Thursday, April 6, 2017

How China rises

In the last 35 years, China has lifted millions from starving. It is no small task. Otherwise, India would be far wealthier than China and all the allied communist countries would not be in bad shape today.

China was as strong as the Roman Empire in the 200 BC period but she did not colonize any country. As late as 1800, she had 1/3 of the global GDP. She did not catch up with the West during the Industrial Revolution. The Opium Wars and the alliance of eight nations semi colonized China and bankrupted China by demanding unreasonable damages.

People’s Republic of China was created in 1949.  Mao was promoted from a great revolutionist to a poor governor, a poster boy of Peter Lynch’s Principle (promoting to a position one is not capable). Soviet’s withdrawal of the financial aids made it worse. Great Leap Forward and Cultural Revolution had done a lot of harm to the country.

The real recovery started when the US took out the embargo. Then Deng promoted his reform. The Special Economy Zone (SEZ) is his legacy. You cannot change a backward and poor country overnight. His started his experiment in a small fishing village. The area was supplied with electricity, road and other infrastructure. With cheap labor, it is an instant success. Most genius ideas are so simple!

The next step was to convert the capital-intensive State Operating Enterprise (SOE) to labor-extensive and market-driven industry. With lower taxes and incentives, Shenzhen, the first SEZ, became a choice for many foreign companies.

Hong Kong was already a first-class city with one of the best ports, trade expertise, finances, legal laws, financial systems and know-hows to support this SOE next-door. Taiwan, S. Korea and Japan were the models to follow.

Before long, it attracted huge foreign direct investment (FDI). They can be viewed as renting China’s cheap but educated labor force and avoiding the restrictions (pollution, union…) at home. The same model is copied to other cities in China and the rest is history.

Shenzhen today is one of the wealthiest cities in China if not the wealthiest. It has its own stock exchange to finance new ventures. With all the component factories such as cable, transformer… available in the same area, it is the most efficient and cost effective city to assemble new products. Today it is also a research center for new products similar to our Silicon Valley.

China’s rise in her economy is not straight line or without problems. Here are some noteworthy events.

In 1988, her inflation rate was 20%. Corruption was widely spread. Officials pocketed the different in official prices and market prices.

In 1989, the Tiananmen Square incident caused by protests due to social inequalities slowed down foreign investments, tightened strategic import and a little brain drain. Chinese students in US were allowed to stay in US and US received the top of the cream of Chinese students.

In 1980s, Hong Kong factories were no longer competitive and most moved to South China. It is similar to electronic industry in Taiwan.

In 1992, Deng’s famous southern tour started a new reform. In 2001 China’s entry to WTO expanded her global market.

Quickly China became the number one producer of steel and for many years used half of the global cement due to its excessive infrastructure projects and buildings. It boosted its GDP and jobs but created excesses.

As in most countries (US included) moving to a developed country, China took the shortest route by copying and using her cheap labor. The ‘copying’ is adaptive and sometimes innovative. If they are not, most other countries should be more successful as most have started earlier.

Has China cheated? Most if not all countries cheated including the US. All countries manipulate their currency rate, subsidize their own industry… It is more political than economical.

China is in the front line of several industries such as high-speed rail, mobile technology, drones, electric cars, etc. “Made in China 2025” is an initiative to ensure quality of Chinese products in 2025. The China’s image of assembling products only would be history. Today most products are still followers but more innovations are coming. When a country is the third one to send men to the moon, she has to be innovative even it is 50 years late.

The above is from my book "Can China Say No?". Click here for more info in

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