Distilling China’s Development

The economic rise of China has created two growth industries pulling in opposite directions. There’s either the school of blind praise of ‘The China Miracle’ or its opposite, apocalyptic predictions about the country’s impending implosion.

On the surface, it appears as if the fundamentals of China’s modernization are similar to what the Western nations went through in the past, that is, a mass migration of farmers from the countryside to the urban centers to work in factories and construction sites. Taking into account the enormous scale at which this migration is happening, the country seems to be moving toward what some observers are dubbing the ‘Chinese Century’.

Similarities aside, however, China’s development is uniquely Chinese. Whereas the U.S. was built upon the backs of immigrants from outside of its borders, China’s development owes its current success to its own huge population. China will never become a nation of external immigrants and will remain a homogenous behemoth long into the future.

China’s current condition and its immediate future remain shrouded in a state of unsettling mystery. Having lived and worked as an architectural designer in China for nearly a year now, my own fervent curiosity has hardly been assuaged. There are a few things I’ve learned though that should be clarified regarding China’s development. Following, I will attempt to belie some common misconceptions.

Misconception: As China continues develop, it will become more open to outside influence and the government system will reform itself to become more democratic and free.

To the naive Western observer, China’s continued economic evolution means that the country must allow more democratic freedoms in order to remain competitive in the future. This assumption is extraordinarily dubious. China’s model is top-down, centralized planning and it has proven to be successful. To argue that it will not continue to work for China is a biased Western-projected fantasy.

A pre-existing culture of collectivism constitutes one reason why state-driven development continues to blaze forward totally unhinged. When it comes to sensitive issues like media censorship or human rights, most Chinese citizens passively shrug their shoulders knowing full well that protesting will ultimately prove futile and self-defeating. Furthermore, most citizens are too busy hustling to make money and pull themselves up the socioeconomic ladder to be concerned with such matters.

Perhaps the past two centuries of Chinese history will offer some clues into why the status-quo is so apathetically accepted. China’s experience of 19th and 20th Centuries consisted largely of a series of hardships: the Opium Wars to the fall of the Qing Dynasty, the subsequent Japanese Invasions and Chinese Civil War, and concluding with Mao’s Cultural Revolution. It is obvious that China is much better off now than it has been for the past 200 years.

This might explain why China’s populace is now seizing the unique opportunity of “reform and opening” to make the best out of the current situation. It might also explain why people are reluctant to disrupt the established order. Thought about in this way, China’s current system of rule is not so much a 'big-brother’ entity as it is an unspoken collective social contract to keep peace.

Misconception: China’s rise to global prominence is over estimated. The looming real estate bubble in China means that economic collapse is imminent.

Doomsday predictions about China’s collapse have become something of a growth industry. Commentators like Gordon Chang and hedge fund manager James Chanos are placing their bets on China’s demise. Many of these criticisms stem from what is speculated to be a coming crash in the real estate market.

To the central government, constructing new buildings is much more than just providing new and modern accommodations for the populace; it stands for social stability. It doesn’t take an economist to acknowledge that city-building is an important part of economic growth. But what is often overlooked is how city-building is a key part of the modernization process, employing rural migrants and giving them opportunity to earn substantially more than they could as farmers.

In China, real estate development is only one part of economic growth equation. Chinese leaders are well aware that the mad pace of constructing new buildings cannot last forever and already there seems to be an overabundance of supply in the residential and commercial sectors in first-tier cities like Shanghai and Beijing. Yet China is not anywhere near finished with its construction boom as 2nd, 3rd and 4th tier cities race ahead to catch up with their 1st tier counterparts.

Looking into the future, China’s leaders are preparing to shift the economic growth to more information-based sectors. The city I live in, Chengdu, the capital of Sichuan province, has already recruited American heavy-hitters such as Cisco and Intel. Chengdu has been successful in doing this by investing in new infrastructure and developing a series of high-tech industrial zones that give foreign companies the option of lower operational costs than found in the increasingly pricey coastal cities.

Misconception: Revaluing China’s currency will help bring manufacturing jobs back to the U.S.

China’s economy would not be the success it is today without the foreign investment that flooded through the gates since they first opened in 1978. The number of foreign enterprises directly benefitting from the low cost of labor in China has expanded greatly since that time. China’s maintaining a low valuation of its currency, the Renminbi (RMB), has been a key factor in attracting and keeping investment from overseas businesses.

Yet the talking heads in Washington have taken to pressuring China to revalue the RMB in order to help ‘rebalance the global economy’. Just ahead of the G20 last month, Treasury Secretary Timothy Geithner told Congress that China’s RMB peg to the U.S. dollar is an ‘impediment to sustainable global growth.’ Responding to the pressure, China announced that it would in fact let the RMB appreciate against the dollar.

Following China’s announcement, the RMB rose a whopping .4% in value leading to what Economist Paul Krugman called the ‘Renminbi Runaround’. Krugman is correct to call out China on its currency manipulation- but it should be no surprise that what China is doing is simply looking out for its own national interests. A rapid rise in RMB value would cause some serious damage to the Chinese economy.

American politicians know this but will continue to pressure China to raise the RMB value to score brownie points with their constituents. The reality is that both China’s economy and foreign companies using Chinese labor benefit from the low value of the RMB. For instance, companies such as Apple would not be able to sell their much coveted iPads at reasonable prices if it were not for cheap Chinese labor.

Pressuring China too much could result in a trade war which would in fact not only hurt Chinese exporters but the American consumer as well. Politicians are also deluded into thinking that manufacturing jobs will come back to the U.S. if China’s RMB goes up. On the contrary, companies will move manufacturing operations to some other place where regulations and labor costs remain substantially lower.

Conclusion: China’s accomplishments over the past two decades are unprecedented and fascinating. The scale at which change is happening means that complexity and uncertainty are unavoidable facts of life. Many challenges lie ahead, both for China’s domestic issues and its relationship with the rest of the world. As far as China has come, there still is a long way to go as millions still aspire to a better life.

Adam Nathaniel Mayer is a native of California. Raised in Silicon Valley, he developed a keen interest in the importance of place within the framework of a highly globalized economy. Adam attended the University of Southern California in Los Angeles where he earned a Bachelor of Architecture degree. He currently lives in China where he works in the architecture profession. His blog can be read at http://adamnathanielmayer.blogspot.com/

Photo by DavidM06