China’s Command Innovation

China’s Command Innovation BY JOHN MAULDIN – Mauldin Economics

Hardly a day passes without some sort of China news in the financial headlines. There’s a good reason, too. China is the global economy’s 600-pound gorilla, second in size only to the US. Yes, it was largely a copycat business economy up until the early 2000s, but Chinese entrepreneurs have really taken charge in the last 10 years. Fueled by the profits from huge consumer demand, they are expanding not only in China but globally. This story is largely ignored in the US and in much of Europe. We hear about a few projects here and there, but we don’t understand the extent.

China is on its way to becoming the largest economy in the world, which because of its population, it should be (possibly with the exception of India, if they ever get their act together). Short-term events and arguments sometimes obscure this longer-term reality. China’s transition from rural poverty to export powerhouse to consumer goliath may be the most consequential economic event in centuries. Possibly ever—I can’t think of a historical example to rival it. Historians might argue the British Empire or even the US from 1800–2000, but that took centuries. China has done it in a little over 30 years.

When I say “consequential,” I mean they can be either good or bad. We’ve seen both and will continue doing so. Along with Worth Wray, I wrote a 2015 anthology on China called A Great Leap Forward? So this is not my first deep-dive into China.

Even so, periodically I like to step back and assess where we are in this massive change, and that will be my focus for the next three letters. Today and next week, we’ll look at the bright side: The good things happening in China, much of which will help the rest of the world, too. Just like the work going on in the US and Europe and other countries is helping the rest of the world. Entrepreneurs and scientists inventing new ways for us to better our lives is good for everyone everywhere. Then the third letter will consider some darker possibilities. It is not all sweetness and light in China, as long-time readers know.

I could start by going through all the stats on how big China is, but they are so mind-boggling, we really can’t process them. In just one generation, something like 300 million+ people went from rural subsistence farming to urban industrial and technology jobs. Some of the cities in which many now work, didn’t exist when they were born. Hundreds of millions more are waiting in the wings to make that same journey or have already made a journey to “smaller” cities of just a few million people (note sarcasm).

I can find 13 cities with over a 10 million population in China. There are literally scores over 5 million. But that doesn’t tell the story. China is currently creating 19 “super city” clusters by strengthening the links between them. HSBC projects that 80% of Chinese GDP will come from those cities.

Last week, Financial Times reported Beijing plans to integrate former Western colonies Hong Kong and Macau with other nearby urban areas including Shenzhen and Guangzhou into this “Greater Bay Area.” Already, it accounts for 12% of Chinese GDP and 37% of the country’s exports. Beijing wants the GBA to lead the nation’s innovation and economic growth.


Photo: Getty Images

To that end, the government is pouring infrastructure investment into the region, including a 22-mile bridge connecting Hong Kong and Macau (not cheap!) with the mainland and a new $11 billion rail link for Hong Kong. It also plans to eliminate some of the bureaucratic barriers that presently slow down commerce.

“The GBA is home to a high concentration of dynamic private businesses, such as Tencent, Midea, and Huawei. It is also China’s most innovative urban cluster, generating more than 50% of the country’s international patent applications. And, according to HSBC, the GBA is the least burdened by inefficient state-owned enterprises and excess capacity.

“The reason is simple: The GBA is far more market-oriented than its counterparts, with Hong Kong and Macau much more open to the outside world than any other Chinese cities. Both cities not only permit the freer flow of goods, services, capital, technology, talent, and resources, but also meet global standards in terms of regulations, business practices, soft infrastructure, and even lifestyles.”

(Source: Andrew Sheng and Xiao Geng, Project Syndicate)

Part of this area is Shenzen, just north of Hong Kong.


Image: Google Maps

In 1980, Shenzhen was a fishing village of 30,000 people. Today, it produces 90% of the world’s electronics and is home to over 12.5 million people. It has 3 million registered businesses. It is compounding its growth at over 12% a year, doubling in the last six years.

The size of this region is hard to comprehend. With nearly 70 million people and $1.5 trillion GDP, it is economically bigger than Australia or Mexico. Guangdong (the mainland China part) alone exported $670 billion in goods last year. Three of the world’s ten busiest container ports are in the region. It will be Silicon Valley on steroids.

For that matter, it could be the US on steroids, at least geographically. From Hong Kong you can fly to Singapore, Kuala Lumpur, Bangkok, Manila, Shanghai, Seoul, and Tokyo as fast as I can get from Dallas to San Francisco. This Greater Bay Area will be the center of the world’s fastest-growing region, with billions of smart business people, scientists, and consumers.

According to Wealth-X, Hong Kong just overtook New York as the world’s largest concentration of ultra-wealthy people (net worth of $30 million or more). Their study specifically attributes it to enhanced links with mainland China. Look for this to continue.

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When Americans import Chinese goods, we get stuff we want and China gets our US dollars to spend. Ditto for China’s other customers. They receive goods, China receives cash. On this end, much of what we purchase ends up in landfills, or like our iPhones, being replaced every few years. Not so over there. They often spend our cash more wisely than we use their doodads. (Infrastructure is a good example. Many Chinese highways, railroads, and airports are far superior to ours.)

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