There's one cloud over China's rosy future
Comment of the Day

March 15 2012

Commentary by David Fuller

There's one cloud over China's rosy future

This is an interesting article (may require subscription registration, PDF also provided) by columnist Anatole Kaletsky for The Times (UK). Here is a section:
The idea that economic growth would gradually turn dictatorship into democracy has turned out to be wrong. If anything, democracy seems an economic disadvantage if China and India are compared. China, for example has built 30,000 miles of motorway-standard roads since 1990, while India has managed just 300 miles. Even more striking is a Western businessman's account of China's advantage over India as an investment destination. The legal system may be corrupt and unpredictable in both countries, but Chinese decisions are at least quick, whereas India's obsession with "due process" extends court cases for years or even decades.

China's single-party politics can also, paradoxically, promote creativity. Local officials are encouraged to experiment with policies in areas such as education, housing, healthcare and environmental controls. An official who pioneered a new approach to early nutrition on 1,000 children in one remote province declared to me proudly that his programme had been extended to 20 million children after just three years.

But while one-party politics may not harm China's development for several more years or even a decade, unchallenged communist government must eventually come into conflict with economic freedom, consumer affluence and the rule of law. This conflict will be aggravated in the next decade, when China runs into its most daunting social problem - the demographic impact of the one-child policy still officially imposed by the communist regime.

China's working population probably peaked this year and from now will rapidly decline. Today there are five workers aged 20 to 59 supporting every citizen of over 60. But by 2032, that ratio will have fallen to two, the same as it is today in Italy and Germany. How will China cope with the reduction in able-bodied labour? The only answer is another question one constantly hears in China: will we get old before we get rich, or the other way round? That is the biggest issue of all for China.

David Fuller's view It is refreshing for this commentator to see that Anatole Kaletsky sees only one cloud over China's future. Most western analysts see myriad problems for China and readers can decide whether this is due to prescience or fear of China's rapidly growing economic power. The Times columnist knows more about China than most western observers because he is a frequent visitor. The same can be said for our own Eoin Treacy.

My personal view is that China faces the same economic and social problems of any other country. However, there is plenty of evidence that following the disastrous Mao era it has managed its economic challenges over the last 30 years more effectively than most other countries. If Kaletsky is correct in saying that China really is obsessed with the question of whether 'we get old before we get rich', that is a powerful 'needs must' incentive for many people and not just the Chinese.

I think China's greater problems are environmental, including the shortage of potable water. Presumably, these can be resolved with the use of technology but that will take time and also be expensive, at least initially.

There is also the intriguing question of how China deals with the question of personal freedoms. Gradually and therefore in an evolutionary rather than revolutionary manner, in my opinion, adapting and largely following the models of Asia's more developed economies.

Another interesting question concerns creativity. Asian educational systems are often formidable but do they tolerate, let alone encourage, the subtle maverick tendencies or intellectual rebellions that often spark genuine creativity? I assume yes, because of their openness to western educational institutions which Asians both attend and increasingly also import affiliates so that more students can experience western style educations in their own countries.

China's size and growing economic muscle has enabled it to import more technology quickly than any other country in history. A temporary downside to this can be a reduced incentive to develop one's own technology when it can be copied from more advanced economies. However, copying and developing need not be mutually exclusive and this recent article from Reuters - China Leads Global Patent Growth - confirms that it is also very serious about becoming a technological leader. Here is a section:

The World Intellectual Property Organization, which administers the global patent pact, reported that 2011 saw a 10 percent rise in applications to a total of 181,900.

"This shows that companies around the world continued to innovate last year despite the widespread uncertainty affecting the global economy," WIPO director general Francis Gurry said.

WIPO figures showed the United States, Japan and Germany, the long-time leaders in total applications, accounted between them for 58 per cent of total filings, but China, with a rise of 33.4 per cent on the previous year, was pushing them hard.

And the Chinese telecommunications equipment giant ZTE Corp. with 2,826 applications, pushed Japan's Panasonic Corp., which filed 2,463, out of top place among individual company filers.

Another major Chinese information technology manufacturer, Huawei Technologies Co. was in third place, with 1,831 applications, the WIPO statistics showed. A previous leader, U.S. group Qualcomm Inc. dropped from third to sixth place.
Global Shift

Gurry told a news conference that applications last year under the global Patent Cooperation Treaty (PCT) that it supervises showed a geographic shift in innovation activity from North America and Europe to Asia.

Overall, Asian applications accounted for 39 per cent filed in 2010, while North America accounted for 28.3 per cent and Europe for 13.9 per cent.

Filings by the United States totaled 48,596, an increase of 8 per cent over 2010, and Germany's were 18,568, 5.7 per cent up on the previous year. But alongside China's huge surge Japan also increased its filings by 21 per cent to 38,888.

Elsewhere in western Europe the picture was mixed, with Switzerland, France and Sweden showing increases ranging from 7.3 per cent to 4.6 per cent, but the Netherlands was down 14 per cent, Finland and Spain by 2.7 per cent, and Britain by one per cent.

While Asia's growth in patents filed is impressive, some of this is for reasons of protection and it cannot provide evidence of the quality of innovation. That will only become apparent over time.

Lastly, China's Shanghai A-Shares (weekly & daily) have lost upward momentum this week, evidenced by yesterday's key day reversal following a test of the 200-day MA and today's downside follow through. This is probably only a temporary pause and consolidation, given the global stock market bull trend, but SHASHR will have to break above the MA, 2600 and the November high near 2660 to provide confirming evidence of demand dominance.

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