Demand Pulled Forward
Rushing the Process
An Insane Travel Schedule
The production of souls is more important than the production of tanks.... And therefore I raise my glass to you, writers, the engineers of the human soul.
Joseph Stalin, 1932
[Our purpose is] to ensure that literature and art fit well into the whole revolutionary machine as a component part, that they operate as powerful weapons for uniting and educating the people and for attacking and destroying the enemy, and that they help the people fight the enemy with one heart and one mind.
Mao Zedong, 1942
Art and literature is the engineering that molds the human soul; art and literary workers are the engineers of the human soul.
Xi Jinping, 2014
This week’s letter focuses on China’s economy. We’ll look at some numbers showing the challenges China faces, but they don’t explain something important. The way China will meet those challenges is going to be substantially different than we would see in the West. So I want to start with a little context.
When European Central Bank President Mario Draghi promised to solve the financial crisis with “whatever it takes,” central bank policy was his only tool. Xi Jinping has a vastly larger toolbox. It is hard for us in the Western world to understand that. Xi not only has every tool a top-down government can have, he has experts to wield them, all of whom are 100% aligned with his goals.
I used the “Bull in a China Shop” pun for this letter’s title to create an image in your mind. A bull tears up the proverbial china shop because it can’t comprehend the porcelain is expensive, easily broken, and hard to repair. It perceives the shelves as threats to its own freedom and so tries to escape, destroying them in the process. But that won’t unlock the door, so the bull stays stuck.
Similarly, many in the West misunderstand China and react counterproductively, breaking things and still not solving the problem.
The Stalin, Mao, and Xi quotes above have a common theme. “… engineers of the human soul.” Mao venerated Stalin, and Stalin’s books sold massively in China. Now Xi Jinping frequently quotes or alludes to Mao and Stalin. “Socialism with Chinese characteristics” has been the case since Deng Xiaoping.
I spent a few hours with Mark Yusko here in Puerto Rico this week. Mark is a good friend and every time I hear him talk about the opportunities he has found in China, it makes me want to get my checkbook and fly to Shanghai or Guangdong. The country has enormous investment opportunities, and an atmosphere where entrepreneurs can create almost anything they envision.
However, you must realize this comes with a level of government intrusion unfathomable to us in the West. In the US, we’re debating the data collected by corporations like Facebook and Google. Their Chinese equivalents are encouraged to collect such data and share it with the government. Moreover, in every interview that I have heard, the overwhelming majority of Chinese simply don’t care, at least not publicly.
These same Chinese companies will extend their practices along the One Belt, One Road initiative, and where do you think that data will end up? By the way, OBOR is a brilliant strategy from the Chinese point of view.
Xi Jinping is intent on having China once again recognized as an equal global superpower and, at some point, even the leader. The Chinese leadership are all students of Chinese history. They know where they came from, and want to regain what they consider their proper place. They are playing a long game—decades long.
China is investing at least as much in artificial intelligence, robotics and Big Data as the West is, much of it controlled, directly or indirectly, by the Chinese military. So when US and European military planners get, let’s just say, nervous about China’s growing capabilities, it is not without reason.
China fully intends for the Yuan to be a global reserve currency. One requirement for that status is willingness to run trade deficits. It is no accident China’s large trade surpluses are beginning to dwindle. That is a feature, not a bug. It is by design.
As for intellectual property and patent rights, the Chinese are rapidly creating their own. China graduated 4.5 million, not counting software developers, mathematicians and other scientists. The vast majority of artificial intelligence patents filed last year were Chinese. Their interest in protecting that property is replacing the former practice of stealing the IP shirt off your back.
But China faces numerous challenges, too. Simon Hunt, who has been going to China for 25+ years and knows the country better than any non-Chinese person I’ve ever met, put it this way.
What should be clearly understood is that China’s economy is facing multiple changes in its structure. They include:
- Exporting companies relocating overseas because of rising domestic costs and American tactics (which won’t reduce the total imports, just the origination of those imports!)
- A shrinking labour force.
- A focus on high-tech
- The need to build infrastructure to accommodate the migration of another 150 million from the countryside to the urban community [in addition to the almost 300 million that have already moved in the last 40 years, in the largest single migration in human history]
- The need to focus development on the lower-tiered cities and rural villages
- Whilst continuing the process of deleveraging the economy.
I talk often about how big China is and how fast it is growing. Often I mention it is the world’s second-largest economy after the US. I may have to modify that practice soon.
Standard Chartered Bank said this month China will likely become the world’s biggest economy at some point in 2020, using nominal GDP and purchasing power parity. Gentle reader, 2020 is next year. This isn’t the far future.
Now, this won’t be the end of the world. It is simply math. GDP growth is a function of the number of workers and their productivity. China has more workers (as in four times more) who are getting more productive. At some point, their large numbers outweigh the higher productivity we have in the US and Europe. This is inevitable.
And that rise won’t happen without some hiccups. I noted last week in Something Wicked This Way Comes that the US and Chinese economies are co-dependent in ways we can’t change quickly. Problems in either country will hurt the other, and both currently have problems.