The Rise and Rise of China

**Ahnenerbe** · Sunday, November 14th, 2004

The Daily Reckoning
Weekend Edition
November 13-14, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

MARKET REVIEW: MY BABY GIRL

Jim Rogers wrapped up the conference yesterday, as always, with a
brilliantly entertaining presentation, including slides and a video
of his 3-year global odyssey.

"And when we got back to New York in 2001, we were pretty darn
tired," recalled the Adventure Capitalist, "so we decided to stay at
home and relax a while. And that's where we received the final
surprise...and the best surprise of the whole trip, in fact. We found
out my wife, Paige, was pregnant. And now, here she is...my baby
girl."

And with that, a picture of Rogers, all smiles, cuddling his
daughter, is projected on three giant screens at the front of the
ballroom.

"Ahhhh" went the crowd...

When Rogers had finished presenting the slides from his world
record-breaking trip, he elaborated on some of his investments, and
some of the major themes he's paying attention to in today's
markets.

"Well, I can tell you, the Chinese are some of the most capitalist
people on earth. And it's a different capitalism to what you might
have thought. In China, they save almost 20% of their incomes,
compared to 2% here in the U.S. and in China, they don't worry about
how many vacation days they might get, no, they worry about how many
days they are allowed to work."

The 19th century belonged to the U.K., once the richest and most
powerful nation on earth. The 20th century belonged to the U.S., but
the 21st century, predicts Rogers, will belong to China. "I recommend
you all start to learn mandarin, and tell your children and
grandchildren to do the same...I'm not just saying it either...my
baby girl has a Chinese nanny, who only speaks mandarin. And already,
my baby girl is starting to pick up some of the words."

Despite his confidence in China's emergence, Rogers expects a hard
landing for China at some point in the next 12 months...

Rogers' next topic for discussion was the U.S. dollar. "It's probably
overdue for a rally. They've been hitting it pretty hard recently. I
wouldn't even be surprised to see a large bounce...but don't listen
to me, my market timing is horrible..."

"What's much more important, is that Americans owe $8 trillion to the
rest of the world," he offers, "and it's only gonna git worse. The
dollar is a fundamentally flawed currency, and still has a long way
to fall."

"My baby girl don't own any dollars. You know what she's got...a
Swiss bank account. That's right. All her money's in Swiss francs."

The dollar closed Friday at $1.2972 versus the euro, having made a
new intraday high at $1.3004 earlier in the day. The euro has never
before traded as high.

For his own account, Rogers owns a basket of 16 international
currencies and some Chinese equities. "But if you wanna know where I
think the rally big money is, and the best way to play China, it's
natural resources and commodities."

Your editors, here at the Daily Reckoning, wholeheartedly agree.
China needs lead. It needs nickel. It needs tin...and rubber and
copper and cotton. There's nothing that can change the basic demand
for these commodities over the medium to long term. Nothing. And what
this means for you, says the former trading partner of George Soros,
well, it will simply be the easiest way to make a lot of money in the
coming decade. And when asked by a member of the audience to list his
favorite commodities, Rogers named sugar, cotton and orange juice, in
that order.

"My baby girl won't be selling her portfolio of commodities until oil
hits $150 a barrel and they're drilling on the front lawn of the
White House. Or until cotton hits $4 and they're growing it in
Central Park."

Oil fell over 5% last week, closing at $47.32, providing a boon for
the stock market. The Dow is now in positive territory for the year,
having gained 151 points last week. The Industrials Index closed at
10,539. The S&P and the Nasdaq were also higher. The Nasdaq gained 46
to 2,085 while the S&P closed up 18 to 1,184.

"What about gold?" asked another member of the audience, as gold was
hitting a fresh 16-year high, gaining $4.50 on the week to close at
$437.90.

"My baby girl owns gold too..." came the reply.

Regards,

Tom Dyson,
The Daily Reckoning

**yamato** · Sunday, November 14th, 2004

interesting, china may lead the world in numbers and economic growth, but the west and japan will still always lead in technology

**Telperion** · Thursday, November 18th, 2004

Originally Posted by yamato

interesting, china may lead the world in numbers and economic growth, but the west and japan will still always lead in technology

There was a newspaper article in the Toronto-based Globe and Mail, part of a special series on China, which pointed out that China's educational system is so rigidly focused on rote-learning and examinations that even the Chinese themselves recognize that it is not producing people with a capacity for creative thinking and innovation. In effect, the Chinese are basing their economic growth on making products for our consumpton based on technology that they have copied (or in some cases stolen) from us, and which they largely lack the capacity to have developed themselves. If western countries weren't set on taking advantage of low Chinese labour costs to keep the wholesale prices of consumer goods relatively low, then China would very likely still be a relatively technologically backward country.

