“A national debt, if it is not too excessive, will be to us a national blessing."
---Alexander Hamilton
There are a lot of people who objects to what Michael Pettis had to say about the Chinese economy, which I discussed in the previous post. They will point out that whatever infrastructure or other investment that was made, it was somehow useful. Besides, if debt cannot be repaid, the government will just write it off.
When the Soviet Union won World War II, Their per capita GDP was something in the order of $2000 where as the United States at the time was already at $6000. The United States won the cold war in no small part due to the fact that the West in general and the United States in particular, made good use of the resources we had compared to the Soviet Union. Their economy fell behind and they were devoting ever increasing share of the GDP for their military. This was one of the unsustainable situations that contributed to their demise. Efficient use of resources means that there must be a positive return on the investment over a couple of decades.
Debt matters. A company borrowing money must have a higher return on investment then the borrowing cost of the debt. A nation borrowing money must do the same. China is increasing its debt load at a very fast rate in recent years. If China were a company, such debt loads must result in higher profits over the long term. For a country, that translates into GDP growth over the period of the debt. The Chinese GDP growth is slowing down. That means that the debt carrying capacity of China is not rising in proportion to the rise of the debt load. In the last seven years, the Chinese GDP growth has slowed from double digit growth to about 6%, at the same time, the Chinese debt has risen from 162% of GDP in 2008 to 266% of the much larger GDP in 2017. This is unsustainable and must be reversed over the medium term. The Chinese leaders must gradually wean the country off this treadmill of ever rising debt without comparable rise in GDP. China will go through a period of slower growth. The sooner they can get this done, the better off the country will be in the longer run.
Some say the Chinese economy will collapse due to the debt. While this might be a possibility, this is an unlikely event. The debts are mostly domestically sourced and the government has the power to make sweeping changes. The most likely scenario is a "lost decade" type situation like the Japanese.
The Chinese leadership understands this problem, but must deal with the trade war as well as domestic vested interests. I have faith that over the longer run the Chinese will be able to get the debt under control.
Sunday, November 18, 2018
Saturday, August 25, 2018
The Great Rebalancing
"China is having a heart transplant.You're probably going to be fine in the long run, but it's going to weaken you, and it's got to be well executed"
---Raymond Dalio
Despite the phenomenal economic growth that China has achieved in the last few decades, or perhaps as a consequence of it, the Chinese economy has fallen into serious imbalances. In the next decade or two, the best outcome is a significantly slower growth to correct the problem before higher growth could resume. There are other worse possibilities, like the lost decades that the Japanese had gone through, or more remote, a financial crisis like Brazil had experienced in 1997-1999.
To see how this could have happened, let's channel Michael Pettis and consider the following scenario. Say you are in charge of a farm with 100 able bodied workers eking out a living. All of these people till the land, but yield was terrible, and life was hard on the farm.
One day, you realize that people spend two to three hours a day going to and from the fields. You came up with a scheme. The farmers would loan their hard earned savings to the collective. You had instructed your right hand man Joe to take all the money to buy construction material and make him work to fix the roads. Since Joe could no longer work at his plot of land, you collected a small share of the harvest from each family to pay off the monthly payment of the loan and also allow Joe to feed his family.
The idea was a success. The travel time has been cut to an hour and a half per day. The farm was more productive. Since the amount of crops collected from each household was a bit arbitrary, Joe was living better than the people who still do the farming. The farmers did not mind, since their lives were better than before, even after giving up a share of their crop.
The farm book keeper, who had read some book about economics, started adding the roads built as part of the output and told everyone that production of the crop and the roads combined had exceeded last year by 5%
Doubling down on your success, you started adding more people to build things. Since the irrigation was bad, you borrowed more money from the farmers and added a few more people to build the irrigation canals. Some of your friends got the job since it pays more than farming.
Farm productivity soared and people have never had more food in their recent memory. By now, thirty people, some your relatives and your friends, are working on the more lucrative construction jobs. There was just one problem, the farm is running out of projects to do. The crops, after getting all the care, water and fertilizers they need, are not yielding more. Travel time has been further cut to 20 minutes and any improvement is now marginal. Yet, the construction workers, seeing how lucrative the jobs were, have lobbied you to add more of their relatives and friends on the job.
Since the construction projects are not increasing the amount of crops produced, the obvious thing to do is to stop many of the construction projects so the saving of the farmers is not wasted. Since this would result in people losing their construction jobs, you need to find a way for them to return to farming their land. If people were starving, they would be willing to return to do farming work. But life on the farm was good, so the construction workers resisted returning to till their plot of land again.
More people joined the construction crew and try to find more reason to do construction. By now, fifty people, half of the able bodied folks at the farm, are working construction. A third reservoir was built, though the second one was already not very useful. The farm book keeper had told you with glee that production, counting the farm yield and construction, have increased by more than ten percent from last year, but you know that the building of the third reservoir was a big waste of manpower and money so must be marked down in the future. Also, if people switch from construction to farming, the production number would go down more, but that was the right thing to do.
You tried to get the construction crew to work on the neighboring farms, but it had created trade imbalances. Your neighboring farms got mad at you and pass laws to reduce the number of construction crew that are allowed to work on their farms. Though cheer leaders in your farm proudly show off the shiny new roads and reservoirs, and told everyone that the trade imbalances were a result of the hard work and thrift of your farmers, you knew that the real reason is you had too many people in your farm working construction and not enough growing food.
