Two Chinas

Three years ago it was asserted that massive unemployment brought on in the Chinese coastal provinces by the global ‘Great Recession’ would cause an exodus of tens of millions of Chinese back to their original inland homes. This exodus was supposed to be particularly destructive as these people would surely riot when they found little to no employment opportunities. After all, the interior of China couldn’t possibly support a domestic and independent economy. Well, those assertions were exactly wrong. Unemployment in the interior of China is reported to be less than 4%. Now, many of the same ‘experts’ are asserting that because unemployment is so low, there will be riots for higher wages!

China Map

Many ‘experts’ appear to be expecting China to implode whatever happens.

Witness the recent multi day traffic jams in a couple of locations across China. This must certainly imply major mismanagement or incompetence at some level. Well, this is just one of many reasons that we have embarked on fact finding missions of our own.

While China is struggling to keep up with the light speed movement of peasants into the middle class, only so much can be done at a time. For example, ten years ago they built eight and ten lane super highways – when there were not even enough cars to fill them. Today, those roads are chock full of traffic. Unfortunately, China has a massive red tape hurdle. The most obvious reason for traffic jams is that major destinations for goods and travelers are ancient cities that still funnel everyone through fixed gates where paperwork must be checked and taxes paid. As additional city entrances, highways and associated infrastructure are completed these issues will be somewhat solved. A sterling example of this is the former capital of Xi’an. They are literally rebuilding their road system for this legendary city – from scratch. They must. Xi’an is reestablishing itself as a central distribution hub for interior China. All the wealth being created there demands it – otherwise they may just pick up and finance another convenient location. This project should finally be completed in about three years.

However, it has become obvious to most people here that road restructuring is not a complete solution. Railroads must also be built out. Even now China currently boasts 12 times the rail intensity of Western Europe. As more and more rail routes are completed each month, even more come onto the drawing boards across China. A fascinating side effect for some routes is the demise of short-haul airline traffic. There are innumerable examples of airlines pulling out of cities that see the opening of new high speed trains that can deliver people to their destinations in less time. The USA should take notice. Instead of bailing out the airlines every couple of years, perhaps some should fail. The remaining strong airlines will make the appropriate capital allocation decisions – otherwise they too will fail. After all, when all the profits in passenger aviation are totaled up since the Wright Brothers, one finds that there aren’t any. But I digress . . .

All of this construction and reconstruction is buttressing the sustainability of the demographic shift of peasants to the middle-class and an associated healthy domestic economy. Even in the remote Yunnan Province I witnessed this. While hiking a fairly inaccessible 45 kilometer section of the Yangtze River there were indications that the domestic economy was pushing prosperity into the corners and crevices of China. Caterpillar earth moving equipment was being serviced amongst some of the most beautiful brick and mortar ‘peasant’ buildings I have seen. Nearly every agricultural community that I traipsed through was brimming with vitality. Thus even the 53% of China that remains in rural communities are seeing the benefits of Chapitalism. Frankly, with the exception of the Tibet Autonomous Region, I’ve observed less poverty in China than in my travels in Chicago and Detroit 18 months ago.

So, from an investment perspective we are faced with deciding between two Chinas. One where disaster ‘is’ waiting around every corner – or one where their economy will develop as most economies have in history, with bumps but on a sustainable trajectory. I suspect that the doomsayers with their incendiary statements have motives other than informing or protecting us. It is clear to me that this is a nation in physical as well as physiological transformation. As one astute 27 year old tooth paste distributor said to me “all we need is time”. Well, lucky for him and this entire region, time tends to move forward.