China has to be up there with “technology” for most impressive phenomenon of the last 20 years. I think the West is generally vaguely aware that something is going on in China, but the extent and magnitude isn’t widely appreciated.
In 1990, the $2 a day poverty rate was almost 90%, which by 2014 had fallen to approximately 11%, an impact of lifting about 900 million people out of poverty. The ongoing move from rural towns into cities is the largest migration of people in human history.
China is usually regarded as the world’s second-largest economy after the United States, but is fast gaining on the US. In fact, it recently passed the US in GNI on a PPP basis:
Economists debate the interpretation of this fact, but the bottom line is that China is enormous, rapidly modernizing, and has been extraordinarily effective at improving the lives of their more than one billion people.
There’s an excitement in China right now that this is their time. Shenzhen and Beijing have rich, thriving startup scenes. There is a huge number of smart people doing creative, innovative work. The topic of China copying the US once came up in a conversation, and my friend said, “of course: there was an opportunity to bring us into the modern world before, but that’s done now, and now we need to do new things just like the West does.” Beyond that, the growth rates being put up by Chinese domestic startups make Silicon Valley look like little leagues: Xiaomi, which is sometimes considered the Apple of China, went from $0 to more than $1B in annual revenue in less than two years.
If the US elections are a popularity contest, the Communist party takes a SimCity approach to governance. Young leaders are given assignments of increasing importance and every five years come together to show off the growth they’ve been able to drive. Over the course of a career a bureaucrat will be shuffled into a variety of different circumstances, each with their own strengths and challenges, and graded on their ability to deliver sustained progress. On his path to becoming paramount leader, Xi Jinping served rotations in Hebei (1982–1985), Fujian (1985–2002), Zhejiang (2002–2007), and Shanghai (2007). The Party embraces smart, technocratic leadership: while Western leaders are often lawyers or come from widely varied other backgrounds, all of the last three Chinese paramount leaders have been engineers.
One of the pieces of genius of Deng Xiaopeng was an insight that, as we’d put in Silicon Valley, growth cures the many sins of management. As James Carville noted in his successful strategy for Bill Clinton in 1992, “it’s the economy, stupid.” The current elder generation in China still remembers going from not having a horse to having two cars.
Whenever you wonder why China doesn’t seem to care about its dangerous levels of pollution, remember the above. It’s worth noting that they are starting to address pollution now that it’s starting to become a growth issue: the talented, valuable workers they’re working so hard to recruit are becoming hesitant to move to such a bad environment. Those are terms the Party understands, and I expect they’re already at work on a fix.
China is unusual among centrally planned economies in its extremely high degree of decentralization of spending authority. Usually, spending discretion below the national level averages around 25% (democracies) or 18% (nondemocracies). In China in 2014, it was 85%. They’ve carefully studied their neighbors in Asia as well as the other significant communist states and have set up a unique system specifically designed to mitigate what they believe caused them to fail.
What about India? Superficially, it’s just slightly smaller than China (though the Bharatiya Janata Party is larger than the Chinese Communist Party), demographically younger, and now growing faster. When I look at the contrast of India versus China, I keep coming back to one thing: the single-child policy. Though the fertility rate in India has been declining recently, it’s still on average one whole child higher than China (2.5 vs 1.6). Families in India tend to be larger, and additional children are more likely to be viewed as a weak form of “social security,” able to look after the family later in life. Parents invest heavily in children in China and spend a huge amount of energy on ensuring their future growth through education. If a family in poverty can barely afford to feed and invest in the future of one child, it definitely will struggle to do so with two or four.
One interesting observation is that China tends to be much more gender equal than anywhere else I’ve seen. No one thinks anything of having women in senior leadership positions or running businesses. My startup has three funds from China as investors: at two of them, the key decision makers were women, compared to zero out of five for our biggest US investors. There hasn’t been a female president yet, but there have only been three presidents in general since the dawn of China’s modern political system in the 1980s. Women are doctors, lawyers and public officials at much higher rates than the West. In my mind, I attribute a lot of this to the single-child policy, but I’ll admit the link is a little fuzzy.
