China Envy American Woes

CHINA ENVY AMERICAN WOES

Envy and why not, China has averaged annual growth of 9.5% for 30 years. China has put growth above all costs. The roots of a communist capitalist system goes back to 1980s and 1990s when the late leader Deng Xiao-Ping declared it was ok to get rich. Beijing down to the local level cadres are all judged by GDP growth. Gross Domestic Product growth was based on increasing production in the export sector. This strategy has been used by all Asian countries starting with Japan. More specifically, even Thailand before 1997 when exports were a mere 20% of GDP has grown today to nearly 80% of GDP. The message was clear to all Asian countries when in trouble export your way out of it. The problem is everyone follows the same strategy.

This over reliance on exports still has produced weak domestic demand and a primitive financial system and stronger foreign exchange rates for other Asian countries. President Hu Jin-Tao has said the economy is unstable, unbalanced, uncoordinated and unsustainable. These are powerful words and directed not only to an internal Chinese audience but also to Chinas largest customer the US.

First, the Chinese leadership will begin to focus on internal issues. The Chinese leadership has the will and more important has the money, something that America does not have, to solve internal issues. In 2006, 30,000 officials were prosecuted for corruption. Product safety issues, manufacturing and environment, copyrights and the capital markets. These issues take money, which China has, and educated people, which China has and no one doubts Chinas will to enforce change.

China has $1.2 trillion in foreign reserves and if China cashed in the US Dollar would be worth about 1 baht. China is cautious in financial matters as well they should be in its recent announcement that Chinese citizens may begin to invest in Hong Kong stocks. Chinas financial markets are insulated from world shocks. China is slowly opening its financial markets when they are ready. No amount of pressure from the US will force China to speed up financial reforms. No debtor walks up to a creditor and demands change. Simple economics money talks and debt walks. China does not want a leveraged future like the US that has sold out to Wall Street.

A daunting task to control Chinas 657 municipalities, 2,862 counties and 41,636 townships, Even mighty Harvard or Oxford could not graduate enough MBAs to manage the sheer size of China overnight. Chinas State Environmental Protection Agency (SEPA) employs 300 people in Beijing and 60,000 employees around the country. The will to enforce and the money to increase inspectors China has. The US Environmental Protection Agency (EPA) has 17,500 employees overseeing the mass exodus of US manufacturers overseas during the past 30 years and an influx of Japanese manufacturers to the US soon followed by Chinese auto manufacturers next year hopefully to Detroit where the price of a car is higher than a house and a large pool of unemployed US auto engineers are waiting for the Chinese arrival.

An even bigger problem for China is understaffing the State Food and Drug Administration. It only employees 1,700 people to control Chinas food producers 350,000 producers have fewer than 10 employees or 80% of the total. Contrast that with the US FDA which has had budget cuts since the 1970s at the most can only inspect 1 or 2% of food shipments to the US again no money,

Evidence of more Chinese internal focus is on education turning out 60,000 Masters and Doctoral degrees in Science and technology alone. These graduates will lead Chinas next push to set up Global manufacturing bases to serve local markets with higher value and quality products such as Cherry Automobile in the US next year.

Chinese graduates have plenty of work to improve Chinas domestic social services, public health care and retirement plans to replace Chairman Maos iron rice bowl policies. China has a lot of hard work ahead of it but the foundation is strong and the future is bright. China has written and passed some of the best laws in the world it will come down to enforcement.

Americas woes are not education. America turns out thousands of graduates every semester year after year. If you believe the governments statistics almost no one is unemployed. A better statistic would be how many are underemployed no one knows. Since America pretty much does not produce anything tangible outside of the service sector, it turns to Wall Street to leverage their grandchildrens future. A simple financial product like a house mortgage is repackaged and sold to investors around the world prime and sub prime. How long America can continue its growth through leverage is the big question. As long as business can lobby politicians to make corrupt practices, like no income verification for mortgages, legal by law first there is by definition no corruption because it is law, As long as there is a law for it, it is a feel good moral placebo for a society that is required to be ruled by rule of law.

Who writes these laws? Politicians do and thereby protected by law. Almost every Presidential candidate has made millions from hedge and private equity funds invested in sub prime portfolios but it is not corruption. By law these firms are not required to disclose their portfolios for possible conflict of interest therefore they have done nothing wrong. It is organized legalized corruption although by law it is not corruption. Ironically, every Presidential candidate is now against these types of funds the game is up but do not worry they will be busy writing new laws for the next round of financial products that ordinary citizens can not participate in. Do not worry it is legal not corruption and you can bet the politicians grandchildrens future is not leveraged cash only please.

It all works because the government promises not to come knocking on citizens doors in return do not come knocking on the government door when natural disaster strikes, a war is needed, health care is needed, infrastructure is needed, retirement is needed, education is needed, childcare is needed, elderly care is needed or heaven forbid a job is needed. Since these programs are taken care of by the strong independent American character of take care of yourself that built this great country that leaves the government free to write more laws carefully making sure each practice becomes legal.

So with all the taxes that Americans so gladly pays what tangible product do they get in return? Americans get to be the freest people in the world. Where does all the tax money go? I guess it gets repackaged just like debt and disappears around the world no one knows. America for sure also has a bright future.

The two countries have vastly different problems and opportunities. MBAs will tell you leveraged finance is better they have a good track record they have built a 12 trillion dollar economy out of it. Poor dumb farmers (since when farming was not a noble profession I do not know anyway that is how we are classified nowadays) will tell you cash is king. I guess only time will tell.

Tawan
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