China Thinks It's An Emerging Market

China Thinks It's An Emerging Market

China Thinks It's An Emerging Market

The FINANCIAL -- China likes to call itself an emerging market. If they are, they stand alone among their peer group.

MSCI officially calls them one, even though Chinese companies make up more a third of their emerging market index and have three times the representation as second place South Korea. When you consider China’s A-shares listings that will be included over the next few years, China will totally dominate that index. Everyone else will be lucky to be at 5% of the weighting.

The emerging market countries are overpowered by China’s importance in the way the developed ones are overpowered by the U.S.

Of the top 10 holdings in the MSCI Emerging Markets Index, 6 are Chinese companies. No other country has more than one in the top 10.

No country outside of the U.S. has more billionaires. Sure, they have 1.4 billion people to pick from. So what? India has 1.2 billion. They don’t have close to what China has. With the exception of certain political freedoms, Mumbai and Bangalore are nothing like Shanghai and Chengdu.

Whether you’ve been to a tier 1 city like Beijing or a tier 2 city like Quingdao, this country doesn't look like anything in any emerging market. The closest you get is Moscow, with its mix of old and brand spanking new; middle- and low-income people mixed with the many fashion-conscious elites to whom an Audi A4 is an entry-level vehicle.

China GDP per capita is only around $9,000. Beijing’s per capita is closer to $17,000, which is more than São Paulo’s roughly $11,000 and less than Moscow’s $50,000, based on exchange rates and data compiled by PwC and the Chinese government. Chinese city Macau has a per capita GDP over $80,000. For a city the size of Boston, it’s per capita income is right in line with the hometowns of Harvard and MIT.

Washington thinks China is no longer an emerging market. For some foreign policymakers, it’s already emerged.

China's growth rate of 6%-plus makes it a developing country, contrary to what Washington thinks. The U.S. couldn’t grow at that rate if it tried.

China is still building bridges and railroads from scratch. Beijing is still knocking down old villas and building high rise residences. No one can complain about losing their home and being forced to move elsewhere, of course. China is a top-down system, to put it mildly. Xi Jinping is both “grandpa Xi” and the country’s boss. Xi has cracked down on bad news leaking out from the mainland, so even if you could complain, it’s officially frowned upon.

After my first 10-day visit to China, it seems people here do what they are asked to do. They follow the leader, so long as the leader is providing them with safety, employment and, for the higher educated, Western-style opportunities.

I wasn’t there long enough to get a sense of people’s disdain for Xi, or the Communist Party. The country is slowing, but it is growing. If you had to chose a side, for or against Beijing, people are mostly pleased with what their country has become in this hybrid capitalist/communist system of theirs.

From a pure safety and money standpoint, China has lived two decades of an economic miracle. People who once lived on a dollar a day, as they do in parts of Africa, in India and in parts of Latin America, are now living in a country with the fastest bullet trains, the most mobile phones and cars, and investments in things like artificial intelligence, and you will be hard pressed to find that anywhere except in the U.S., Europe and maybe Australia and Canada.

Wouldn’t it be great if their economic model could be replicated?

Who am I to tell you that it can’t? My takeaway after visiting four Chinese cities in October is this: If you really believe you can import the Chinese model, you better import a few million Chinese along with it.

Beijing is clean and crowded. Within the second ring road near a Grand Hyatt, there is the quintessential Chinese village selling exotic foods few Westerners outside of a Food Network crazy man would consider. I see fried tarantulas; live scorpions squirm on a stick before they get deep fried; some kids hold super-sized pastel-colored ice cream cones.

Near the Caixin financial publisher’s office in a rainbow neon, Tokyo-like downtown, a skateboarder does his ollies like he’s signaling to passersby that he has a second home in Los Angeles. Meh, so doesn’t everyone else around him?

In a smaller city called Yantai, I saw what looked like Chinese ghost cities. Dozens of residential towers had no signs of life.
There’s that part of China too. The oversupply story that helped its economy boom.

Nearby, the Yantai Door and Windows office is a five-story building with no one around. Maybe they’ve relocated. But considering I was driving on a six-lane road with almost no cars on it, I’d say it’s not in business or is a shell company.

The roadside in the Yantai new development district is perfectly landscaped with pitch pine trees and grasses that must have cost tens of thousands of dollars to plant and manicure. I saw two public transportation buses with literally no passengers in them.

It is places like this that make Beijing nervous. Municipalities have been spending recklessly for growth and blue-collar jobs in a country that is now the biggest user of robotics. China is automating. It doesn’t have a top 10 robotics manufacturer yet, but they will get there before Brazil, India, Russia and Mexico.

China pulled far away from these countries once it joined the World Trade Organization in 2001. One of the reasons it did so well was because the big American multinationals that pushed then-president Bill Clinton and later George W. Bush to vote for China’s ascension knew they’d get cheap labor, almost no regulation, and weak environmental and labor laws. Let’s face it: China was what every big corporation wanted—a docile, big and cheap labor market, and almost no rules stopping them from polluting the environment and working people to the bone.

China has made many improvements and in some respects is on par with the developed world. Tougher labor laws has Chinese manufacturing turning to industrial robotics or moving to poorer countries like Vietnam.

Beijing is also cracking down heavily on polluting industries, a move that has more to do with the potential for health crises than placating the WTO.

The WTO gave China a free pass early in its membership. It led to massive investment, a boom in exports and foreign cash flow. Then the Chinese entrepreneurial Taoist spirit of building something from nothing made their country what it is today. This is not your Che Guevera Communist Party. These aren’t the Bolsheviks running things in Beijing. China is different. There is nothing like her. And as China strengthened over eight years of Obama, China is scaring the bejeezesus out of the Trump administration.

Some American companies are worried that they will not be able to compete with China in its home market. That market has been mostly closed to foreigners. X Box and PlayStation were banned until 2014, for example. By then, the Chinese gamers had grown accustomed to mobile and PC games.

The other way to get into China is to develop your product with a Chinese partner—creating the old capitalist/communist Frankenstein.
Regardless of the rules American firms now bemoan, there is no country they want to sell to or build in. Whether making sneakers or selling baby food, China is the place to be.

To some, China is advancing so fast in strategic economic areas related to technology and the human sciences that it warrants being roadblocked. Washington under Trump wants to do that. It is unclear if a new president will want to do the same, or whether we’ll return to status quo.
Either way, China’s tier 1 cities are now considered lower middle income by the WTO, compared to upper middle for São Paulo and Moscow. There is room to grow.

China’s tier 1 cities are expected to see their GDP rates average over 6.5% between now and 2025 , according to PricewaterhouseCoopers projections. That is more than Sao Paulo and Moscow. Only the Indian cities compare.

China’s middle class will expand. It’ll expand while the Chinese build bigger, faster, and—at least in Brazil’s case—safer cities and global corporations.

China will also have more world-class cities in the top 50 than any other emerging market. PwC thinks they'll have at least 4 in the top 50 by 2025 and 8 in the top 100. Again, only India compares.

But here is where China may be right when they say that they are far behind the U.S. Despite China’s impressive growth story, this semi-closed Frankenstein economy will have fewer than ten cities in the top 100 by 2025. The U.S., meanwhile, has 23.

according to Forbes