If the trend continues, 100% of the farmers will work as construction and everyone would starve. The solution is still blindingly obvious. You need to reduce the number of people doing construction and return them to do farming, but they don't want to see their life style reduced so they dig in their heels and refused to go. Some of them pointed out that the village next door spends even more money and people doing construction. You argued with them that the next village are artisans and craftsmen. They have a need to maintain their equipment. They are wealthier because they had better skills and laws as a town of craftsmen. Someday, you can transform your farm into more like them, but until that day comes, building a third reservoir and other roads etc are still a waste of manpower and money.
Exacerbated, you start crafting a baseball bat and threaten the construction workers with violence if they don't stop working on construction and return to till their plots of land. Folks inside and outside the farm started calling you a tyrant and a dictator.
Similar to the farm above, China is overly reliant on debt driven capital spending to boost their GDP, capital spending that are increasingly non-productive. The accumulation of such non-productive spending overstates past GDP growth, which must be written down in the future as slower growth. Japan in the nineties, had 17% of the world's GDP, today, they are something like 4%. Such is the impact of writing down these non-productive use of capital. Something similar will happen to China in the coming years or even decades. China needs to go through some gut wrenching transition from an investment and debt driven economy to a more consumption driven economy. The persistent trade deficit and high debt accumulation as a result of having too big a piece of pie devoted to capital spending cannot continue for very much longer. Like the farm, China was not in great danger of an abrupt default since the money was owed by the farm to the farmers. The most likely danger is slower economic growth due to unproductive spending and a scenario of the lost decade like Japan. The leadership seems to be aware of this problem, but executing is extremely difficult due to the power of the vested interest groups, namely the local governments. Part of the reason Xi Jingping wanted to accumulate more power and longer time is that he needed the power and time to fix this mess. We should all wish them luck. In a sense, the trade war that is happening now may present the Chinese government an opportunity if they use this as an excuse to slow down the economy and deleverage. A further slowdown of the economy will itself be a sign that Xi Jingping has finally succeeded in gaining control of the vested interest groups and finally able to implement the reforms.
---Raymond Dalio
Despite the phenomenal economic growth that China has achieved in the last few decades, or perhaps as a consequence of it, the Chinese economy has fallen into serious imbalances. In the next decade or two, the best outcome is a significantly slower growth to correct the problem before higher growth could resume. There are other worse possibilities, like the lost decades that the Japanese had gone through, or more remote, a financial crisis like Brazil had experienced in 1997-1999.
To see how this could have happened, let's channel Michael Pettis and consider the following scenario. Say you are in charge of a farm with 100 able bodied workers eking out a living. All of these people till the land, but yield was terrible, and life was hard on the farm.
One day, you realize that people spend two to three hours a day going to and from the fields. You came up with a scheme. The farmers would loan their hard earned savings to the collective. You had instructed your right hand man Joe to take all the money to buy construction material and make him work to fix the roads. Since Joe could no longer work at his plot of land, you collected a small share of the harvest from each family to pay off the monthly payment of the loan and also allow Joe to feed his family.
The idea was a success. The travel time has been cut to an hour and a half per day. The farm was more productive. Since the amount of crops collected from each household was a bit arbitrary, Joe was living better than the people who still do the farming. The farmers did not mind, since their lives were better than before, even after giving up a share of their crop.
The farm book keeper, who had read some book about economics, started adding the roads built as part of the output and told everyone that production of the crop and the roads combined had exceeded last year by 5%
Doubling down on your success, you started adding more people to build things. Since the irrigation was bad, you borrowed more money from the farmers and added a few more people to build the irrigation canals. Some of your friends got the job since it pays more than farming.
Farm productivity soared and people have never had more food in their recent memory. By now, thirty people, some your relatives and your friends, are working on the more lucrative construction jobs. There was just one problem, the farm is running out of projects to do. The crops, after getting all the care, water and fertilizers they need, are not yielding more. Travel time has been further cut to 20 minutes and any improvement is now marginal. Yet, the construction workers, seeing how lucrative the jobs were, have lobbied you to add more of their relatives and friends on the job.
Since the construction projects are not increasing the amount of crops produced, the obvious thing to do is to stop many of the construction projects so the saving of the farmers is not wasted. Since this would result in people losing their construction jobs, you need to find a way for them to return to farming their land. If people were starving, they would be willing to return to do farming work. But life on the farm was good, so the construction workers resisted returning to till their plot of land again.
More people joined the construction crew and try to find more reason to do construction. By now, fifty people, half of the able bodied folks at the farm, are working construction. A third reservoir was built, though the second one was already not very useful. The farm book keeper had told you with glee that production, counting the farm yield and construction, have increased by more than ten percent from last year, but you know that the building of the third reservoir was a big waste of manpower and money so must be marked down in the future. Also, if people switch from construction to farming, the production number would go down more, but that was the right thing to do.
You tried to get the construction crew to work on the neighboring farms, but it had created trade imbalances. Your neighboring farms got mad at you and pass laws to reduce the number of construction crew that are allowed to work on their farms. Though cheer leaders in your farm proudly show off the shiny new roads and reservoirs, and told everyone that the trade imbalances were a result of the hard work and thrift of your farmers, you knew that the real reason is you had too many people in your farm working construction and not enough growing food.
