In part two of Li Lu (Trades, Portfolio)'s speech at the Global Investor Conference, he shared his insight on the unprecedented growth of the Chinese economy and the modernization process of China during the past four decades.
China was forced to open its trading ports after the Opium War. After losing the Opium War, China had to face the reality that it had completely missed the industrial revolution. The West was ahead of this industrialization process by hundreds of years. For more than a century after the Opium War, China was a semi-colony. In 1949, China finally reestablished itself as a unified country and embarked on the road of a planned economy in the initial stage. Part of the reason why the government chose the planned economy route is that the characteristics of a planned economy coincided with the cultural instinct of Chinese people to organize the potential of the collective. This was thus also a natural choice for the Chinese government.
However, the planned economy didn't work, and when Deng Xiaoping came to power in 1978, he did not know what the right path was to lead China to prosperity. He made a very practical observation that after World War II, all countries that had good relationships with the United States were prosperous and those who were closer to the Soviet Union became very poor. After Deng Xiaoping's visit to the United States, China and the United States established diplomatic relations under President Jimmy Carter. From then on, Deng Xiaoping changed China's path and began to advocate a market economy. He opened up the country and eagerly learned modern science and technology as well as market economy principles from the United States and the West.
Since then, we have witnessed China's ultra-high economic growth during the past 40 years. The average compound growth rate in these 40 years was about 9.4%. In real terms, China's GDP has increased 37 times in the past 40 years. The world's largest country by population has achieved sustained and ultra-high economic growth in a long period of time.
There are conventional and unconventional reasons for the 40 years of super-growth of the Chinese economy. One conventional explanation is that China and the U.S. engaged in a win-win relationship. Deng Xiaoping's policy of reform and opening up made the Chinese people observe the success of the United States, which was a model of Western success. Then, when China opened up its economy, the United States was confident, open-minded and willing to help China. Politically, the United States was willing to help China because both China and the United States were facing the same enemy politically - the Soviet Union. Secondly, the United States also had a business-minded enthusiasm to lead China into modernization.
In addition, the world environment was relatively peaceful at that time. It was in the process of large-scale globalization. China joined the World Trade Organization and opened up even more opportunities.
The Chinese culture places high emphasis on hard work, education and entrepreneurship. The experience of the past decades has made the Chinese people cherish the opportunities brought by the reform and opening up policy. Western\consumers' consumption power also helped China's economic growth.
In terms of high quality labor force, through globalization and accession to WTO, hundreds of millions of young Chinese entered the industrial labor force and were rapidly integrated into the global economy. These young people could manufacture a very large quantity of products in a very short period of time (and at much cheaper wages that the U.S. labor force). And it happened that these products can be absorbed all over the world. All these factors partly explain China's decades of rapid growth, but they are not all.
Li Lu (Trades, Portfolio) then offered his own unconventional explanations. He pointed out that the essence of modern civilization is not about the political system, but the combination of free market economy and modern science and technology. The Chinese had been going into the wrong directions for more than 150 years before they really achieved this combination of market economy and modern science and technology in 1978. At that time, China already had a potential unified market and a unified and stable political environment. Once it really began to accept the essence of modern civilization, China, like other modern countries, begins to flourish. Historically, other countries have followed the same path in their economic take-off.
Another reason is China's unique political and economic system. There is close cooperation among the central government, local governments and enterprises. The central government formulates strategies, provides resource support and regulates the business cycle - similar to the U.S. federal government. What makes China unique is the competition between local governments. The behavior of Chinese local governments is more like that of enterprises. These local governments act like headquarters for the enterprises. If a company wishes to invest in a certain area, the local government can provide them with land, build roads and bridges, organize labor, change the tax system and even buy the first batch of products produced by the company. The local government does everything it can to help the company to settle down and succeed locally. Companies just need to seize market opportunities. In exchange, companies employ large numbers of local workers, contribute to GDP and pay taxes to local governments. In a sense, it's more like paying rent, because it's equivalent to renting a ready-made corporate headquarters. At the same time, different local governments compete with each other to provide better services for companies.
During this period, the international environment has changed. When China became the world's second largest economy, the largest trading country and the largest industrial country in the world, the economies of other countries and regions did not grow by the same 9% to adapt to so much output. Moreover, one of the consequences of globalization is that the formerly developed industrial powers are losing their industrial advantages. The benefits of globalization for developed countries are largely enjoyed by the elites, especially in the fields of technology and finance. The polarization between the rich and the poor is becoming increasingly serious, and the living standards of the middle class have been stagnant. So the anti-globalization movement and all kinds of populist political movements began to gather strength. After 40 years of sustained economic growth, China's unique development model has thus encountered similar difficulties to those faced by older systems of capitalism - those at the top are running out of things they can siphon off from those at the bottom.
Read more here:
- Li Lu Explains the Case for China - Part 3
- Li Lu Explains the Case for China - Part 2
- Li Lu Explains the Case for China - Part 1
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