Debunk the myths on China

"China as a sleeping lion whose roar would one day shake the world." - Napoleon.
Yes, China is roaring in this decade and the roar is getting louder and louder.

The most successful story in the last two decades

When the USA played the China card against Russia, it took away the embargo. Deng Xiaoping started an economic zone to build infrastructure (electricity, road, etc.) in an undeveloped city in South China and the rest is history. It is my Coconut Theory that when hard working folks have a chance to sell their 'coconuts', they will prosper. Lifting millions from starving to death is no small task. However, since China has dominated the world, except the last three centuries, it is no surprise to me.

The Myths on China

Sam Walton was a patriot. He preferred to make less money by not selling Chinese goods. He estimated wrongly the profits from the Chinese products. When he died, the company turned into stores for Chinese products making his heirs the richest family and many of his investors millionaires.

Investors should not follow these myths that have been spread by TV networks and even professors.

·         A TV network advocates "Made in USA" in a series.

·         A professor from a prestigious university believed India will replace China as their population is younger.

·         A professor from one of our top universities believed colonization is good using Hong Kong as an example.

·         China is evil and they are communists.

·         They're stealing our jobs, technologies and movies.

·         All Chinese products are inferior products.

All the above are wrong or not totally correct and I will dispute them one by one.

Globalization

China is one country in the chain of the global economy which promotes free trade. Buy the best product from the country that produces the best product at the least cost. Globalization debunks the myths.

·         China is moving up the product-value ladder. Some manufactured products, such as garments, will be moved to countries such as Vietnam and Burma with wages lower than China. This TV series makes you feel good and hence makes it easy for them to sell their advertising. In reality, manufacturing in many products will not come back to the USA due to our high wages, regulations and taxes. In a sentence, we're hurt by our own success. We need to give up these industries that we cannot possibly compete in and concentrate our efforts on high-value industries and industries we can compete in.

·         Product quality is controlled by outsourcers. Do you find product quality problems in Apple's products?

·         China is not stealing our jobs, but globalization does. Most companies can outsource all functions of the company to other countries where they can find the best workers at the least costs.

·         China is polluting the world. Aside from the pollution from factories producing products for export, energy consumption per capita is far less than ours. China is #1 or #2 in most green energy technologies. Unfortunately, China is blessed with coal, but not blessed with the less-polluting gas and oil.

·         China is stealing our movies and intellectual properties. It is the same for most developing countries. China will enforce intellectual properties before it can move up to the next phase to a developed country. Our companies have to protect our secrets as the best defense is a good offense. Even the US had been in that stage briefly. Charles Dickens was so angry that he did not want to visit the US. Did we pay royalty to Hitler for using German atomic technology and other similar technologies?

We can shut ourselves out from all foreign trades, but it will harm us more than help us. We have to enjoy a $50 toaster to start. All the chicken feet, a delicacy for the Chinese, will be dumped into the ocean. Our high-tech companies, farmers, movie industry will suffer.

Communism and China

China is only communist in the second "C" of CCP, China Communist Party. Chinese are more capitalist than us. If you do not work, you do not eat. This simple rule motivates its citizens to work hard. The safety net is improving, but it is a long way from our social security system; our system may be too generous as it has encouraged too many free loaders and cheaters (also in the corporation level too). It explains why they have a high savings rate. Most companies in China do not have unions, inconveniences of labor laws and sometimes even help from corrupt officials. After a taste of capitalism, China will never return to communism, which encourages folks to be lazy.

Human rights and Tibet

When you compare present day China to the China 30 years, 20 years or even 10 years ago, human rights have grown by leaps and bounds. To me, food and shelter come first before human freedom. Human freedom should be allowed gradually and it requires educated citizens that China has, except in the rural areas. Allowing freedom too fast would cause chaos (my thought and is debatable).

Before the 'liberation' of Tibet, only monks could get an education. One-child policy does not apply to Tibetans and other minorities. Their culture is maintained throughout from the experiences in my two visits in the last 10 years.

Hong Kong

Present and past, Hong Kong's wealth depends on its proximity to China, contrary to the colonialism theory a professor had stated. I had bet on the iShares MSCI Hong Kong ETF (NYSEARCA:EWH) (an ETF for Hong Kong) at the start of the Umbrella Protest.  My order had not been executed due to my low price. The reason that the stock market did not drop further could be the plan allowing citizens in China and Hong Kong to buy stocks from the opposite exchanges. It will materialize soon after they finalize the tax and regulation details. Hence, the Chinese have more investment choices instead of investing in ghost cities.

