More Thoughts on China

From Neal Asbury (Neal Asbury is the president of "Greenfield World Trade which is the largest foodservice equipment and related services export management company in the industry." He has extensive overseas business experience including Southeast Asia.) :

Today we find two Chinas running side by side at near light speed. They are totally incompatible. One China is supported by unprecedented levels of foreign investment, an unlimited pool of low cost labor and unsurpassed economic growth rates. Just ask anyone in the steel, scrap, plastics, cement and lumber business about the scarcity of these resources and the soaring prices. All of this stuff is going to China to feed its domestic construction projects and export manufacturing industries.

The “other” China is one of the few Communist Governments left on Earth that routinely interferes with its domestic market forces and manages trade. Foreign investment has become the “opium” that creates the illusion of health and prosperity. There is a growing economic gulf between the coastal regions benefiting from Economic Reform and the 900 million peasants inland still living as they did centuries ago. The restructuring of State-Owned Enterprises has left hundreds of thousands of unemployed workers. There are well-documented incidents of increasing civil unrest throughout the country (over 60,000 in 2004 according to the New York Times).

He also predicts:

The next generation of leaders will be the first to have grown up under the Economic Reforms. Once they take control of government and business, we will know the China of the 21st Century.

I like this observance of his:

If China today has a capitalist economy and capitalism means economic freedom, the logical next step is political freedom. The emerging class of Chinese industrialists, entrepreneurs and yes, capitalists are generating enormous wealth. You can now see them everywhere you go. It is their wealth and influence that will finance the growing demand, at all social levels, for political freedom. Economic freedom will not be enough and anyone who thinks the two can in perpetuity be separated is nuts.

This will not be an easy journey for China. Neal says, "China must still reconcile its economic freedom versus its political stranglehold. This could be very painful and destabilizing."

He summarizes:

Is it possible under Capitalist Communism that two conflicting realities can co-exist? I don’t think so. I reflect back to the 1980’s and the steady flow of books regarding all aspects of Japanese business and work ethics. Many writers and journalists fervently believed (as well as many Japanese) that they would bury us economically.

Then came the pin prick that quickly deflated the bubble economy and Japan has been crawling ever since. Prior to the collapse of the Japanese economy in the early ‘90’s, many Japanese businessmen would assure me that their out of sight P/E ratios and real estate values were possible only in Japan as Japan was different (translation: Japan was superior). They insisted the economic rules that applied to the rest of the world did not apply to Japan. They were wrong.

Can China defy world economic principles while suppressing political freedom thus allowing the boom to continue? Or like South East Asia, Korea and Japan before, must it swallow hard medicine with an inevitable major market correction just around the corner?

It is delusionary to believe the former and deny the latter.