Let's talk about China

http://www.spiegel.de/politik/ausland/0,1518,740779,00.html
Coca Cola's Chief Executive Muhtar Kent accidentally proposed a toast to Chinese President Hu Jintao by saying "kanpai" (which is Japanese) and caused everyone on the table - including Henry Kissinger - to laugh.

So what's so funny about this minor mistake, one may ask? Well let's say China is the market with steady amazing growth rates for beverages and 1.3bn thirsty potential customers, it is the place where Coca Cola announced to invest 2bn USD within three years and China is also the country where Coca Cola experienced 11% growth in sales in Q3 2010. So is it possible to address 1.3bn people if you don't speak their language?

Twenty years ago it was probably enough to know "kanpai" in Asia, but time has changed and there are a lot people out there who think that it is now en vogue - yes maybe inevitable to also know "ganbei" to stay competitive in today's global market - for instance like those who laughed at Mr. Kent's mistake.

In times when the visit of Chinese President Hu Jintao to the White House (hyped by the media as the "meeting of giants") happens to take place and everyone in the world is talking about China it is hard to stay unenthused as a native Chinese like me. Many friends questioned me on various topics regarding China, so finally I decided to write down some lines about my thoughts on China.

I don't want to talk a lot about the facts that are rather obvious to maybe all of you. Those facts about decades of two-digit GDP growth, 2.7 trillion USD of foreign-exchange reserves, the fact that China effectively overtook Japan as second biggest economy, that China is catching up with developed countries in modernizing its army and so on and so on.

Let me just grab some points that I think are most important:

1. China is growing

Undeniably China's growth in previous years has been striking also in wake of the financial crisis (+9.2% in 2009 vs. -2.6% for US), but the most striking number for me is 300 million. 300 million is the number of people who had been lifted out of poverty in less than a generation in China (according to World Food Program). Regardless of the admittedly high social inequality in China, this is a tremendous achievement. One must imagine that a mass of people making up approximately the whole US population has been saved from hunger in something like 30 years. Amazing!

This is what really matters about Chinese growth so far - giving the people the primary human right...to live.

Why China will grow further:

Anyone who has ever been stuck in one of the hundreds of thousands of traffic jams in Beijing, Shanghai or Shenzhen understands why VW is now selling more cars in China than in the US or in its home country Germany - 1.92m in 2010. Well, this number looks quite tiny if one considers the fact that only 2% of all Chinese households are possessing a car at all - you do the maths...

So asking me why China will continue to grow I would generally say it is size, relative stability provided by the government and a certain work ethic among Chinese people deeply rooted in its tradition.

This is also why China inhabits the largest ports in the world, the largest banks, producing most solar cells, having largest energy consumption etc. Everything is just large and even growing larger.

But one must bear in mind that the per capita GDP is not large at all among Chinese people (ranking somewhere between 90th and 100th in the world, right before Namibia and behind Ecuador). And this is the challenge that bears a lot of chances for China in the upcoming decades.

2. China is becoming a peaceful global power

In Western media China is often depicted as a fire breathing dragon that will later or sooner abuse its power to concuss its competitors. I would say they have rather mistaken the Chinese - quite severely.

People say that China is a growing world power and nobody is able to predict its moves. Well that's not new, take a quick look into Chinese history (yes, China really has one) and you will find out that excluding recent 200 years China has for almost the last two millennia been a world power:



Daily Chart: Economist

If you open up the history book of any Western power you may always find at least some bloody offensive wars, be it the US (in Iraq), be it Great Britain (in France or take any other European country) or be it Germany or Japan (in the world). But if you open up a book on Chinese history you might rarely find any offensive wars despite Chinese long-period strength and the resulting capability to start one (assuming Dschingis Khan just had fun doing war and didn't really wanted to conquer the countries he had overrun).

Therefore Chinese philosophy was always about self-defense - protecting and conserving the wealth that the country has achieved. Because in contrast to the European countries China was always big enough to inhabit its citizens (no scarce "Lebensraum") and in contrast to the US China never felt being predestined to fulfill the mission of a "world-police". In my opinion these two distinguishing elements are key and also strongly contributing to the present (and past) policy of the Chinese government of "peaceful rise". Just look at the topics where China is said to be opposed to the "Western world" - it is all about defending its very own interest. Of course in today's global world those interests interfere with the interests of other countries, but from the very intention China does not want to harm any other country and moreover is willing to talk about those conflicts of interest.

Much of Chinese-defined core interests may seem odd to the Western audience at first glance, but there's quite a lot of Chinese culture and also very pragmatic rational buried deep inside them.

3. China requires a new growth model

Given size, relative stability and people's willingness to work hard, the economic growth will not last into perpetuity if you only try to produce cars or clothes cheaper than anyone else. So more and more innovation and improving technology move into China's field of focus.

In terms of education and research China is still by far lagging behind developed countries. Many high school students are accused of lack of ability to think creatively and often speak quite awful English, Nobel prizes in sciences always make a circuit around China and internationally China has not overcome the reputation of being a copycat concerning advanced technologies.

But fortunately Chinese leaders have also realized those challenges and decided to face them. In addition, China is all but a country without a proper basis. The traditionally high esteem towards learning and inventions has been inherited through hundreds of generations (recall Confuzius, the tradition of "imperial examinations", the "Four Great Inventions" etc.) and there is also a relatively high literacy rate of 92% in China (compared to about 66% in India).

Education has become one of the top priority topics in China over the previous decades. For instance central budget planning in 2010 targets education spendings at 215.99bn RMB, an increase of 9% from 2009 or 2.7 percentage points higher than the average increase in total expenditures in the central budget.

Early successes have been realized so far. 2010's international PISA Test results on 15-year-old students' performance in Science, Reading and Maths surprised many experts. Debutant Shanghai scored best in every category, followed by Hong Kong in Top 3 or Top 4:

http://www.nytimes.com/2010/12/07/education/07education.html
Also regarding innovation and technology China has made great steps. Heavy investments into "new" industries such as solar energy or electric vehicles led to technology leadership. Also undeniably China has become a serious competitor to the US or Europe in aerospace and fields of airspace. In 2007 China overtook Germany (the "land of poets and thinkers") in terms of patent applications.

So although the 2009's Nobel laureate in Physics Gao Kun strictly said has not been a product of the Chinese education system (born in Shanghai, main part of education in Hong Kong - back then British colony - and England), one may start to place bets on when the first "real" Chinese will be awarded the Nobel prize in sciences.


4. The miscellaneous about China
After reading the points above one might argue that I am totally blinded by my patriotism. Well, I am certainly very bullish on China, but I - needless to say - also know that China's growth story faces various challenges. Issues on intellectual property, the aging society, pollution, social unrests - to name few - have to be mastered in the upcoming decades...and centuries.

A 60-year-old German investment banker who has travelled a lot to China once said to me: "You know what is so amazing about you Chinese guys? You think about the future in quite a different way than our governments do. We talk about the next four years, you talk about the next 20, 30, 50 years!"

I am eager to explore

http://blog.renren.com/blog/bp/QmawzMF2zD