If the trend continues, 100% of the farmers will work as construction and everyone would starve. The solution is still blindingly obvious. You need to reduce the number of people doing construction and return them to do farming, but they don't want to see their life style reduced so they dig in their heels and refused to go. Some of them pointed out that the village next door spends even more money and people doing construction. You argued with them that the next village are artisans and craftsmen. They have a need to maintain their equipment. They are wealthier because they had better skills and laws as a town of craftsmen. Someday, you can transform your farm into more like them, but until that day comes, building a third reservoir and other roads etc are still a waste of manpower and money.
Exacerbated, you start crafting a baseball bat and threaten the construction workers with violence if they don't stop working on construction and return to till their plots of land. Folks inside and outside the farm started calling you a tyrant and a dictator.
Similar to the farm above, China is overly reliant on debt driven capital spending to boost their GDP, capital spending that are increasingly non-productive. The accumulation of such non-productive spending overstates past GDP growth, which must be written down in the future as slower growth. Japan in the nineties, had 17% of the world's GDP, today, they are something like 4%. Such is the impact of writing down these non-productive use of capital. Something similar will happen to China in the coming years or even decades. China needs to go through some gut wrenching transition from an investment and debt driven economy to a more consumption driven economy. The persistent trade deficit and high debt accumulation as a result of having too big a piece of pie devoted to capital spending cannot continue for very much longer. Like the farm, China was not in great danger of an abrupt default since the money was owed by the farm to the farmers. The most likely danger is slower economic growth due to unproductive spending and a scenario of the lost decade like Japan. The leadership seems to be aware of this problem, but executing is extremely difficult due to the power of the vested interest groups, namely the local governments. Part of the reason Xi Jingping wanted to accumulate more power and longer time is that he needed the power and time to fix this mess. We should all wish them luck. In a sense, the trade war that is happening now may present the Chinese government an opportunity if they use this as an excuse to slow down the economy and deleverage. A further slowdown of the economy will itself be a sign that Xi Jingping has finally succeeded in gaining control of the vested interest groups and finally able to implement the reforms.
Sunday, July 15, 2018
The Chinese Demographic Time Bomb
"Demographic is destiny"
---August Comte
It is well known that the Chinese are growing old before they grow rich. They are not making enough babies to sustain the population. Most people, when they hear about this, go straight to the lost of labor and declines of the economy. Actually, the decline of the population does not have a big impact on the economy in the short term. The reason is productivity gain and economic growth occurs at a much higher rate compared to population decline. The population decline is also counteracted by lengthening of the life span and thus increasing the productive years left for each person. Increased life span also has the effect of increasing population size, at least in the short term.
Nor is liability for the elderly going to be a big issue for government finance. Unlike the United States with Medicare and Social Security, the Chinese government does not have formal agreements with the population to provide for the elderly with certain level of benefit. What is more, the elderly in China have seen a steep change in prosperity from when they grew up, and will be very happy with whatever benefit that they will get.
The imperceptible nature of demographic change makes it easy to mask titanic and dire changes until decades later, at which time it will long be fait accompli. Imagine a situation in which China cease to have any babies. Each year, the population would decreased by 1.5% or so. Since the kids would not even be productive until they turn 20 or 25, we won't see any change in economy for a while. Thirty years later, the entire nation has gone extinct, but there would still be six or seven hundred million souls walking about. In certain part of the country, you could still say that there is over population. At this time though, there would be some dramatic change in the economy. Work that require youthful physical labor would find it increasingly impossible to hire. The pool of old folks relative to the general population has shot up dramatically. Someone must care for them. Both of these situations hugely incentivize import of menial labor. The Japanese and the Koreans, who are currently at an advanced stage of aging, have resisted this urge. They are right to do so. Due to the nature of the work involved, the people thus imported will likely have significantly lower IQ compared to the native population. Just as the Hispanics in the United States, they will form a permanent underclass that will increase crime and contribute to the internal strife of the nation that import them.
The current Chinese total fertility rate(TFR) is about 1.5. This number is similar to the developed world in general. A TFR of 2.05 is required to maintain the population. However, the trend is ominous. The TFR for most Chinese urban areas is around 1 or less. Since the Chinese are urbanizing at a very fast pace, the national TFR will fall from 1.5 toward 1 as more and more Chinese move from rural areas to cities. At TFR of 1, the young population gets cut in half every generation. Unless China succeeds in getting young people in urban areas to have more babies, they will not be able to reverse this trend. So far, not a single country who see low TFR has the ability to reverse the trend. Without intervention to break the trend, China will zoom past Europe and United States to become some of the oldest populations in the planet.
On the positive side of the ledger, the Chinese starting out with larger number of babies. Among the high IQ population of European and East Asian countries, the Chinese gave birth to more than twice as many babies as the rest combined in 2016. There is still some time to fix this problem. If the government is able to find a solution to stabilize the population, they would pull off something that no other government could.
