." Jim Rogers thinks "China will likely constitute tomorrow's most powerful nation-state." I've been working for years now for a company with factories and extensive dealings in Taiwan and China. It's been my opinion for some time that China is a primitive basket case. Land is leased, not owned. The communist party corruption is everywhere. The Asian mentality is far different than the western one; they are less innovative, more subservient and servile, more order-following, more collectivist and less individualistic. Poverty and peasantry are rampant. Asians are far more racist and superstitious than Americans (everyone is more racist than Americans in my experience). You have to get permission for everything. There are currency controls. Contracts are not respected--they are signed because they are viewed as red tape and then they start being renegotiated the next day. And on and on. In my view, America is, for all our faults, still, by far, the strongest and best large economy in the world. Who can match the US? Canada is too small. Japan is not quite our size and has its own problems. Europe is like an older, more kleptocratic version of the US--and is probably second best in the world. South America is a basket case of banana republics. Africa is even worse. Russia and Central Europe?--mired in pessimism and corruption and the tendrils of the wreckage of communism. Of the rest, I think India has a better chance than China, for two reasons: they speak English, and they inherited the English property rights system--unlike in China where you still have to lease land from the state for 50 years instead of buying it. And I think India is a basket case too, unlikely to improve much for many decades. So the US is and will remain preeminent, in my view--despite all our problems. (See also Jonathan Bean's America’s Hidden Strength: Babies, Immigration.) Unfortunately, this will allow our parasitical state to maintain its warfare-welfare state (see my post Hoppe on Liberal Economies and War). An American friend of mine living in China sent me some of his thoughts, which I provide, with editing, and anonymously, below: China is [screwed], I tell you. This place is one big pile of poo. Jim Rogers and Peter Schiff are wrong, at least about China. Jim Chanos is right! [See also Jim Rogers: China not in a bubble, Chanos couldn't spell China; China May ‘Crash’ in Next 9 to 12 Months, Faber Says. Also note: Mark DeWeaver, who has written for the Mises Institute before, recently gave a speech about Chinese monetary policy. There's some interesting meat in both the audio and corresponding slides.] There is sooo much unbelievable corruption here. There is very little tolerance for criticism of government policies. They are afraid of Twitter! Yep, the PRC is afraid of 140 character messages. Twitter-Facebook-Youtube: all blocked. The people are ignorant peasants, and their health is terrible too: every guy I know smokes--dude, there are 300+ million smokers in this country. Light it up on the bus. Light it up in the elevator. Light it up in the hospital. I kid you not, I went in for cold medicine and my doctor lit up a cigarette and asked me "what is your problem?" Students regularly smoke during break time and come back in smothered in the world’s sh*ttiest cologne. But hey, I probably wouldn’t worry either if I saw the impending demographic time bomb. And you think that is annoying? Did you know that during the height of stimulus follies last year, the brilliant officials in Hubei province actually mandated a quota of cigarettes public workers were supposed to consume? You might take the Chinese man off the farm but you don’t take the farm out of the Chinese man. The health system is in disarray. I was very sick last summer and visited 6 hospitals in a couple cities. These were all large centers (both public and quasi-private) and in several of these floor after floor had family members camping out on the ground. Sanitation in the bathrooms is horribad... you can smell them all the way down the hall after coming out of the elevator. And when you visit a doctor all the other customers stand next to you and listen in and look at whatever is going on. Privacy was simply not something you had in many cases. I was actually very bullish on China a year or so ago and now I feel like an idiot after having lived outside of the big metropolises. I read a really good interview the other day--some American bigwig was interviewed on cctv. He mentioned just how polluted the waterways here are. Sure, this is just one small thing--but I know that in the city where I live, the river is completely untouchable. It is so unbelievably polluted with heavy metals, that the only thing that its used for is transportation of low-tech barges moving coal up and down between cities. As for corruption--well, at every college, you have a two-part administration. One half of it does the typical bureaucratic stuff, and it is simply filled with Communist Party staff members. A friend who teaches told me that when he goes to a faculty dinner, he is always sitting next to the local Communist Party heads. It is bizarre--just completely dead weight. It gives you an idea of just how interconnected it is here. Imagine--Michael Moore would blow a gasket if the GOP had offices on campuses throughout the country, where curriculum had to go through them first! Here's the CP is just one big vetting machine. Teachers are extremely and notoriously corrupt--for example, bribery is rampant, the teachers will just sell students test answers. This is very commonplace. These poor people are in a really bad place, and the current policies are not going to lead them to what Schiff and Rogers have in mind. No land of milk and honey for sure. One silver lining, I suppose--they can only block ideas for so long, and wireless tech really can be a disruptive force at some point. We'll have to wait and see. And hope. *** Some other thoughts: so I've had a live-in girlfriend for more than a year. She's not from the countryside but is from a modern-middle class family in the south (Guangdon). And she has a brother. Everyone showers him with love, attention, money and pretty much sh*ts on her in comparison. And she's hardly an exception to this very mainstream chauvinistic thinking that permeates much of the rural peasantry. The stories you hear of men having 3, 4, 5+ kids until they have a boy is not uncommon nor are the horrible stories of girls being thrown into public waste bins or drowned in streams by angry mother-in-laws (because they want to have grandsons as well!). So it's not only racist, but sexist. The racism is terrible too--I have a Ghanian friend, a teacher--the Chinese people call him "demon" and "devil." Along with my girlfriend, I've traveled to several large cities with my friend from Ghana. And during the train rides, bus rides, taxi queues and restaurant visits, many residents of these modern cities will murmur and not-so-murmur slurs like "demon" and "devil." They're fine and dandy with white people (cause they all want porcelain white skin) but the slightest shade of brown is considered lower-class ... because your parents worked outside on the farms! What Hong Kong movies also fail to illustrate (much like their Hollywood counterparts) is that in addition to superstitions and racism, nepotism is a huge problem here. Unfortunately most westerners have drunk the Crouching Tiger Kool-Aid when it comes to the very primitive nature and mindset large portions of the population still has (remember more than 50% of the population still lives in the countryside at or near subsistence), believing that everyone here is some kind of egalitarian calligraphy master sitting on top of mountains. Modern engineering requires modern management and accounting practices to operate, and during the industrialization and globalization process, countries, cultures and domestic firms have to implement meritocracy-related promotions and compensation in order to remain competitive and solvent. Yet, meritocracy is not part of the current corporate culture here. It is all about family connections if you want to do anything because there is a ceiling you simply cannot overcome no matter how smart or hard working you are. Throughout the semesters I hear demotivating stories from former students who have done internships at companies and the nepotism that permeates State-owned enterprises. Contracts are easily broken if you are connected to the judicial system, a judicial system that is not independent or transparent. I could go on and on but check out Andy Xie if you want the real beat on Chinese Finance. And don't even get me started about trash and road side pollution or gambling! *** I’m not jaded. In fact I have a pretty comfortable life. But I do live here, outside the big cities, which is something people like Jim Rogers or Peter Schiff don't do. Singapore is to China like Beverly Hills is to Compton. And the mean, gangster-filled streets of Greenwich Connecticut are pretty divorced from the drearily decrepit dusty roads in the middle of middle-of-nowhere central China. Earth to Rogers, there is a reason why there aren’t huge lines in San Francisco to get the next flight back to Zhong Guo, because anyone with half a brain makes their way to the West and not the other way around....