**yamato** · Thursday, November 18th, 2004

there is also the problem of brain drain; the intelligent, creative, well-educated people china does produce often move away to other, more affluent nations.

**Test** · Friday, November 19th, 2004

Originally Posted by yamato

there is also the problem of brain drain; the intelligent, creative, well-educated people china does produce often move away to other, more affluent nations.

Yes, the research facilities of universities and corporations is stocked with graduate students from China. I should know since half of my family's friends work in those places. And the American engineering students are basically a pot of various Asian ethnics. And we haven't even discussed the computer field.

So, even American technology is increasingly becoming "Chinese".

**OraclePhilosophy** · Friday, November 19th, 2004

It is too bad that the United States can not lead the 21st century due to it's out sourcing jobs , and political/war fiasco.

Not mention our spending and our deficit.

**Test** · Friday, November 19th, 2004

I don't see how naturalized citizens or Asian Americans can be considered in the out-sourcing category, since they are creating wealth and spending it here. It's proportional. The more people, the more jobs there are.
Do you mean they are taking jobs away from Whites?

**Test** · Friday, November 19th, 2004

Originally Posted by zeno

The problem in this case is that corporations in the US are bringing people into the country at a much lower wage, so that they can layoff native Americans who are working at the normal rate. Look at any IT firm in the US for example. Anywhere from 40%-80% of an IT workforce here will be south Asian. They all are here on special work visas provided by the US government. The IT firm will go to the US government and say that there is no one in the US who understands a particular technology (which is a complete and total lie) so they want to hire this person from India. The US government grants that Indian a special visa to come here, only to work, and only to work for that particular company. The Indian guy is so happy to come he will work for slave wages, the IT company knows this and pays him slave wages. The IT company is then able to layoff the native American guy making normal wages. And if the Indian guy complains, the company can very easily ship him back and get another guy from India to replace him. And since he is only here to work "temporarily", he is not going to be spending his money here, but will be sending it back to his family in India. But then again, they all end up staying here somehow.

Please see:

Nonimmigrant Work Visas
Immigration and Labor

Yes, but I mean Asian Americans... the Indian or Chinese kids who were born here, not the temporary kind. The case I'm talking about is a case of proportional growth, where the more engineers there are, the more people and the more economic growth they create, and in turn creating more IT/engineering jobs... Proportional growth. I see what you are talking about, but it's not what I'm addressing.

**Ahnenerbe** · Monday, October 10th, 2005

In my last editorial, "Living in a Topsy Turvy World", I wrote about my experience in Lijiang, a beautiful, historic old town in south-west China.

See: http://www.sovereignlife.com/essays/26-09-05.html

In November 2004, I wrote of my first experience of China, in Beijing and Chongqing - in "A Most Unlikely Freedom Haven".

See: http://www.sovereignlife.com/essays/22-11-04.html

In fact, my current three month sojourn in China is my fifth trip to this country since May 2004. And I have to say it has opened my eyes in many surprising ways. It has also caused me to reappraise many assumptions I had about the place, and to ponder the likely future of this huge country - and its impact on the rest of the world.

I'm back in Chongqing now, with three more weeks to go before departing, and have had a chance to reflect on what I've experienced and to try to make sense of it all.

Yesterday I visited an historic building, turned into a museum, which records the large immigrations of various ethnic groups into Chongqing. But it was the drive there, in the taxi, that got me thinking.

We were driving from Nan Ping, over the Yangzte River, to the city centre - and doing 90 km/hour, which is quite common in this city without traffic cops and published speed limits.

When I first visited this city in September 2004, I was very afraid of the taxis. It seemed that stepping into one was to enter a lawless zone, where anything goes, and where your life could end at any moment. You have to drive in this place to really know what I'm talking about.

There are lanes on the roads, but nobody observes them. Cars weave in and out of these phantom lines in a constant effort to gain some advantage - at quite hair-raising speeds, and with the constant use of the car horn.

There is a dearth of traffic lights, so most intersections are negotiated simply by wriggling your way through - with no apparent road rules as guidance.