In the longer term, if China can resist bringing in low IQ immigrants, the low birth rate would eventually fix itself. That is because those who have babies by definition pass along their genetic and cultural attributes to the next generation, who would be more inclined to have babies in this urban environment. After many generations of weeding out the people who will not have kids, the younger generations will have a much stronger drive to reproduce, despite the urban environment that deterred others in the previous generations. The Chinese can accelerate this by allowing as many babies as anyone would like to have.
Longer term, demographic implosion is the biggest danger to the rise of China. The Chinese have some time to fix this problem, but the trend is unmistakable. The awful statistics of the other East Asian countries points to an ominous future. Hopefully, the Chinese can intervene and turn this around.
Friday, July 6, 2018
Potholes In The Paths of A Rising China
"The world is getting better, but not in a straight line."
---James P. Goreman
The rise of China has encountered many obstacles along the way, it was due to the intellect of the leadership and their ability to execute difficult decisions that the Chinese economy and society continues to grow and transform itself. What pot holes lie awaiting in the future?
The United States started the first salvo of a trade war with China today, but I am pretty sanguine that this wouldn't lead to a major setback for either country. Fortunately for China, their future is largely in their own hands. China still face many challenges in the future. In the economic front, they face the prospect of slower growth and the need to transition from an investment driven economy to a more consumption driven economy. In the security arena, having grown dependent on trade, especially raw materials to fuel economic growth, the Chinese must now protect the ever growing trade routes, both from the ocean and from land. On the diplomatic front, China faces the challenge all rising power faces. There is a great deal of fear, jealousy and push back against the rise of China from the established powers, particularly U.S., Japan and Western Europe. China also faces enormous environmental challenges still as they continue their industrialization. The Chinese government structure have not faced a challenge that is bound to come up in the future, namely how to govern in hard times. China had slowed growth from time to time, but never a prolonged recession since Deng took over. With all the corruption and abuse of power of some of the Communist party members, a new generation of people accustomed to an ever growing economy, would the government be able to handle hard times if and when it comes will determine if the country would fall apart or continue on its course. Finally, the looming demographic crisis on the horizon could threaten to severely diminish the prospect for China in the longer term.
Looking at the past track record of the government, I feel that China will be able to handle the economic transition. There are still enormous opportunities to add to the economy. The robotic revolution, which is just starting in China, will greatly accelerate productivity gains. There are still a lot of room to improve the infrastructure, like the Chinese version of the hyperloop, which will provide travel at faster than speed of sound at a tiny incremental cost. Urbanization, which greatly enhances the productivity of the urbanized inhabitants, is happening at a scale and compressed time frame never seen before in human history. A.I., which will greatly accelerate productivity in many industries, is happening at a very fast pace. The Hongqi River Project, with the potential to create a gigantic farming area out of the arid Xinjiang, is the biggest water project since the Hoover Dam. Hoover Dam diverted the Colorado River to make California a farming power house. Hongqi River project has the potential to do the same for China. An area that is barely habitable will now have enough water to host two hundred million people or more. Mechanized farming at huge scale, as practiced in United States and Canada, will now be possible in China. On the negative side of the ledger, the economy does contain some very serious imbalances that needs to be rectified. In the next decade, we will see some significant slow down if we are fortunate, or, equally likely, China may experience lost decades like the Japanese if the leadership fail to reform. I will discuss this further in a future post.
The growth of the Chinese military, which will be the topic for later posts, is progressing extremely well. This bodes well for their security and diplomatic areas. The Chinese have also grown much more adroit at diplomatic maneuvering. China still faces the Thucydides Trap as a rising power, but I feel that the leadership from both countries are smart enough to avoid a hot war. The fly in the ointment is Taiwan. The independent wing of Taiwan, feeling their prospect for independence ebbing away as China gets stronger, are feeling anxious. Egged on by Trump, who uses Taiwan as a bargaining chip, they are calling for a referendum to declare independence in 2019. This could trigger a war that at the end will not be in anyone's interest. Hopefully, cooler heads prevail to avoid a war.
While pollution is still a problem, they are being tackled by the government using many innovative approaches, like using nuclear power to heat homes. I feel that they have moved past the worst polluting era for China and the trend is good.
The government, like all governments in the world, has many problems. The current incarnation is still relatively new and untested. This in contrast to the United States government, which has gone through many challenges and is quite staple. Continue reform is still needed to fix many of the contradictions and inertia that still plague them. One can observe one of these through The existence of Tea House Scam in Beijing. For the uninitiated, the tea house scam is one of many scams that were on going in big cities like Beijing where tourists were fleeced out of hundreds or thousands of dollars by scammers. Given that this is happening for many years right in the capital of China, the police and other authorities must have allowed it, mostly because the part of the money that the scammers got went into bribes for the authorities. Scams have become one of the industries that enriched the CPP members in power. For the small money that the scammers got, this generates enormous ill will for China, yet it seems the authorities are unable or unwilling to stop such practices. One of countless issues to be fixed by more reforms in the future. The changes that were made thus far bodes well for them to continue to make reforms that would allow them to make progress on their system in the future.
The biggest issue in the medium term is demographics. Like all their East Asian counterparts and Western world in general, China's birth rate is significantly below replacement level. In the short term, the impact is still limited. In the longer term, the impact could be quite catastrophic. The problem of population implosion is now a major issue with Japan, Korea, Taiwan, Singapore, Western Europe and the White population in the United States. So far, no country has found a way to reverse this problem. I will discuss this problem in my next post.
