The Two Worlds of China – Mythology and Reality

Americans still think of China as a job-stealing pool of impoverished manufacturing labor, putting out masses of cheap goods upon which we have become addicted. That image clearly defined the earliest phases of China’s growth in the 1990s and the first decade of this century. And equally clearly, even today there are two Chinas: one rural, backward, poor and very traditional, the other wealthy and ultra-modern. But as average real wage rates in China have doubled every 10 years – much faster in the larger cities, less in rural venues – Chinese is hardly the “cheap labor” capital we still think it to be.

Labor costs have soared so high that even China is turning to the same focus on automation, driven by artificial intelligence, that has driven virtually all of the “reshoring” of manufacturing back into the United States. As technology-driven growth has become a forceful economic driver, hard patent filings in China are rising just as they are contracting here in the United States. Their exports are becoming increasingly sophisticated electronics and machines.

As we spend less on research and education, China spends more. As our aging infrastructure falls into disrepair, China’s is massive, new and cutting edge. As we shoot ourselves in the foot with future-killing austerity where it matters, China just sneers and accelerates its fueling of growth into becoming a fully-developed country with a highly competitive innovative push.

While rural centers remain decades behind, you just have to look at the People’s Republic of China’s most developed urban centers, Beijing and Shanghai to see how deep change has been. “At the high end are Shanghai and Beijing. Gross domestic product per capita adjusted for purchasing power — one measure of average incomes — was slightly more than $53,000 last year. That’s a similar level to Switzerland and the U.S. At that level, in fact, those cities would rank among the top 10 of all countries with populations of at least 3 million people, according to a Bloomberg analysis of data sourced from the International Monetary Fund and China’s National Bureau of Statistics.

“Shanghai, the mainland’s biggest financial center, and Beijing, the nation’s capital, lead the list in large part because they are more compact and benefit from supportive government policies. They have the best universities, the highest-paying jobs and, until recently, unmatched infrastructure development.

“For at least two decades, general laborers and highly skilled workers have been lured to help the big cities grow, though most have second-class status. Most lack the difficult-to-acquire household registrations, or hukou, meaning they don’t have access to legal residents’ rights to social services and education resources.

“‘There are places farmers can move, now, and transfer to being fully urban, but there is a point system for elite cities like Beijing and Shanghai,’ John Giles, a World Bank economist, said at a recent conference on China’s antipoverty campaign in Washington. ‘You have urban residents who don’t want those migrant kids in school with their children.’

“China’s yawning economic disparities aren’t just of academic interest — they form the basis for one of Xi Jinping’s three ‘critical battles,’ namely poverty alleviation. And as the economy slows, policies that bring the incomes of those in Gansu closer of those in Shanghai will help ensure that the whole pie grows in a sustainable way.

“‘While early waves of migrants flocked to more affluent coastal and higher-tier cities, more migrants are now choosing to stay within their home provinces,’ Hyde Chen, an equity analyst for UBS AG in Hong Kong, wrote in a report that compared urban development trends.

“‘Historical experiences from mature economies suggest that household incomes of wealthy and poor areas in China will likely converge over time,’ Chen said. ‘In China, the income convergence is taking place at a fast pace, with the household per capita income gap between lower-tier cities and tier-1 cities narrowing from 56% in 2005 to 46% in 2017.’

“Just 10 years ago, it would’ve taken a dozen workers in Guizhou province to earn what one worker in Shanghai made. By 2017, that wealth gap had narrowed by half.

“Still, the gap remains wide… Guizhou and Yunnan provinces in the south and Gansu in the north each had per capita GDP income below $10,000 last year, ranking them among Ukraine, El Salvador and Guatemala. But with a combined population of 110 million — nearing that of Japan, with average income of $39,000 — those three provinces have tremendous potential.” Los Angeles Times, May 28^th.  The emphasis going forward is to level off wage growth in those biggest urban centers and spread that wealth to the lesser provinces in a catch-up effort.

Thus, President Xi Jinping has targeted bringing the rest of China up to the top urban economic standards, and given the PRC’s track record of implementing its desired growth targets, we can expect the next decade to reflect an increase in the professionalization of the biggest cities combined with the rise in economic power in those rural areas and smaller urban markets once left behind. China is pouring billions into these lesser areas for infrastructure, education and research. All the while turning towards the Silk Road nations to the south and east as part of building China’s power and influence in the region through its high-investment Belt and Road initiative.

As Donald Trump pulls the United States out of its once powerful global connectivity, he is trying to push the United States back in time to restore uncompetitive blue collar labor to middle class earning power, mostly through trade barriers and tariffs. Most economists see that effort as dead on arrival. Add federal budget cuts to educational support and research and an inability to mount a coherent infrastructure policy, and you can actually see how federal policies are actually handing over the economic baton to China.

Even Trump’s rather obvious “gift to the rich who didn’t need it” tax cut marketed as a job-creator – which mandates further federal budget cuts where it matters most to pay for it – has not only failed to generate those higher-paying jobs (the only measurable increases have been in the lowest earning sectors, particularly part-time and unstable gig economy jobs) but increased income inequality. The resulting dividends and stock buy-backs have made the rich richer… and done virtually nothing for everybody else.

So as our income polarization slams our middle class and skews our earning force into a world where a tiny minority control virtually all our wealth, we take on the economic appearance of a banana republic… even as authoritarian China has policies that have simply exploded a massive new middle class into being. In short, Donald Trump has found one clear slogan he literally is implementing every single day: Make China Great Again.

I’m Peter Dekom, and Donald Trump’s “nationalism masquerading as patriotism” may reduce our power, influence and economic well-being to a level no prior American president has remotely ever done.