Tuesday, March 11, 2014

We've Been Shanghai'ed

A far cry from the “oriental” fishing port city of yesteryear where over-imbibing sailors from the West were captured from the sleezy bars and bordellos surrounding the docks to be spirited aboard Chinese junks and merchant ships for months, sometimes years, of forced servitude, Shanghai is a modern day wonder.  In fact, in all our travels, Vicki and I agree the Shanghai skyline is one of the most spectacular we have ever seen—day or night

Called “Paris of the East” and also “Queen of the Orient”, Shanghai is a large (pop. 24 million), clean (as clean or cleaner than Singapore, one of the cleanest in the world), gleaming city and the largest in China. The crowning jewel and result of modernization and innovation over the past 25 years, Shanghai, even more than the capital city of Beijing, represents what can be accomplished with the right combination of political and economic policy. Built on the banks of the Huangpu River, Shanghai is the financial center of China and the rival of Hong Kong in most every way. The people are friendly, happy, smiling folks and not at all what we expected from a citizenship that lives at the low end of the poverty scale in a very expensive environment.  Shanghai is proof of the rise in Chinese economic superiority; however, some think China’s best days are behind them.  Let me explain.

In the early to mid-1970’s, President Deng Xiaoping and his cabinet moved to make significant changes in economic policies.  Communist China did not allow for private ownership of property. Realizing that agriculture had to be emphasized as the monetary engine which could power expanded investment in industrialization, Xiaoping established 30-year land leases to peasant farmers. This incentivized families to maximize production on their land, join with other families to produce small joint ventures and then larger, more efficient cooperatives.  Expansion was encouraged by allowing farmers to mortgage their leases to provide capital for growth.  Agriculture rose to be 38 % of their gross domestic product (GDP) and, consequently, investment in industry blossomed.  By comparison, agriculture in the U.S. is only 1 % of our GDP.  At the same time, industrial production boomed due to a combination of domestic and government investment.  Using their abundance of cheap labor, China focused on overseas markets, boosting exports to record levels.  To stem population growth, Chinese law forbade a family to have more than two children. It worked.

By 2009, China’s GDP was up + 400 %, averaging + 9.5 % a year.  That year China became the 2nd largest world economy, surpassing Japan, and is responsible for 20% of world GDP growth.  In 2009 the Chinese bought more cars than Americans did.  China is the second largest importer of oil but had a $ 200 billion trade surplus.  Not incidentally, China also owns about $ 1 TRILLION of the U.S. government debt.  Someone said China is like Walmart with an army.

Unfortunately, the recession which hit the rest of the world finally caught up with China as well.  When the U.S. and European economies declined, so did Chinese exports.  From 1970 when China’s per capita income was 1/3 that of Mexico, in 2009 it was 1/3 higher than Mexico and + 434 % higher than Vietnams.  However, even though the middle class in China had grown during those years of relative prosperity, per capita income remained one of the lowest in the world.  Ranked at # 117 it is only $ 9,100.00 per year.  More bad news, The Economist did a recent analysis on the debt that China holds and estimates that up to 50 % of the loans they have on their balance sheet will be non-performing, not counting the U.S. treasuries.

The birth rate declined from 5.8 children per family in 1970 to 1.8 per family today, not enough to sustain population levels. At the same time, the population has aged with the elderly growing from 100 million people to over 320 million….nearly as many elderly as the population of the United States. Despite population declines, unemployment is calculated at around 20 %, although the Chinese government will not confirm that figure. There is no pension system in China. Pollution is still a major problem in China.  Two-thirds of the energy produced in China is from coal-fired plants and their carbon footprint is one of the highest in the world.  It is estimated that only 1 % of the population of China breathes what the World Health Organization defines as “clean air”.  Healthcare is underdeveloped and the government made the decision to put the money into upgrading their military instead of providing this vital service for their citizens.  Even though China has only internal and regional security challenges, defense spending is estimated to be between $ 148 and $ 241 billion, more than publically stated.  By comparison the U.S., with its global security challenges spent $ 524 billion plus $ 88.5 billion for the war in Afghanistan in 2013.  

Corruption, while having declined in the past forty years, still is a problem and ranks # 80 in the world.  President Xi has vowed to crack down on corruption but it is a deeply rooted part of the system and will be slow to change.

In 2010 the government decided to change their focus and move the economy more away from external consumption to internal consumption.  This, of course, would be difficult with a declining and aging population. To aid that, they have partially lifted the ban preventing more than one child per family.  Similar to the U.S. the government pumped over $ 600 billion into economic stimulus, cut interest rates to 1% (which they have since raised back up) and set aside $ 123 billion for healthcare.  China also started cutting some corners in agriculture and industry by loosening standards and ignoring other safeguards accepted by most first world countries.  Inserting recycled plastics as fillers in certain prepared foodstuffs and cutting copper pipe with cheaper aluminum are two examples typifying the desperation for China to lower costs and maintain their export competitiveness.

Vicki and I are about to get off the ship on our own and do a little shopping, maybe get a Peking duck lunch before we go to a Chinese Acrobat show tonight in the city.  More info and photos in the next Travel Update.  Until then,

God Bless you all.



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