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A reader criticizes Bassolino and he replies with a survey of China’s ills

In a recent mailing, Francis Bassolino wrote, “When Pigs Lead” on the travails of American companies in China, particularly GM and Apple. A reader wrote in response:

“He may be an avid China watcher … but he is an avid cherry picker too. How about them, apples? 

*Deliberately set up system to systematically abuse/legally steal IP is not a problem?

*Building islands in international waters and claiming ownership is not a problem?

Sounds like Pravda to me … but then, a lot in America these days sounds like Pravda to me.”

Bassolino replies:

This flippant response illuminates a problem that I find dispiriting and far too common. A seemingly well-educated person is not engaging with the topic by challenging the positions posited but instead draws attention to self-evident and irrefutable issues that are somewhat related but not germane. Rather than deliberate the logic of my position that China is being used as a red herring, the disingenuous commentary discredits my argument by tainting me with things I did not say or support. And then for good measure finishes with a snide reference to a communist propaganda arm. I suspect that if the attack were to continue on other fronts I would be labeled a climate science denier as well.  

For the one comment that is at least tangentially related, my response is that casual observers will know that intellectual property theft in China is rampant and indeed a driver for increased competition in many markets. Companies need to do more to protect their assets and governments need to do more to enforce the laws when broken. Successive administrations in the US and Europe have been derelict in this duty. And many companies should have put stronger locks on the door once it became evident that roaming hordes of heavily armed hackers were prowling. I don’t condone or deny the practice of theft but I do protect myself when I know thugs are around.

Territorial expansion in the South China Sea is just a non-sequitur, unless we are looking for more examples of neglected duties in the face of thugs. What should/could be included in a 1000 word-piece on the topic I was trying to cover? I have lot of unflattering things to say about what is happening in China but such issues are just not relevant to the topic at hand!

Clearly there are serious macroeconomic and public policy issues in China. Indeed, looking out over the medium to long term, China faces a collection of fundamental structural problems that have been ignored or even exacerbated over the last decade. For example:

  • China has an education system that does a good job with mass education which lays a solid foundation in primary school, but the systems break down and deliver poor results from secondary training and beyond. Social and political imperatives hamper the development of leading educational institutions and think tanks. The education system stifles the drive for knowledge in higher learner. Outside of PISA scores and basic education for all, the Chinese education system is third-rate for most disciplines that drive economic growth. There is a reason why anyone worth their salt goes abroad for graduate school, especially in STEM.

 

  • Somewhat related to this is the State’s orchestration of the truth. The obsession with control is counterproductive and it is breeding a nation of citizens who lack the information and requisite critical thinking skills to innovate, effect change and lead organizations. Once a population stops thinking critically, they stop thinking. And that is dangerous.

 

  • The increasing support of large companies and State-Owned Enterprise (SOEs)—including the quasi state-level organizations such as Alibaba, Tencent and Haier—has eroded the competitiveness of the most productive parts and job-creating enterprises in the economy: the private entrepreneur and the foreign invested enterprises. While there has been some positive reform in the past year or so, the pace is not fast enough to facilitate the changes needed to support a rapidly changing macroeconomic environment. And even so the general direction is to support the growth of a tight-knit plutocracy of 2-3 homegrown organizations per industry that can be more easily controlled by if not beholden to the State oligarchy.

 

  • Capital allocation is wasteful, and the major financial institutions work within ossified systems wholly unsuited for a modern economy. Enormous savings deposits of average citizens are depreciating rapidly due to high inflation of food and housing as well as a general debasement of the currency due to fiscal and monetary policy designed wholly to preserve the state not promote growth and wellbeing. The road outside my home has been paved five times in the past decade. This is not sustainable.

 

  • If China were a company, it could be criticized by a branding consultant as suffering from two common challenges: it doesn’t have a clear vision statement and there is a problem with the brand name. For coming on 30 years the vision was quite clear. Namely, it doesn’t matter the color of the cat as long as it catches mice. The aim was to grow wealth and improve the standards of living. Our latest guiding slogan, The China Dream theme, sounds almost as practical and implementable as the Green New Deal being peddled in the U.S. by America’s Social Democrats (aka Democratic presidential candidates). Socialism with Chinese Characteristics is a ridiculous juxtaposition of words that signify nothing but code that the Party is in charge. As the demographic dividend diminishes and rapid “catching up” phase ends, the absence of guiding principles and an inherently flawed ideology will have serious consequences, most likely leading to a period of “lost decades” as we witnessed in Japan.

 

These long-term 7-10 year problems are just a small sample of a long list of things that we watch but when it comes to the short and medium term, 3-7 years, we are much more sanguine as over this period China will continue to reap the benefits of the demographic dividend, smart public policy started under Deng and the industriousness, frugality and practical nature of Chinese culture. The near to medium term will be fueled by strong retail sales growth, rising income levels and very strong balance sheets at the personal and national level. And this is why when we return to the two most cited issues about China—declining sales for companies such as Apple and General Motors or some vague reference to the slowing GDP—we can say with confidence that these common memes about a coming collapse are not worth paying much attention to for insight.

 

francis_bassolino@alaris.com.cn

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