Wednesday, November 11, 2009

China's Command Economy, Resource Efficiency, and the worlds Geopolitical Future

I have had many discussions with people about the seeming meteoric rise in China the last 25 years. A LOT of people have long been excited about the prospect of doing business in China. The reality is that the opportunity for any foreigner or foreign business in China is usually limited until some form of domestic market has been established. Usually there is a strong incumbent by that time. It's true that China has been growing at an incredible rate. To me it just smells like a bubble. An even BIGGER bubble than Japan (who we all overestimated, though they still have some international heft).
Let's do a simple comparison. Look at this chart of Chinese GDP:

It's pretty obvious there have been NO contractions since 1980. The US has had 5 recessions during that time. I believe most people accept that recessions are just part of the business cycle and are inevitable (not that they talk or vote that way). I feel that recessions are important in balancing the business equation. Survival of the fittest. Trim the fat.

Particularly I would site inefficiencies and excess in China's command economy. People in America complain when we bail out banks. In China the government is still 100% in control of everything, and there are no laws to give companies a level competitive playing field. An Economist blog posting citing Tyler Cowen and the Wall Street Journal seems to resonate well
with how I feel:
Most of China's growth this year has been unsustainable, driven by stimulus. China's money supply has risen 29% in the past year. At the government's behest, banks have increased their lending by nearly $1.4 trillion, or 32%, during that time
All that during the worst recessiong we've seen in a while? Wow. Admittedly the journal citations also comments that:
That flood of borrowed cash has been channeled into new infrastructure and production capacity. These investments will account for up to half of China's gross domestic product this year, according to some estimates.
To me on the surface that seems smart. Captial investment is always good right? Or is there a law of diminishing returns. I often cite a notion which came to me from natural capitalism. We've spent the last 200 years (since the industrial revolution) maximizing the ability of people to utilize resources. Now we have too many people, no jobs, and we're running out of resources. Now is the WORST time to be investing heavily in infrastructure.

Here's one of my favorite case studies as a small aside. The Three Gorges Dam in China.
It's well accepted that when it comes to cost per watt BIG Hydroelectric power plants are a good deal. This dam produces about 22.5MW of power. It cost $30 billion conservatively, so it works out to about $1.33 a watt! First Solar makes Solar Panels for $ 0.85 a watt right now, and their modules are all recyclable and getting more efficient and cheaper every day. I'm excited to see both countries use of alternative energy growing immensely. Wind power for example is forecasted to grow by 6000MW in the US and 10,000MW in China this year. Still it appears that China overpayed for the whole project probably as commodities and equipment have steadily increased in cost over these years.

Never mind the fact that massive ecosystem upheval was a likely result, over a million were forced to move, and probably even earthquakes were caused by this endevour.

Of course China still has a IMMENSE proportion of the worlds population, VERY low costs of labor and living, and a clear competitive interest on the world scene. It will be a force to be reckoned with for many years to come, and possibly emerge to dominate. Clearly it's a wise decision for any company or investor to look into China for the future. But NEVER put all your eggs in one basket, or too many at all for that matter.

I especially don't think it's going to be all roses. China isn't the whole world, and I bet we'll see a correction in their GDP, some costs of their wasteful overeagerness, and watch them relive many of the mistakes we made along our path to becoming a global power (like recent scandals with tainted baby formula, pet food, and pollutants). Probably along with that will come some that could never happen in a place with freedom of speech/press, and due process. India is a challenger when it comes to cheap labor, and immense population, but also has many of the democratic and legal institutions that make business work in the US. Europe is showing a bit of modernization, and recent integration/expansion of the EU bodes well for their access to cheap labor and stirring the pot. South America (especially Brazil) appears to be waking up. America will always have it's ingenuity, creativity, and endless stream of ambitious immigrants willing to fight to live the dream.

I believe we've clearly seen an inflection point with the importance of Technology increasing dramatically, along with the pace of innovation. The US still has the worlds premier higher learning institutions, business schools, venture capital firms, banks and other financial firms, and a host of other factors that make it an outstanding place to effect technological advancement and change. We're also not nearly as wasteful, nor spending quite as much on Stimulus without a floating currency. Still any businessperson, and investor alike will be well advised to integrate China into a future multi-polar world view.

1 comment:

Horatio said...

Interesting. A good article from the economist this week points out why India is looking strong in the face of all powerful China.