India

Indians compare themselves with the Chinese, but the Chinese usually compare themselves with the USA. India will not catch up with China in this decade. It is more corrupt than China, more protective than China, and has more social inequality than China. The Tier I cities in India cannot compete with the Tier II cities in China when you compare the infrastructure, high rises, subway, airport, etc.

The growing population of India eats up all the limited resources of the country. As a Chinese saying goes, you get rich by making fewer babies and building more roads.

China's advantages

·         Huge internal market. The scale of economies is quite obvious.

·         An educated and hard-working work force.

·         Relatively low wages for qualified engineers and researchers. The wage of one US engineer is about the same as four Chinese engineers from my rough estimate. It is giving some technology companies problems, such as Cisco.

·         Government incentives and subsidies.

·         Most big projects and major purchases to foreign countries have a clause of technology transfer. If we do not oblige, they buy them from your competitor. The trick is to use the money for research (not bonuses to the management) and hold out the top technology.

·         Bitter tough lessons in the past 300 years starting from the Opium Wars to WW2.

·         One-party political system is not a bad thing. By the time China connects most, if not all, the Tier I cities with high speed trains, we're still arguing about who is on top for the first one.

The success of China is good to the world

After the last earthquake struck China, Chinese and the overseas Chinese helped to rebuild the disaster region without asking other nations for help. If China is as poor as before, you may have 20% of the world population begging for money.

When you need a drug to cure a terminal disease, do you care whether it is from the USA or from China?

It has rescued many US companies such as GM from bankruptcy. So is Volvo. China will buy many bankrupted US companies if we allow them. Some bankrupted US companies do not have much salvage values, but we argue not to sell on national security reason. Most do not make sense.

Vietnam is copying China's model and it is at least 15 years behind. Eventually, many factory jobs will be replaced by robots and countries such as Vietnam with labor cost even far lower than China. Our politicians have to WAKE up and try to solve our problems instead of blaming our problems on China. It already has attracted many industries such as textile that cannot afford the rising wages in China. The latest riot against foreign factories (mostly from Taiwan) is more political and not against the Chinese. The Chinese have been more integrated with the Vietnamese than most other SE Asian countries.

Resource-rich countries such as Brazil and Australia benefit from the demand in China. They will return to the normal trade levels when the global economy improves. Macau and Hong Kong have been benefiting from Chinese tourists. With the suppression of corruption, the gambling industry in Macau will suffer. Due to the recent Umbrella Protest, Hong Kong will suffer from fewer Chinese tourists.

China has become number one in tourist spending in France. It is similar to many other countries. Most companies producing luxury products benefit. The myth of an average Chinese citizen making less than $5,000 is debunked by these tourists. Firstly, the median salary is not $5,000 and secondly the size of the middle class is huge. Most countries benefit with the rise of China today, except Japan, which has an islet dispute with China. Philippines, backed up by the USA, has similar problems with China. Hope they will resolve the problem by sharing resources.

Not too long we will compete with China on higher-value products as we’re competing with Western Europe now. There are many recent examples that worry me more. A Chinese company captures 70% market of the consumer drone that was invented by our military. Chinese military drones cost about one quarter of ours and they have little restrictions to whom they sell to. Chinese has a monster machine to build bridges. They have more than the high-speed rail than all other countries combined. These are a few of many examples. If we ignore Chinese products due to poor quality, then we may have lived in a cave for the last year. When the average Chinese student spends at least two more hours in studying than ours, they will achieve more in life and catch up fast.

Afterthoughts

Being born in Hong Kong, I am naturally biased. I try to present this article with facts. China has a lot of problems that most developing countries have.

Shortly after this article was published, Barron’s has an article titled The New China. The following data are obtained from this article dated on Nov. 17. 2014.

	Vietnam	Cambodia	Laos	Thailand	Myanmar
GDP Growth	5%	7%	8%	3%	8%
Export Growth	12%	13%	17%	0%	16%
Population	93 M	16 M	7 M	68 M	56 M
Monthly MFG Wage	$250	$130	$140	$370	$110
ETF	VNM			THD

Thailand is the most developed with a thriving tourist industry. However, political unrest would take it several steps back. This article is dedicated to our beloved Boston mayor Thomas Menino 1942-2014. This article was published in Seeking Alpha on 11-2014, a site for investors. Some additions on 6/10/16.

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