---James P. Goreman
The rise of China has encountered many obstacles along the way, it was due to the intellect of the leadership and their ability to execute difficult decisions that the Chinese economy and society continues to grow and transform itself. What pot holes lie awaiting in the future?
The United States started the first salvo of a trade war with China today, but I am pretty sanguine that this wouldn't lead to a major setback for either country. Fortunately for China, their future is largely in their own hands. China still face many challenges in the future. In the economic front, they face the prospect of slower growth and the need to transition from an investment driven economy to a more consumption driven economy. In the security arena, having grown dependent on trade, especially raw materials to fuel economic growth, the Chinese must now protect the ever growing trade routes, both from the ocean and from land. On the diplomatic front, China faces the challenge all rising power faces. There is a great deal of fear, jealousy and push back against the rise of China from the established powers, particularly U.S., Japan and Western Europe. China also faces enormous environmental challenges still as they continue their industrialization. The Chinese government structure have not faced a challenge that is bound to come up in the future, namely how to govern in hard times. China had slowed growth from time to time, but never a prolonged recession since Deng took over. With all the corruption and abuse of power of some of the Communist party members, a new generation of people accustomed to an ever growing economy, would the government be able to handle hard times if and when it comes will determine if the country would fall apart or continue on its course. Finally, the looming demographic crisis on the horizon could threaten to severely diminish the prospect for China in the longer term.
Looking at the past track record of the government, I feel that China will be able to handle the economic transition. There are still enormous opportunities to add to the economy. The robotic revolution, which is just starting in China, will greatly accelerate productivity gains. There are still a lot of room to improve the infrastructure, like the Chinese version of the hyperloop, which will provide travel at faster than speed of sound at a tiny incremental cost. Urbanization, which greatly enhances the productivity of the urbanized inhabitants, is happening at a scale and compressed time frame never seen before in human history. A.I., which will greatly accelerate productivity in many industries, is happening at a very fast pace. The Hongqi River Project, with the potential to create a gigantic farming area out of the arid Xinjiang, is the biggest water project since the Hoover Dam. Hoover Dam diverted the Colorado River to make California a farming power house. Hongqi River project has the potential to do the same for China. An area that is barely habitable will now have enough water to host two hundred million people or more. Mechanized farming at huge scale, as practiced in United States and Canada, will now be possible in China. On the negative side of the ledger, the economy does contain some very serious imbalances that needs to be rectified. In the next decade, we will see some significant slow down if we are fortunate, or, equally likely, China may experience lost decades like the Japanese if the leadership fail to reform. I will discuss this further in a future post.
The growth of the Chinese military, which will be the topic for later posts, is progressing extremely well. This bodes well for their security and diplomatic areas. The Chinese have also grown much more adroit at diplomatic maneuvering. China still faces the Thucydides Trap as a rising power, but I feel that the leadership from both countries are smart enough to avoid a hot war. The fly in the ointment is Taiwan. The independent wing of Taiwan, feeling their prospect for independence ebbing away as China gets stronger, are feeling anxious. Egged on by Trump, who uses Taiwan as a bargaining chip, they are calling for a referendum to declare independence in 2019. This could trigger a war that at the end will not be in anyone's interest. Hopefully, cooler heads prevail to avoid a war.
While pollution is still a problem, they are being tackled by the government using many innovative approaches, like using nuclear power to heat homes. I feel that they have moved past the worst polluting era for China and the trend is good.
The government, like all governments in the world, has many problems. The current incarnation is still relatively new and untested. This in contrast to the United States government, which has gone through many challenges and is quite staple. Continue reform is still needed to fix many of the contradictions and inertia that still plague them. One can observe one of these through The existence of Tea House Scam in Beijing. For the uninitiated, the tea house scam is one of many scams that were on going in big cities like Beijing where tourists were fleeced out of hundreds or thousands of dollars by scammers. Given that this is happening for many years right in the capital of China, the police and other authorities must have allowed it, mostly because the part of the money that the scammers got went into bribes for the authorities. Scams have become one of the industries that enriched the CPP members in power. For the small money that the scammers got, this generates enormous ill will for China, yet it seems the authorities are unable or unwilling to stop such practices. One of countless issues to be fixed by more reforms in the future. The changes that were made thus far bodes well for them to continue to make reforms that would allow them to make progress on their system in the future.
The biggest issue in the medium term is demographics. Like all their East Asian counterparts and Western world in general, China's birth rate is significantly below replacement level. In the short term, the impact is still limited. In the longer term, the impact could be quite catastrophic. The problem of population implosion is now a major issue with Japan, Korea, Taiwan, Singapore, Western Europe and the White population in the United States. So far, no country has found a way to reverse this problem. I will discuss this problem in my next post.
Sunday, March 11, 2018
Globalization And Rise of China's Economy Part Nine, The Start Up Culture.
The creation of a thousand forests is in one acorn.
--- Ralph Waldo Emerson
Once upon a time, our economy was mostly agrarian. In 1830 American Fur Company was the largest company in the United States. Later on we came up with trains, automobile, electricity, etc. All these companies were start up once upon a time. Today, fur trading is not even a thing. Looking at it another way, start ups represent the future of our economy.
