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VIDEOChina's Scramble to Increase GDP Will Hurt in the Long Run
By
Kristin Graham Aug 03, 2010 9:40 am
Instead of artificially inflating numbers by over-staffing workforces and building unnecessary infrastructure, the country should focus on areas such as telecom and education, which will stabilize the markets for the future.
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Ironically, the Shanghai Composite Index is down nearly 20% year to date -- not the kind of market performance one would expect from an emerging market roaring past the world’s most developed economies. The explanation for the divergence is twofold.
First, paper GDP doesn’t necessarily translate into real long-term GDP.
To demonstrate, I’ll describe my commute to work each morning, which begins at one of the most prominent and modern streets in Shanghai.
Leaving my apartment complex, I pass numerous street cleaners using brooms to tidy up the roads and sidewalks. When I reach an electronic stoplight, numerous crossing guards direct people traffic and yet another few individuals hold signs that literally mimic the walk/don’t walk electronic signal.
Entering the metro, three guards stand at every entrance, three or four more stand and simply point to a metal detector. A few more can sometimes be found holding instructions on how to use the escalator and nearly every door opening in the train is manned by someone to assist the queuing and boarding process (a concept most Chinese have yet to master).
Beyond my commute, venture a few miles outside of Shanghai and vacant highways intertwine countryside homes where most don’t even have running water, let alone vehicles. The most extreme example is that over the last few weeks, I’ve seen workers planting flowers, removing the flowers, and re-planting the flowers near my home.
The list goes on and on, but by now, my point is clear: The cash-rich Chinese government can produce whatever GDP it so desires. Hence my sureness that GDP will exceed Japan’s this year.Short-Term Profits = Long-Term Pain
Like a company that invests in itself for short-term purposes to reach a target bottom line and ultimately boost its stock price, rather than building a long-term brand, China is artificially inflating its numbers by over-staffing city workforces and building infrastructure that doesn't need to be built. And apparently in some cases, excessively re-landscaping.
The good news is, it doesn’t have to. There's plenty of infrastructure that does need to be developed and there are a plethora of ways to invest capital that will generate long-term growth.
Make the Investment Count
The number of dropped calls, missed text messages, iPhone (AAPL) data outages, and non-existence of voice mail with my China Mobile (CHL) plan tells me there’s plenty of room to improve China’s telecom infrastructure. Current investment into the Shanghai metro system has resulted in one of the world's most aesthetic-looking transit systems. Yet electronic timetables seemingly offer random times that never match actual train arrivals and my metro card isn't recognized by the computerized scanner upon entering/exiting at least two or three times per week. My utility bills to state-owned providers must be paid in person with cash, so it’s no surprise enterprises not directly targeting Westerners still lack platforms that accept Visa (V) and Mastercard (MA).
Like income levels, a wide education gap exists. Many pursue supplemental education from private Chinese schools such as New Oriental Education (EDU), but top performers are mainly Western-educated. Consequently, investment in the education system is a must.
The integration of creativity to encourage idea invention will allow the next generation of Chinese to think and perform on a different level. Investment in technological creation, rather than duplication, will help the country emerge out of its outsourcing status to a nation that produces its own goods labeled with its own brands. And investment in open collaboration across the Internet, rather than currently restricted social media, will help promote forward thinking.
These are all areas requiring investment that will truly impress the world, even if it doesn’t always amount to 10% growth. Insiders here, experiencing China, are aware of this, making them less bullish about reported GDP figures and thus, less optimistic about the market.
Moving to Point Two
The discrepancy between Chinese GDP and market performance is also attributed to the fact that the market, in general, is still quite speculative. Individuals don’t use the market as a mechanism for building future wealth; the concept of a 401(k) and IRA is unheard of. The Chinese prefer to invest in what they can see with their eyes and feel with their hands: cold hard cash and real estate.
Further, the vast number of IPOs are creating an oversupply of liquidity, with shares exchanging hands so quickly by the “get in, get out to get rick quick” mentality. While the Chinese market is rapidly developing, it has a ways to go before it can be relied upon as an economic indicator. In response, the State Council has established a goal to emerge Shanghai into an international financial center by 2020.
Significant investment is necessary. Financial education, including the importance of growing capital, and the promotion of individual investment vehicles is vital. Development of the mutual fund industry -- which is about one-tenth the size of the US -- is necessary to permit individual investors to invest in a less speculative manner, as is enormous investment in fund and trading platforms.The average Chinese person saves 30% to 40% of their income in cash. If they allocated even 20% to investment and used the remaining portion -- which typically would have been stored in a plastic bag (the Chinese version of the proverbial “mattress”) -- on purchasing goods, they could grow their capital for retirement and simultaneously create higher domestic consumer demand that's so greatly needed. The combination would result in a far stronger and self-sustaining economy.
Conclusion
As I’ve stated before, China holds enormous potential, if its growth is executed in an effective manner. Chinese society is built around a core concept of saving face. Unfortunately, this idea can clash with Western business. Right now, it’s clashing internally with the country’s ability to properly develop. From an economic standpoint, China needs to leave this mentality in the past, worry less about today’s reported figures, and invest in the areas that will propel it into tomorrow’s greatness. Only then will the country truly outdo the world’s top nations and have a stabilized market that does in fact follow along with the economy.
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