Disclaimer: The views expressed represent Giancarlo Lamourtte’s opinions. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment.
From the U.S. perspective, it’s hard to imagine China as a land of opportunity. We’re mostly fed stories of the atrocities committed by the Chinese Communist Party (”CCP”), e.g., the well-documented genocide of China’s Uyghur Muslim population, stealing of intellectual property, the takeover of Hong Kong, etc. But within China, you find a strong sense of nationalism. It’s important to distinguish between the State (government) and the Nation (people) and to understand the psychology of the Chinese people, one must understand their recent history.
History: The Architect of Modern China
The start of China’s rise to economic power began in the late 70s after the death of ruthless dictator, Mao Zedong. Mao’s legacy lives on today through his form of communism called, Maoism. The philosophy takes influence from Leninism where the economy centers around the State for decision making. The State decides what goods to produce, how much, and how to produce them. Mao also made sure China was economically and socially isolated from the rest of the world. The underlying philosophy is control at all costs. These policies led to China being economically dead in the water for several years.
After the death of Mao, political instability followed until Deng Xiaoping was brought to power as the new Paramount Leader of China in 1978. Deng took a practical approach to governance and enacted several market reforms which opened relationships with the West and the spoils of free trade. China embraced the efficiencies of a free market where the State isn’t burdened with running the economy, but it still maintained a strong grip on the social lives of its citizens. The reforms enacted under Deng laid the foundation for the Nation we know today and earned him the title of, “Architect of Modern China.
Optimism Is a Hell of a Drug
What followed was China’s GDP growing from $150 billion in 1978 to $17.13 trillion in 2021. During this period, 800 million people were pulled out of extreme poverty, more than any country in recorded history. Individuals who experience this major shift in economic privilege must feel immense gratitude toward one’s nation. What follows is a strong sense of optimism for the future:
In one generation China went from a nation of rice farmers to a developed society with several pockets of high-tech cities. They have collectively turned the corner where each generation is more economically privileged than the last. While in the U.S. and developed Western society, we’ve entered the era of comparison, questioning whether past generations have had it easier than us. This type of pessimism is a luxury provided to those who have time to sit around and criticize the privileges around them. As hall of fame basketball player Charles Barkley said:
“You just sittin’ at home in your grandma’s basement with your draws on, typin’ on your damn keyboard.”
While this culture has become prevalent in the West, Chinese citizens in the East are imbued with optimism, and optimism is a hell of a drug. It’s the psychological stimulant that urges individuals to build and push society upwards towards a better future. But psychology can only take you so far. There must be a robust societal foundation to build a nation, and it’s questionable whether China’s socially repressed society can innovate and continue this upward trend. The cracks are beginning to show and will only expand in years to come.
50 Is the New 30
The greatest threat to China is its demographic issue. Post WW2 China experienced a baby boom which led to an influx of workers in the 1970s - 2000s. During this time, the United States had cleaned up its labor laws and was looking to export cheap labor. China was the perfect candidate with an enormous pool of young labor who were willing to work gritty — dangerously conditioned — manufacturing jobs too boujee for the powerful American consumer. Chinese citizens went to work and quickly became the world’s leading manufacturer. However, in the 80s the Chinese State decided to implement the infamous one-child policy and began a broader effort to control population growth. Last year they finally put an end to these policies because they’ve hindered their most valuable asset, people. Now, China is faced with an aging population that is leaving the workforce. In 1978 the median age of a Chinese citizen was 21.5 years. By 2021 it has risen to 38.4 — surpassing the U.S. — and at this pace, their median age is projected to be over 50 years old by 2050. This video does a great job of visualizing the severity of the issue:
Reverting this crisis will take one of three things or a combination of each:
Developing machines within the next 15 - 20 years for each piece of the manufacturing cycle that is cheaper and more efficient than human labor.
Incentivize the populous to have more babies, but it takes about 20 years to grow a full-fledged worker.
Immigration.
The last option is the easiest to implement. Especially when looking at the immigration/emigration numbers by country, China has a lot of room to improve:
Total Immigrants by Country
Total Emigrants by Country
Unfortunately, immigration goes against the Chinses State’s infatuation with maintaining the Han ethnicity, the ethnic majority in China (92% of the population) whose history traces back thousands of years. It’s these ideological blocks that cause states to inevitably collapse. Our success as humans came from constant evolution, and this applies to the state level, in the end, all states are simply a collection of people who make important decisions for other people.
Mo Money Mo Problems
China’s aging population is already impacting its economy. Being a recently developed nation with a shrinking workforce has created a weak environment for labor competition. This has led to a huge spike in wage inflation:
Chinese workers are earning more than ever, but the Nation has lost its competitive advantage as the world’s manufacturer. Now they must compete with the United States in the market of entrepreneurship and innovation, a feat historically held by countries with the most intellectual freedom. A standard China does not promote. The book, Why Nations Fail by Daron Acemoglu and James A. Robinson, presents hundreds of pages of research on the correlation between a nation’s aptitude for promoting freedom of thought and expression — which leads to experimentation and innovation — and its ability to maintain its status at the top of the global economy. Based on China’s demographics and economic rise, it must pivot from a manufacturing-based economy to one of service and entrepreneurship, but it’s missing the key ingredient of freedom.
The Revolution Will Be Financialized
We’ve also seen distress in the current Chinese financial system. In July we witnessed protests in the Henan province by individuals attempting to withdraw money from their local banks.
These small rural banks were operating fraudulent schemes with client deposits which led to insolvency. It shows a structural issue from lax regulation in the rural banking sector and a gap in China’s deposit insurance. The unrest became a national debate and the general populous was caught in a mist of uncertainty, questioning whether this could happen to their deposits in Beijing or Shanghai. The Chinese State had to send a veteran bank regulator to quell the ruckus in Henan and tell protestors they would reimburse funds lost from fraud.
There are also fractures in the real estate market. In 2020, Beijing began clamping down on excessive borrowing and a year later was faced with the debt crisis of Evergrande, China’s second-largest real estate developer which began to default on its debts. Evergrande’s fall has trickled through the entire sector now challenged with a cash crunch, and the individual Chinese homebuyer has decided to inflict more pain on developers. In China, developers can start collecting mortgage payments before they complete a project. The pandemic has severely slowed down property construction and those who have been paying their mortgages for the past 2 years and seen little progress aren’t happy. This has led to popular protests where citizens have chosen to stop paying their mortgages as they attempt to draw government attention and push developers to finish constructing their homes.
Governing Philosophy
These two protests — against rural banks and real estate developers — are fascinating because it shows civil unrest in China that we haven’t seen in years, and with the prevalence of social media, we get to see the State’s real-time response. It also may be the beginning of a long drawn-out battle between the Chinese State and the Nation.
In my opinion, the CCP governs the Nation with two underlying philosophies in mind: Pragmatism and Control. But soon there may be a time when these two philosophies must come to a head. China now has a booming middle class with enough power to hurt its government. It’s easy to maintain control over an impoverished nation with little communication with the outside world, but many parts of China now represent the opposite of that, developed cities where the consumer is of growing importance. The regime must lean on one of these two philosophies to quell the unrest. Either control the populous by force and destroy any form of protest or enact policies to nudge (incentivize) their people out of this mess.