Long before the current raft of start ups, the Chinese are already adapt at gut wrenching changes. Back in the seventies, the Chinese economy were old and highly inefficient. When China entered WTO in 2001, it was feared that many of the old and inefficient companies would collapse when faced with the onslaught of efficient foreign companies. Instead, they rise up to become the world's manufacturing center. When I was growing up in China, I remember being sent to a sewing machine factory while in high school as part of the "learn from the worker" program. All the workers were sitting around reading news paper waiting for gas for blow torches to arrive. We were told to part a section of the angle iron with a hack saw. When the gas came, we watched as the worker cut these sections out with blow torches. It took us an hour to cut one, and he did it in a minute. That was how backwards the Chinese industries were at the time. Behind changes that transformed their industries must be massive internal displacements as China re-configure its economy to use the latest way to organize and manage their companies.
It is not a big jump for those who are used to changes like these to the chaotic scene of creating start ups. In addition, the Chinese local governments has been competing with each other to create more start ups as that is in the interest of the local governments. Using the Silicon Valley as examples, they have created an environment where many start ups flourished. The picture below, provided by visualcapitalist, shows where the world's 200 largest "unicorns" are located. A unicorn is a startup that has grown to one billion U.S. dollars or higher.
As we can see from the picture, most of the unicorns in the world are located either in the United States or in China. The picture below comes to us from Wall Street Journal. As could be seen, Venture capital investment in China is a relatively recent event. Since the Chinese are late comers in the start up game, I predict that a decade or two from now, they would pass the United States to become the undisputed leader in start ups. In the future, the most powerful companies will either be in United States or in China.
Today, the largest AI start up in the world is SenseTime, a Chinese company that uses AI to do face recognition.
What makes these two countries special? Why do Europe and Japan, both stewards of Western advanced economies, have so few unicorns? Start ups are quite difficult to initiate, even more difficult to grow into a big company like the unicorns we see in the graph. Most failed to grow up. Start ups requires brain power, but that was just a starting point. It requires a visionary with in depth knowledge across many different disciplines. Someone equally comfortable with business and science and engineering. It requires a tenacious and driven team of highly effective executives that will overcome many problems. It requires a driven and diligent work force that are not only smart, but willing to work long hours and driven to get things done. The high risk nature of start ups requires these very special people to also be able to take a great deal of risks and not afraid to fail. The high failure rate of start ups work best in environment in which not only tolerate the disruptive nature of such start ups, it also should have an ecosystem that nurtures these start ups, provide capital and management skills often lacking in the first stages of the start up. Governments that will provide support is also crucial. The United States evolve the start up ecosystem in the Silicon Valley as many start ups formed over the decades. The Silicon Valley also has many visionaries that are willing to take risks. The favorable environment in Silicon Valley also attracted the brightest and most ambitious people world over to come and create their companies. For the Chinese, re-making their old command based economy was one giant start up, so there are many people who are already comfortable in this kinds of environments. The Chinese work force is second to none. Hundreds of millions of people were already making tremendous sacrifices. They migrate to big cities where there is opportunities and working long hours. They only get to return home a couple of weeks a year during Chinese New Years. The Chinese government is also working very hard to nurture start ups, perform many of the functions that angel investors perform in the United States. In contrast, the Europeans have long vacations and short working hours. The Japanese worked pretty hard, especially for a country that is already wealthy. Unfortunately, the big companies such as Toyota sucked out the best and brightest from the universities every year, removing many of the candidates that might succeed in start ups. Another issue that a commentator alerted me to was that Japan was a very hierarchical society. The commentator, who runs a high tech company, opened a branch in Japan. Accustomed to paying high salaries for high tech people, he offered a pretty high salary to some young folks. This is something that would feel very natural in the Silicon Valley. I imagine that the Chinese are equally at home with some young folks earning a lot of money. However, in Japan, he felt that he was operating against social norms. It seems salary in Japan was determined largely by age. Obviously, decision making is also done by this hierarchy. Well, since older folks are in general less comfortable with new things, I imagine that it is unlikely for folks in their fifties to see opportunities for a start up. Both Europe and Japan also do not have the scale that China or the United States have.
The Silicon Valley has provided a model for start ups, but it is one industry. There are many other industries that has potential for breakthroughs. These are emerging technologies that may become the industries of the future. We now see that in these areas, China has pushed her way near the front. In many areas, such as quantum technology, material science, high speed rail and nuclear power technology, China has become the leader. In the area of artificial intelligence, China is a solid number two, not much behind the United States, with the rest of the pack way behind these two. Given the track record of how fast they turn an idea into commerce, there will be many companies that come out of these areas from China in the future.
--- Ralph Waldo Emerson
Once upon a time, our economy was mostly agrarian. In 1830 American Fur Company was the largest company in the United States. Later on we came up with trains, automobile, electricity, etc. All these companies were start up once upon a time. Today, fur trading is not even a thing. Looking at it another way, start ups represent the future of our economy.