Pedestrians freely mingle with the traffic, so the Chinese have never heard the term "jaywalking"! And "zebra" crossings appear to have no meaning in real life - as venturing out on to one in no way ensure cars will stop for you. However, the traffic is most forgiving of people, tolerating them in ways inconceivable in most western cities.

Night time is another matter. All the vehicles have headlights, but perhaps only 70% actually use them - including buses. And you have to watch out for those damned covered motor-rickshaws, which seem to exist in a safety standards time warp - judging by the physical state of most of them.

Then there's the buses! I tried to avoid them where possible - as they are terribly overcrowded, not to mention the distinct lack of leg room between the seats. Besides, with taxis being so cheap, buses seemed so plebeian.

Yes, the driving is chaotic - but so is the parking. I've never seen such creative parking in my life. People parked right on the corner of intersections. Cars parked on the bends in roads. Cars parked in all the areas westerners would assume were "no parking" zones. And not one parking meter in sight! Western local city bureaucrats would have a field day here, trying to get order into, and revenue out of, the place.

However, with all this apparent disorganisation on the roads, don't get the impression it is really so. No, not at all, as I have learnt. The initial impression of chaos turns out to be a form of order in its own way. And what I've found, now that I've been here a few times, is that although there are no apparent speed limits, rules of "engagement" and so on, the traffic still works - and surprisingly, I didn't see one traffic accident, nor
any "dings" in the many new cars populating the roads.

But back to my visit to the immigration museum.

I wasn't able to read much of the text, being as it was mostly in Chinese. However, there were plenty of photos and illustrations, not to mention tools and artefacts of trade and every day living on display. There were also full-sized recreations of town life giving examples of the existing social order at the time.

What became immediately apparent was the long history the Chinese have had of trading and doing business. It's in their blood. And I realised that the "blip" of communism, starting with the revolution of 1949, was but an aberration on an otherwise highly organised and productive society.

Communism was bound to fail of course, but its demise was given a "boost" in the late 70s, by Deng Xiaoping, who was the first leader of the post-Mao period. He basically reversed the collectivist nature of enterprise in China, and ushered in the practical free market. The "new" Communism.

China hasn't looked back since.

The "market" is everywhere. Whether you're talking about the hundreds of shoeshine vendors and home-made food sellers, or the house-front mini-shops, workshops and hairdressing salons, or the bustling shops and department stores - everyone, it seems, is in business of some sort. And if you're not in business, then you're out peddling your labour on the streets - if you don't have a job.

Labour-for-hire is everywhere. Groups of men sit around with their mini-tool kits around their waists, or in in a bag, waiting for someone to hire them. Folk from the country walk around with long poles, which are used for carrying stuff - on demand.

The city skyline is riddled with construction cranes - and work goes on 24 hours a day. I've never seen so many apartments being built at one time. Most the workers appear to be migrants from the country - and are no doubt working for minimum wages.

A typical manual worker here earns around 400-600 yuan each month - or around US$50-$75. Not exactly a king's ransom. But in this non-welfare state, you either work or starve. It's as simple as that.

The contrasts are amazing. One minute you can be walking around a first-world department store, with literally everything you can get in the west. Then you can be walking around the market, where chickens are slaughtered on demand, and where strange body parts are bought for their "health" properties.

You can eat in the most sophisticated of restaurants, with impeccable service, or you can eat noodles in a local street cafe, sitting on an old plastic stool.

You can walk down the street and see trendy young women strutting their stuff, while their poor country-cousins shuffle past in their continuing struggle to make a living.

You can turn on TV to watch "Super Girl" and participate in the craze for reality TV and pop music, or you can stop and listen to the street musician demonstrating his talent on some traditional instrument.

Gaudy neon lights. Chronic air pollution. Girlie magazines and dubious "playgirl" shops. Street vendors shouting about their wares - at 6 am in the morning. Four day funeral events, with loud music at the crack of dawn. Mobile phones everywhere. Food, food, and more food - and usually very HOT (as is the Sichuan style). Mah-jong and card playing on every street corner. Pop music blaring out of shops. Noise everywhere. And, surprisingly,
huge numbers of trees to soften the brazen landscape and provide shelter from the hot summer sun.

Then there's the hairdressers. And I must say this was a real experience. I paid 20 yuan (around US$2.50) - which, to my surprise gave me a 1.25 hour session which included extensive head massage, upper body massage, double hair wash - and finally the hair cut itself. This was all carried out in a trendy salon, with the usual modern music sound track and young people sporting crazy, multicoloured hair styles. Of course I was interested in
the final result, and I can report that it's one of the best haircuts I've ever received. Did I mention the ear-cleaning??

