Morningstar has an office in mainland China in Shenzhen, a city just over the border from Hong Kong. I spent little over a month there earlier this year, ostensibly to help train some of the equity analysts we’ve hired here to cover Chinese shares for us. But my main motivation for going was to gather as many insights as I could about the booming Chinese economy via an immersive learning experience. This article will focus on my insights, as well as those accumulated by my colleagues who have also made the journey.
First, some background information. Much of what you hear about the boom is absolutely true. Signs of the exploding economic activity are everywhere. While Shenzhen is a boom town in itself and growing faster than China as a whole, it is still quite shocking to see the literally hundreds of construction cranes that dot the skyline. Shenzhen has gone from a population of 300,000 to more than 12 million (and still going strong) since it was set up as a "special economic zone" in 1980 meant to attract business from around the globe. Companies are migrating here, meeting a mass migration of people from China’s rural areas to urban areas.
In the cities (where I spent nearly all of my time), the technology and lifestyle is really not much different than what you would find anywhere in the developed world. People are driving cars, talking on cell phones, using PCs, and watching high-definition televisions. One advantage that China has is that it is "leapfrogging" many technologies. For instance, when a Chinese person goes online for the first time, it is often not dial-up, but rather broadband. Forget wired telephones, they all seem to have advanced cell phones.
Visiting China in 2007 is a bit like visiting Silicon Valley in 1999 at the height of the dot-com era. Things are happening at light speed, and the economy is white hot here, but caution is certainly warranted. The economy has grown at a 10%-13% rate for several years in a row, and on a purchasing power parity basis (excuse the economist-speak), the Chinese economy now has a GDP of about US $10 trillion, trailing only the EU and the U.S. at roughly US $13 trillion each. (After adjusting for currency effects, the actual value is much lower, but that’s another story.) The bottom line is that like it or not, you cannot be a student of the modern world economy without taking time to study China. It is simply too large a force to be ignored.
So what’s driving this growth? The ingredients in the explosion are 1.3 billion people (it’s the world’s most populous nation, accounting for about 20% the global population) meeting a steadily liberalising economic environment, fuelled by copious amounts of foreign capital looking for cheap labour, helped along by the technological "leapfrogging" I spoke of earlier.
China’s Competitive Advantages
Clearly, China has some competitive advantages relative to the rest of the world, otherwise companies would not be expanding in China at a break-neck pace. There is no doubt that China is a very low-cost provider, but why is that?
I think one reason has to do with the country’s lax environmental restrictions, or at least a willingness to accept a greater share of the world’s pollution. One of the benefits of America exporting its manufacturing capacity to China is that we have also exported many of our environmental problems. Smokestacks may be going dormant in the U.S., but they are blowing strong here. And you can tell! I am not exaggerating when I say I did not see blue sky a single time my entire time here, only clouds or brown haze that at times literally burned the sinuses.
I should also note that the tap water is not potable. And recycling? While I often saw poor migrants salvaging, only at a handful of high-profile locations did I see small (and mostly empty) recycling bins. So you can forget the stories about an emerging environmental disaster happening here. It has already happened.
Also wanting here are the safety standards of more-developed countries. When you have cabs without seatbelts, much less airbags, traction control, etc., of course they are going to cost less. And if the safety standards in the factories are anything like they were on the streets I observed (a good bet) and the same dynamics apply… it means far less safety, far lower cost. It should be little wonder why, for instance, China’s coal mines and roads are several-fold more lethal places than in America.
Of course, one of China’s largest advantages is its people, all 1.3 billion of them. Ponder the fact that if China got to a point where its economic output per person reached half of what it is in America, the Chinese economy would be double the size of that country’s. And make no mistake, these are people who are generally well educated, hungry for a modern lifestyle, and excited to be able to lift themselves up to compete on the global stage.
This is clearly a country very, very long on manpower. The signs of the ridiculously inexpensive labour smack you in the face. To get from my hotel’s front door to the elevators, I got to say "ni hao" (hello) to no fewer than four "greeters" manning the lobby at all times. There are police or security guards just standing around on what seems like every other corner. Every restaurant and retail outlet seems overstaffed by threefold or more. Street sweepers literally sweep with brooms. This huge excess pool of labour is great for businesses, but not so good for the wage-earners.
One final advantage has to be the government. Love or hate the communists, one of the benefits they bring to the country is that decisions can be made very quickly without debate, and things can and do get built in a flash. Infrastructure projects like dams, roads, subways, airport runways, etc. get built at lightning speed without lengthy litigation processes concerning environmental impacts or trampled property rights.
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, and it is being sold like hot cake. 
Good LUCK - ONBVN