Long before the current raft of start ups, the Chinese are already adapt at gut wrenching changes. Back in the seventies, the Chinese economy were old and highly inefficient. When China entered WTO in 2001, it was feared that many of the old and inefficient companies would collapse when faced with the onslaught of efficient foreign companies. Instead, they rise up to become the world's manufacturing center. When I was growing up in China, I remember being sent to a sewing machine factory while in high school as part of the "learn from the worker" program. All the workers were sitting around reading news paper waiting for gas for blow torches to arrive. We were told to part a section of the angle iron with a hack saw. When the gas came, we watched as the worker cut these sections out with blow torches. It took us an hour to cut one, and he did it in a minute. That was how backwards the Chinese industries were at the time. Behind changes that transformed their industries must be massive internal displacements as China re-configure its economy to use the latest way to organize and manage their companies.
It is not a big jump for those who are used to changes like these to the chaotic scene of creating start ups. In addition, the Chinese local governments has been competing with each other to create more start ups as that is in the interest of the local governments. Using the Silicon Valley as examples, they have created an environment where many start ups flourished. The picture below, provided by visualcapitalist, shows where the world's 200 largest "unicorns" are located. A unicorn is a startup that has grown to one billion U.S. dollars or higher.
As we can see from the picture, most of the unicorns in the world are located either in the United States or in China. The picture below comes to us from Wall Street Journal. As could be seen, Venture capital investment in China is a relatively recent event. Since the Chinese are late comers in the start up game, I predict that a decade or two from now, they would pass the United States to become the undisputed leader in start ups. In the future, the most powerful companies will either be in United States or in China.
Today, the largest AI start up in the world is SenseTime, a Chinese company that uses AI to do face recognition.
What makes these two countries special? Why do Europe and Japan, both stewards of Western advanced economies, have so few unicorns? Start ups are quite difficult to initiate, even more difficult to grow into a big company like the unicorns we see in the graph. Most failed to grow up. Start ups requires brain power, but that was just a starting point. It requires a visionary with in depth knowledge across many different disciplines. Someone equally comfortable with business and science and engineering. It requires a tenacious and driven team of highly effective executives that will overcome many problems. It requires a driven and diligent work force that are not only smart, but willing to work long hours and driven to get things done. The high risk nature of start ups requires these very special people to also be able to take a great deal of risks and not afraid to fail. The high failure rate of start ups work best in environment in which not only tolerate the disruptive nature of such start ups, it also should have an ecosystem that nurtures these start ups, provide capital and management skills often lacking in the first stages of the start up. Governments that will provide support is also crucial. The United States evolve the start up ecosystem in the Silicon Valley as many start ups formed over the decades. The Silicon Valley also has many visionaries that are willing to take risks. The favorable environment in Silicon Valley also attracted the brightest and most ambitious people world over to come and create their companies. For the Chinese, re-making their old command based economy was one giant start up, so there are many people who are already comfortable in this kinds of environments. The Chinese work force is second to none. Hundreds of millions of people were already making tremendous sacrifices. They migrate to big cities where there is opportunities and working long hours. They only get to return home a couple of weeks a year during Chinese New Years. The Chinese government is also working very hard to nurture start ups, perform many of the functions that angel investors perform in the United States. In contrast, the Europeans have long vacations and short working hours. The Japanese worked pretty hard, especially for a country that is already wealthy. Unfortunately, the big companies such as Toyota sucked out the best and brightest from the universities every year, removing many of the candidates that might succeed in start ups. Another issue that a commentator alerted me to was that Japan was a very hierarchical society. The commentator, who runs a high tech company, opened a branch in Japan. Accustomed to paying high salaries for high tech people, he offered a pretty high salary to some young folks. This is something that would feel very natural in the Silicon Valley. I imagine that the Chinese are equally at home with some young folks earning a lot of money. However, in Japan, he felt that he was operating against social norms. It seems salary in Japan was determined largely by age. Obviously, decision making is also done by this hierarchy. Well, since older folks are in general less comfortable with new things, I imagine that it is unlikely for folks in their fifties to see opportunities for a start up. Both Europe and Japan also do not have the scale that China or the United States have.
The Silicon Valley has provided a model for start ups, but it is one industry. There are many other industries that has potential for breakthroughs. These are emerging technologies that may become the industries of the future. We now see that in these areas, China has pushed her way near the front. In many areas, such as quantum technology, material science, high speed rail and nuclear power technology, China has become the leader. In the area of artificial intelligence, China is a solid number two, not much behind the United States, with the rest of the pack way behind these two. Given the track record of how fast they turn an idea into commerce, there will be many companies that come out of these areas from China in the future.
Saturday, March 10, 2018
Globalization And Rise of China's Economy Part Eight, A Strong Education System
The function of education is to teach one to think intensively and to think critically. Intelligence plus character - that is the goal of true education.
--- Martin Luther King Jr.
United States values education. It was said back in the days when we open the West, the first three public buildings created for a town are church, town sheriff office and school. To this day, while the media dwell on the fact that United States have fallen to the middle of the pack among OECD countries, like this PISA 2015 result, things look very differently if we break up the scores by race. We found that Whites In the United States score better than most scores of other OECD countries that are mostly white, Asians in the United States do quite well against Asians in other OECD Asian countries like Korea and Japan. What is more, Hispanic Americans did better than the Hispanics in their native countries like Argentina and Mexico. African Americans did better than the only African country that participated, Tunisia. What we failed to do is to elevate the scores of Hispanics Americans and African Americans to the level of White and Asian Americans. In fact, the gap has stayed pretty much the same despite decades of experimentation and billions of resources poured in to try to solve the problem. As the whites and Asians share of the population declined, the combined scores of the United States declined compared to other countries.
