China produces an astonishing number of astonishing numbers, including this: In the 20th century, America made automobiles mass-consumption items, requiring prodigious road building. China, however, poured more concrete for roads and other construction between 2011 and 2013 than America did in the 20th century. This fact is emblematic of China’s remarkable success. And is related to its current difficulties, including its 2015 growth rate (6.9 percent), its slowest in 25 years.

The regime’s contract with its 1.4 billion subjects is that it will deliver prosperity and they will be obedient. Now the bill is coming due for the measures taken to produce prosperity.

In 1978, when Deng Xiaoping began the regime’s attempt to leaven Leninism with market reforms, half of the Chinese lived on less than $1 a day. In just six years, collective agriculture almost disappeared and grain production increased 34 percent, freeing people to move from the countryside to more productive urban employment.

No Westerner knows more about China’s regime and political economy than Henry Paulson who, as CEO of Goldman Sachs, then U.S. treasury secretary and subsequently, has made more than 100 trips to China. In his book “Dealing With China,” he writes:

China consumes almost half the world’s cement, coal, iron ore and steel, and 40 percent of the aluminum and copper. Beijing has six ring roads and the seventh, under construction, will be almost 600 miles long, encompassing an area as large as Indiana. (Washington, D.C.’s beltway is 64 miles long.) Demand for roads so exceeds supply that a 2010 traffic jam extended 62 miles and lasted 12 days. China has six of the world’s 15 tallest buildings (America has three) and eight of the 10 tallest under construction. In four years, beginning in 2011, the government built enough housing to shelter the population of the 12th most populous nation, the Philippines. Two months after the September 2014 $25 billion IPO for the Chinese internet company Alibaba, the world’s biggest IPO, the company had a $280 billion market capitalization, bigger than Amazon and eBay combined.

China’s prosperity has been fueled by the traditional modernization trek of people from the countryside to cities — 300 million so far, with another 300 million by 2030. But China has also relied perilously on exports and excessive, grossly inefficient infrastructure spending to employ the former peasants and make burgeoning metropolises habitable. Just between 2010 and June 2013, local government debt alone surged 70 percent to $2.9 trillion.

David Fuller's view

Investors remain scared of China for a number of reasons, including its size, authoritarian political system, military strength and economic success launched by Deng Xiaoping.  He may or may not have said: “To get rich is glorious”, but he probably believed it.  More importantly so do well over a billion citizens in China today. 

Their confidence may be somewhat lower today because China’s GDP growth has slowed to a rate somewhat below 7 percent.  The economy is in a necessary but somewhat bumpy transition from mostly heavy industry exports to the consumer-led growth of developed economies. 

Governance is seldom easy, not least in countries with large populations.  Nevertheless, China enjoyed over a generation of the fastest economic growth the world has ever seen.  Today it has a well-educated middleclass which is larger than the entire US population, and still rapidly growing.  I would not underestimate their potential.

China’s stock market remains a source of concern, not least due to regulatory problems as we have seen recently.  I suggest that investors who may be interested in China should take a long term view. Ask yourself how you think China’s economy will perform over the next decade.  If that view is optimistic, then China is very cheap today as we can see from the Hang Seng China Enterprises Index (P/E 5.81 & Yield 5.03%).      

(See also: China Vice President Vows to Look After Stock Market Investors – a PR exercise at Davos)