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VIDEOWhy China Has a Growth Problem
How its will to succeed will end disastrously.
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1. Pre-crisis, 1998-2008 -- Late-Stage Growth Obesity
2. During crisis, fourth quarter of 2008 to second quarter of 2009 -- You Lie!
3. Post-crisis, second quarter of 2009 to today -- Super Steroids-R-Us
Period 1: Pre-Crisis -- Late-Stage Growth Obesity
Growth is high, but its quality is low.
Starbucks (SBUX) is a good example of late-stage growth obesity
Consequences for Starbucks
- Opened too many stores in wrong locations (too close to each other, wrong side of the street, etc.), signed expensive leases
- Hired McDonald's-caliber employees, not the Starbucks baristas
- Management took their eye off innovation
Closed stores, terminated leases (took charges)- Slowed store openings
- Laid off employees
- Focused on innovation
Chinese Late-Stage Growth Obesity Resulted in Significant Overcapacity
- Grew at 10% (real growth) for 10 years. When building new plants, made assumption that past growth would continue into the future.
- The natural demand for its goods from the developed world was lower. Demand was driven, in large part, by heavy borrowing by US and European consumers -- China provided the financing; similar to Lucent (LU) financing dotcoms that were buying Lucent’s equipment.
- Future growth will be significantly lower -- China’s customers (the US and Europe) are overleveraged and are deleveraging.
- Result: overcapacity (more on this later)
Quality of Decisions Was Poor
Government intervention, corruption, and political capital-allocation decisions take things to a new level of financial insanity. Provinces are given growth targets that they must meet, and this is why the South China Mall or Ordos get financed and built.
- South China Mall, the second-largest shopping mall in the world (second only to Dubai Mall), opened in 2005. It has 1,500 store capacity, 7.1 million square feet, and 99% of its space is empty.
- The city Ordos was built in Inner Mongolia for 1 million residents on spec. Ordos is a ghost town; it is empty.
Period 2: During Crisis -- You Lie!
- Global economy is contracting (its customers are buying a lot less)
- Exports are down more than 25%
- Tonnage shipped in China by railroads is down double digits
- Electricity consumption is declining
You’d think the Chinese economy would be declining. Wrong! China is still showing positive GDP growth numbers of 6% to 8%.
How does China achieve growth in this environment?
It doesn’t. The Chinese government lies. The government cares deeply about ideology: It censors media and Internet, and sends people to jail for writing anti-government articles. Making up GDP numbers is just one of many tools.Period 3: Post-Crisis -- Super Steroids-R-Us
China will do anything to grow its economy.
- Farmers moved to cities in search for jobs, but had no social safety net -- if you lose your job, there's no unemployment insurance and hospital only accepts cash. This explains the high savings rate.
- Hungry people don’t complain, they riot -- the government is afraid of political unrest.
- Chinese chose growth at any cost, even if it was profitless, with bad loans and uneconomical projects.
- Once you look at what’s taking place in the Chinese economy through this lens, the decisions of its leaders start making sense, or at least become understandable.
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