A lot has been written about China’s impending “population bomb” — China is aging and will soon have a very elderly, traditionally non-working, population. This isn’t an issue unique to China: it’s true in most of the world, including the US. I don’t have a specific prescription to speculate on, but I’m optimistic that this won’t wholesale derail social and economic progress over the next 50 years; the future will find a way. A separate but related issue is that there are tens of millions more men than women in the country, and tens of millions of frustrated men unable to find partners is bad news.
Much, too, has been written about China astroturfing their growth and being left with ghost cities, setting themselves up for a real estate crash. My impression from spending time in China and talking to people on the ground is that this is probably overblown. Due to complexities of how local and provincial governments sell land, it must be immediately developed, though the area may take longer to fill in with people. With more than a billion people and limited resources in each area, China still follows a hukou system that assigns each household an area to live and continues to move families into cities (and progressively weaken the hukou) as capacity allows. This is certainly a rosy view of the situation and there are serious controversies about China’s true growth rate, human rights issues, and urban development. My guess, though, is that these are 5–10 year crises that over the next several decades can’t help but give way to a torrent of upward mobility for hundreds of millions of people.
Separate from the real estate issue is a broader one of asset pricing, which is certainly a challenge. The Party hasn’t quite gotten used to accepting that in a free market, thanks to the fact that humans are involved, prices will sometimes go up and they will sometimes go down:
When equities fell sharply last summer, the government poured in an amount of money that “estimates tend to settle, roughly, on different quantities of ‘lots’,” to try and prop up prices in addition to taking some other measures like banning institutional investors from selling too much of their holdings and arresting short sellers for being unpatriotic, all of which are obviously bad ways to run a stock market. Seeing how the Party reconciles and ultimately resolves their long running effort working towards Deng Xiaoping’s vision of economic reform without political reform is really the key question of the next 20 years.
Back in startupland, there’s a heavy financial component these days, and time from founding to IPO can be very short. The laws were recently changed to allow unprofitable companies to go public, and there are entirely new exchanges springing up, including the much-less-regulated “New Third Board,” (新三板) to facilitate. As one prominent investor I know put it after visiting last summer, “they’re in full 1999 mode right now.” This has cooled since last year, but regardless, depending on how things turn out, we went through something either just as bad or much worse 16 years ago and had forgotten all about it just a few short years later. The arc of innovation and progress is long and financial cycles are short, but the scale is unavoidable.
Much has been written about the insane work ethic at Chinese startups, going 16+ hours a day 6+ days a week. This is often presented in the context of a narrative that they want it more. I see it a little differently: with how huge the domestic market is there, the same conversion rates can quickly mean millions and millions of more people than it does in the US. We famously already struggle to deal with hypergrowth here (though how quickly we forget that Twitter was at one point more whale illustrations than social media app), so I can’t imagine what it’s like in a market several times larger. Culturally, I expect we’d work the same hours here that startups do in Beijing were we in the same situation. The moral is this: China is now such a large and wealthy market that many big domestic Chinese companies have no international expansion plans and their growth is not worse off for it. In general, though, the best Chinese companies no longer aspire to be best-in-China, but to be best-in-world, much like their American counterparts.
At this point, I could go on for a long time yet but I hope I’ve sufficiently motivated the main point, which is that I think that most of the world is underestimating the scale and velocity with which China is rising to the global stage. I might be wrong, of course, and there are many economists much smarter than I am with gloomier outlooks. China is also shrouded in a wide range of controversies, some minor and some much harder to ignore, like speculation on how they’re able to provide far and away the shortest organ transplantation waiting time in the world. A major state-funded organization is the world’s largest DNA sequencing center with a major project focusing explicitly on adding 3–5 IQ points to their population per generation, and I’ve seen slides from another significant Chinese genomics company that nonchalantly say that their short-term goal is preventing birth defects and their long-term goal is eugenics. This may be scary to the West, but it also might be possible. The Chinese system is certainly producing results.