A particular strength of the United States in this area mirrors the same American strength in general. America values individual initiative. In the American system, kids from a very young age are encouraged to make their own decisions. The end results speak for themselves. The American Universities are among the best in the world.. Research is an area where independent thinking is highly valued. Often times, the discovery is made when the data does not fit the previously orthodox theories. It requires someone with a independent streak to look at them in a fresh and new way.
Unfortunately, this individualistic value only works for a small subset of the population that is self driven and talented. The majority of population works a different way. Decades of peace and prosperity have stripped many Americans of our drive. Many are not even willing to do the basics like working for a living and not committing crimes. The hollowing out of the American manufacturing sector was often blamed on the greedy corporations and China, but in fact it has as much to do with the decline of American drive and work ethic as well as the rise of China.
The Chinese culture also value education. Their best universities are catching up to the Western levels. Like other Asian countries, the Chinese place a higher emphasis on learning knowledge. Developing a student that will only be able to pursue the answer if someone else pose a question and tells him that there is an answer. These students are less inclined to ask the questions when there is no assurance that there is an answer to be found. At the same time, all this drive to get into the best universities by the tiger moms and dads produce kids that work well under pressure and tight deadlines. They are model workers. The rise of the Chinese industries is in no small part due to the strength of the Chinese workers. Innovation in their work place have lead to a number of world first like 3D printed houses and innovation in ship building.
While the Chinese universities across the board have not not yet reach the level of the United States, they have come a long ways from even a decade ago. They have also produced many brilliant individuals like Ma Weiming. The rise of China, across a broad array of areas, would not have been possible without people like these. These people have acquired individual initiative and created the array of technologies and companies that not only allow the Chinese to catch up to the West, but also have allowed the Chinese to be at the forefront of technologies.
China is an incredible learning machine. In time, I have faith that they will continue to explore and improve their education system to produce better students. I am less sanguine about the future of education for the United States. In our attempt to equalize the results of different racial groups, we have introduced a number of measures like common core and changing the SAT standards. The result is the degradation of education for the good students. Since the good students are the only ones that matter to the future of our economy, this is something we need to fix.
--- Martin Luther King Jr.
United States values education. It was said back in the days when we open the West, the first three public buildings created for a town are church, town sheriff office and school. To this day, while the media dwell on the fact that United States have fallen to the middle of the pack among OECD countries, like this PISA 2015 result, things look very differently if we break up the scores by race. We found that Whites In the United States score better than most scores of other OECD countries that are mostly white, Asians in the United States do quite well against Asians in other OECD Asian countries like Korea and Japan. What is more, Hispanic Americans did better than the Hispanics in their native countries like Argentina and Mexico. African Americans did better than the only African country that participated, Tunisia. What we failed to do is to elevate the scores of Hispanics Americans and African Americans to the level of White and Asian Americans. In fact, the gap has stayed pretty much the same despite decades of experimentation and billions of resources poured in to try to solve the problem. As the whites and Asians share of the population declined, the combined scores of the United States declined compared to other countries.
A particular strength of the United States in this area mirrors the same American strength in general. America values individual initiative. In the American system, kids from a very young age are encouraged to make their own decisions. The end results speak for themselves. The American Universities are among the best in the world.. Research is an area where independent thinking is highly valued. Often times, the discovery is made when the data does not fit the previously orthodox theories. It requires someone with a independent streak to look at them in a fresh and new way.
Unfortunately, this individualistic value only works for a small subset of the population that is self driven and talented. The majority of population works a different way. Decades of peace and prosperity have stripped many Americans of our drive. Many are not even willing to do the basics like working for a living and not committing crimes. The hollowing out of the American manufacturing sector was often blamed on the greedy corporations and China, but in fact it has as much to do with the decline of American drive and work ethic as well as the rise of China.
The Chinese culture also value education. Their best universities are catching up to the Western levels. Like other Asian countries, the Chinese place a higher emphasis on learning knowledge. Developing a student that will only be able to pursue the answer if someone else pose a question and tells him that there is an answer. These students are less inclined to ask the questions when there is no assurance that there is an answer to be found. At the same time, all this drive to get into the best universities by the tiger moms and dads produce kids that work well under pressure and tight deadlines. They are model workers. The rise of the Chinese industries is in no small part due to the strength of the Chinese workers. Innovation in their work place have lead to a number of world first like 3D printed houses and innovation in ship building.
While the Chinese universities across the board have not not yet reach the level of the United States, they have come a long ways from even a decade ago. They have also produced many brilliant individuals like Ma Weiming. The rise of China, across a broad array of areas, would not have been possible without people like these. These people have acquired individual initiative and created the array of technologies and companies that not only allow the Chinese to catch up to the West, but also have allowed the Chinese to be at the forefront of technologies.
China is an incredible learning machine. In time, I have faith that they will continue to explore and improve their education system to produce better students. I am less sanguine about the future of education for the United States. In our attempt to equalize the results of different racial groups, we have introduced a number of measures like common core and changing the SAT standards. The result is the degradation of education for the good students. Since the good students are the only ones that matter to the future of our economy, this is something we need to fix.
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