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Notes by EMA: Conventional Wisdom & China

CONVENTIONAL WISDOM & CHINA

YUKON HUANG

SUMMARY

Enrique Aboitiz Mendieta

04 2018

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Yukon Huang – watch him on YouTube to get a full picture. This is a summary of what he thinks. I have learned from him. I have never liked conventional wisdom and have sought those that help me challenge the same; not for the sake of challenge but because in a world that is rapidly changing and adapting, conventional wisdom cannot generally be the best path forward. It is not to say that it is not a well-proven path forward that will get you to Rome – it may very well be – but it is not the best way forward. We are not really committed to better ways – the intent of our better way mindset is to find the best way.

 

Take a look at the marijuana direction in the United States. Years ago, you went to jail in some states for having rolling paper. Now, it is seen as ridiculous and the entire nation is going to legalize it. They did the same thing 100 years ago with the Volstead Act and this just served to strengthen the Mafia.

This summary and Yukon’s YouTube will serve to help us understand China who will be a force to contend with as its intentional and unintentional actions have intended and unintended consequences. One million tourists from PRC (People’s Republic of China) entered the Philippines last year. This number will reach 10 million one day. This force will have serious consequences on our lives and our landscape. You can be sure the government will mismanage the overall situation as they always do.

YH expounds on our conventional wisdom and how that sees China in its various aspects and how he sees that as wrong. He tells us he got it wrong. He was Beijing and World Bank-centric and he got it wrong. When you get things wrong, your decisions and strategies going forward are wrong.

 

1. The US-China Deficit

US FDI to China is 1% of GDP; Japan and South Korea, as high as 25%.

US trade deficit 500 billion — 300+ billion with China.

Deal with the deficit and the deficit problem is solved.

YK – no connection. US and China trade imbalance with the trade deficit. The US ran a trade deficit before China’s exports exploded (2000 to 2005), i.e. without China.

Take an Apple phone. What stays in China of a $650 iPhone is $25; $250 is imported from South Korea, Japan, and Taiwan. Apple invests zero in China. The Apple plants are financed by a Taiwanese company.

Deng made a decision in the 80s, one of unbalance. Connect to the world through the coast and focus on three provinces. Make them highly competitive and gear them to the export markets. Since then, wages have grown 12% per year compounded.

YH also argues that if you want to be the world currency, you need to run a trade deficit to export money all over the world so everyone uses your money in their reserves.

us-china trade
Photo from maltawinds.com

 

2. Corruption

In China, corruption feeds growth and growth feeds corruption. Conventional wisdom has told us that corruption holds back growth and it normally does.

In China, all the resources were in the hands of the state. The state realizes that the returns are higher if the private sector manages these resources to they turn it over to the private sector and get a share of it for individuals – their interests are aligned. In India, the resources are in private hands but the permits to exploit them are in the hands of government whose individuals hold back the permits to get paid thereby slowing things down.

Xi [Jinping] is curbing corruption because it gets unhealthy if it goes too far, i.e. when it creates great inequality and that inequality is being seen and is becoming unacceptable.

Now, how can they substitute corruption and with what? It is very difficult because the institutions needed are Rule of Law & Liberalization, among others, and that is very difficult for them to achieve.

 

  3. Chinese Provinces and Why They Compete

Most provinces or states worldwide do not have the great incentive to compete because their governors are elected. In China, they are appointed and they rise in the Party depending on how well they do as governors. The dynasty is at the top and not at the provincial level.

EMA – Our system of political dynasties is lethargic.

 

  4. Protests

China spends as much on internal security as it does on external security. One million people are involved in internal security. They use protests as a venting valve. They address the protest and calm them down. This makes the CCP more powerful.

EMA – The fallacy that China will be a strong military power soon is questionable. They are increasing their military spending but there is a very deep balance sheet of assets that need to be built up, bases that need to be built up, carrier fleets that need to be built up, and the soft part – intellectual capital, technology, and 100-plus years of war experience the US Military has. Chinese submarines are noisy and noisy submarines are useless as they can be taken out very quickly.

 

5. Innovation and Liberalization

The Chinese do not use checks and they do not, generally, use credit cards. They have skipped this step and have moved to using the mobile phone to pay. This will drive more political liberalization through the ubiquitous smartphone that will not only move money but circulate news and information, fake and real – well, mostly fake.

YH mentions that, curiously, South Korea and Taiwan liberalized politically at the same GDP levels.

 

6. China’s Debt Problem

It is at 260% of GDP – government, private, and corporate. That is the same level as the USA and Britain.

EMA – Not that they are the bastion of prudence. Of the top 80 countries in the world, they are in the middle. Less than most developed and more the least developed. Is that not what they are in actuality.

YH explains it further: 15 years ago there was no private ownership of houses; 95% of most Chinese own their homes — they were given the homes they live in by the government that used to own and had built them for the people. So the value of real estate and debt went up.

Are real estate prices to high? Delhi and Mumbai are at triple the level of Beijing and Shanghai.

China GINI was at 0 – all equally poor. 1 is when one person owns everything and 0 is when everyone owns everything. China was at .25 when Deng made his move. They are now at .5 – more unequal than before but with a much bigger pie. The USA is at China levels.

Now, here is where YH explains inequality in China. Top-level wealth in China is in real estate and in the USA it is in technology. Everyone has his home but those with more access to land have very much more. Property is more scarce in China.

EMA – It also has much higher population density. This is what is happening to ROP – higher and higher density and lower and lower per capita agricultural land.

 

7. One Belt One Road

China’s major foreign policy and economic initiative, 65 countries will be connected. A new route will be established. Power will be diversified. The Middle Kingdom will look west instead of only east to look for new friendly faces.

This will be good for all. China is investing $18 billion in Pakistan hoping that economic improvement will prove to be a better weapon against terrorism that is harbored in Pakistan than military aid.

Everyone can join in the initiative.

Over time, the east will learn from the west and the west from the east, and each will gather strengths from the other and shed their weaknesses.

Point in fact: the Chinese president sent his daughter to Harvard for her undergrad. More and more Chinese are sending their children not only to university and graduate educational opportunities [in the US] but also to elementary levels. There is admiration for the American system, a love-hate relationship.

EMA – Everyone wants freedom, even the Chinese.

The US deals very well with winners but it does not take care of its losers. With productivity, jobs are won and jobs are lost but they are not the same people. Europe deals poorly with winners and covers the losers. Neither is the best of any world.

There is no doubt that China will be more open but all will be done within the Party.

 

8. Climate Change and Pollution

Xi talks less about growth and more about harmony and quality of life. The Chinese middle class is larger and has more purchasing power. It is more concerned with the quality of life than with jobs. Hence, the change in the CCP outlook.

Let us take into account that China will be the first returning power. In the 1500s, China and India were 60% of world GDP. They bottomed off at 4% in 1950 when both were very poor.

 

9. US and China Power

China is much further behind that conventional wisdom things. Its GDP is way behind. Us is to focus on growing at 3 % per year as China Growths slows down. China is getting old before it gets rich – this will suck up resources. It has a very long border with Russia that needs minding.

 

 

What matter is relative and not absolute so focus on that.

CONVENTIONAL WISDOM ????? IT IS A NECESSARY TOOL TO ADAPT ERGO TO SURVIVE?