This is one bustling, crazy, hectic metropolis. I can only imagine what Shanghai must be like!

So, what do I make of China? Well, first it has trashed any impression I had that these people were living under some sort of miserable dictatorship. These people know how to work and enjoy themselves - and do both with gusto. I have lived here long enough, and spent enough time with the locals to get a feel for their lives and aspirations. I can tell you, in all the essential ways, these people are as free to live and make a living as you
and me. And if you're wondering how China manages year-in-year-out GDP of around 9%, I know the answer. They have low overheads.

I'm not talking about low wages, I'm talking about a low state "overhead" on the lives of ordinary Chinese. If you're an average worker here, chances are you pay no tax at all. Even if you're the up and coming middle class, your tax bill (if there is any) is likely to be miniscule. In fact, I have it on good authority that most people and companies pay virtually no tax. And if they do pay tax, it's only on the declared income - not the "hidden"
one.

The Chinese invented the principle of keeping two sets of books. And they have a vastly superior grasp of the importance of financial privacy. Sheesh, even a bank will give you a mortgage without any financial statement of income. If you can't make the repayments, they simply reclaim the property.

There is no social welfare to speak of. The Chinese government raises revenue via a VAT of some sort, and various duties and miscellaneous taxes. But the sheer number of Chinese workers means this state "overhead" is almost negligible, giving people virtually 100% control and ownership over their own income.

The Chinese save like you wouldn't believe - even when they are earning close to nothing. But they are not opposed to a bit of ostentation, and it is clear to me that aspiration is a much more common trait than jealousy and envy. If you're rich in China, then you make sure everybody knows!

Of course, what's most amazing about China is the rate of transformation. From a North-Korean-like state of poverty to rapidly rising wealth and prosperity - all in a remarkably short period of time.

My father always said to look out for China - the "sleeping dragon". And I have to conclude he was right.

If you think Singapore or Hong Kong are successful, then imagine China the same way - with all its added size and entrepreneurial capacity. That's how I see it. I believe China is modelling itself on the successful Asian "Tiger" economies. China is turning into a giant Hong Kong.

With its minimal tax overhead, the creative energy of its millions of citizens is being unleashed in ways almost impossible (now) in the west.

I can tell you, we're in for a nasty shock in a few years. And I think it will all come together after the 2008 Beijing Olympics. I really feel that the Chinese see this event as their "coming out" ceremony - their debut on the world stage of nations. It's already all over TV here.

I'm expecting their currency, the yuan/RMB, to be fully floated by that time, and their banking and investment sectors to be mostly fully-revamped in line with modern western practices.

Right now, China is building business, trade and diplomatic relations all over the place. Their rising economic power ensures that others are listening. And in doing so, they are creating an alternative power bloc to the Euro-US one. This will have major ramifications for the future of the world, and not all scenarios are rosy. There could be a resource "war", as China consumes more and more of the world's available energy.

Then there's the potential reaction of the existing alpha-nation the USA, which is unlikely to take being "challenged" lying down. Then again, it may have no option - as its own economy is being so downgraded by present (and future?) governments that it may simply be incapable of competing with the "sleeping dragon".

Other nations will face a similar challenge, as China out-competes them on almost every front. Its competitive edge will be in the Chinese people's natural talent for business, their ethic of hard work, their capacity to save, and their low-low tax burden. It's even possible that a brain-drain could occur - in the direction of China - as they surge into such industries as
biotech, which is continually being strangled by red tape in the West.

All this will create a nation-to-nation competitive environment which can only have two possible outcomes. Either other nations will be forced to compete and enact the necessary economic reforms, or they will become increasingly impoverished and possibly revert to trade war, protectionism and forms of national socialism as a response.

As an optimist, I'm hoping that China, rising as it has out of poverty, will create an example of what is possible with copious amounts of economic freedom.

The only thing that could possibly slow them down, would be the arrival and implementation of "democracy", which (as we've experienced in the west) would simply be a front for socialism and eventual social and economic decline.

Maybe they'll be smarter than us, and over time develop a form of social order that is not incompatible with freedom. We'll see!

China has many challenges, and its future is far from certain, but if what I've seen is any indication, then they are headed for the big-time.

My advice to any freedom seeker is to keep abreast of what is happening there, as it is bound to have a significant impact on the rest of the world, and very likely your own life.

Yours in Freedom,
David MacGregor
Source: sovereignlife.com