Kris Kanthan -- HOW CHINA SUCCEEDED — 50 REASONS

 

HOW CHINA SUCCEEDED — 50 REASONS

China’s growth over the last 40 years has been nothing but miraculous. There’s no denying this incredible achievement even if you’re not a fan of the CCP. In 1978, China was one of the poorest countries in the world, poorer than almost all African and Latin American countries. Today it’s an $18 trillion economy, larger than the entire European Union (EU) and ready to surpass the U.S. within a few years.

China’s astronomical rise as an economic powerhouse

In 2022, China will officially escape the middle-income trap and stop being a “developing” or a “third-world” country. This year, China’s GDP-per-capita will exceed $12,700 and thus officially placing it as a high-income country. In big cities like Beijing, Shenzhen, Guangzhou and Shanghai — with a combined population of 80 million — the GDP-per-capita is $28,000, putting them on par with many European countries like Spain.

So, how did China accomplish such an incredible growth? Most people have their favorite couple of talking points — cheap labor, communist dictatorship, cheating, protectionism etc. There is some truth to all the cliches and stereotypes, but the truth is more holistic. Rather than a couple of simplistic and memorable reasons, here are dozens of reasons behind China’s success. Here is a comprehensive list of 50 reasons how China became a superpower. They are listed in no particular order of importance.

 

Investment, Exports and Saving

This is the proven strategy from other Asian Tigers like Japan and South Korea. Entice foreign companies to invest in domestic manufacturing and then accumulate foreign exchange reserves through exports. Easier said than done but works great when implemented properly. In China’s case, the investments flowed from numerous places — Japan, South Korea, Taiwan, Singapore, Europe, USA etc.

The Chinese are also prolific savers, which also means that Chinese banks have huge capital, which they leverage to invest in infrastructure and other forms of investments to boost growth.

Mercantilism and Protectionism

China has been practicing mercantilism for centuries. It’s a smart strategy that the US embraced in the 19th century. It means focusing on “selling” more than buying — exports more than imports. BTW, Germany also practices this strategy — German exports equal 40% of the GDP.

China also engages in protectionism, shielding domestic companies from foreign competition. Foreign companies are often told that if they want to sell something in China, they should establish factories in China and manufacture the products locally.

Cheap Labor and Urbanization

From 1980 to about 2008, China’s labor was very cheap. In 2000, when China entered the WTO, manufacturing wages were still only $0.50 an hour. The first reason being that China was still a poor country. Second, hundreds of millions of people moved from rural areas to Chinese cities, creating a massive pool of cheap workers. Urban population in China exploded from 200 million to 900 million in 35 years. All these worker bees turned China into the “world’s factory.”

Communism and Capitalism

China created an efficient, hybrid system of communism and capitalism. Huge state-owned enterprises thrived alongside of a vibrant private sector. “To get rich is glorious,” claimed CCP leader Deng Xiaoping. China embraced stock markets, privatization, free market, entrepreneurship, venture capitalists, startups that churned out millionaires, and even billionaires. At the same time, the communist party (CPC) remained at the apex of power and kept the capitalists, imperialists and the masses in check. This has been so successful that there are now more Chinese (136, not including Taiwan) than American companies (124) in the Global Fortune 500 list. More fascinatingly, 87 of those Chinese companies are partially or fully owned by the government.

Long-term Planning and Meritocracy

Chinese leaders routinely came up with 5-year plans and devised strategies for much longer. They really planned the country’s future for the next 10, 20 and 30 years. The lack of elections was a blessing since the bureaucrats and politicians did not have to appeal to populism or worry about the next elections. Leaders could make tough and unpopular decisions, which eventually helped the country. And politicians got promoted based on measurable achievements, just like in a corporation. (There is also political infighting and loyalty-based promotions, but overall meritocracy has done well).

Foreign Technology & Foreign Systems

China did not have the technologies or the basic capitalist tools like the legal system, finance, accounting, management philosophies etc. So, the Chinese borrowed these wholesale and incorporated them. By forcing foreign companies to establish joint-venture projects, Chinese government made sure that Chinese workers learned valuable skills in technology and management.

Centralized and Decentralized Systems

Some people think that Xi Jinping and others in Beijing micromanage the entire country. However, this is false and impractical. While Beijing may dictate broad goals, local governments have enormous flexibility to come up with strategies optimal for the local economy. Each province, city and village devises its own plans for growth, investments and prosperity.

WTO and (Not so) Free Trade

China’s extraordinary growth really took off after joining the WTO in 2001. Now as a part of the global community, China could sell stuff to the entire world. Thus, China fully took advantage of the free market. Even now, it signs free trade agreements like RCEP and looks for new treaties with Europe. Of course, China’s free trade is not so free due to protectionism and other barriers. For example, China may theoretically be open to foreign banks but in reality, all sorts of ridiculous regulatory hurdles — say, one year to get a license for a website — make it impossible for foreign banks to succeed in China.

The chart below shows how China came to dominate the global trade after joining the WTO:

In 2000, the US dominated world trade. By 2020, China was the bigger trade partner for vast majority of countries. (And #1 trade partner for 130 countries)

Copy and Replicate

China quickly copied everything and replicated the products and services whenever possible. Chinese companies would copy everything — the business model, products, marketing strategies (including logos, slogans and product names) and everything one could think of. Eventually, they would be competent enough to compete with the foreign firms.

Just 20 years ago, Chinese were only making clothes for Western brands and couldn’t make any cars. A great example of Chinese transformation is Shein, which is now the world’s largest fast-fashion company with a valuation of $100 billion. Similarly, China is poised to surpass Germany this year as the world’s second largest exporter of cars. There are numerous other examples in virtually every other sector — smartphones, appliances, computers and so on.

Industrial Champions and Strategic Manufacturing

The Chinese government picks “champions” in various sectors and helps them succeed with policies and subsidies. Huawei is a prominent example. Other sectors like solar panels, electric cars, rare earth minerals, and semiconductors are also highly promoted and guided by the Chinese government. Thanks to such strategic planning, China is the #1 global manufacturer of 200 critical industrial products.

The chart below shows how China came to dominate the EV industry, manufacturing and buying more electric cars than the rest of the world combined. China’s world market share went from close to 0% ten years ago to 52% in 2021 to 59% in the first half of 2022. This is made possible by the Chinese government’s strategic planning.

Public-Private Partnership and Poverty Eradication

While the CCP has the ultimate power in China, the Party officials respect private firms, without whom China cannot succeed. Thus, the bureaucrats and party leaders woo leaders of private enterprise, whether they are in high-tech startups or factory owners or farmers. At the same time, the government understood the need to lift everyone and not just the rich. Thus, China put enormous and unique efforts in lifting 800 million people out of extreme poverty. Eradicating poverty meant automatically boosting the economy.

Political and Economic Stability

While China has extreme censorship and some serious violation of human/labor rights, this authoritarian rule led to stability, which is essential for attracting investments and creating consistent growth. Western corporations love this, although they occasionally virtue signal and condemn China. Similarly, China’s state capitalism has managed to avoid recessions and financial crises for 40 years, which is an astonishing feat. Look at all the other developing countries which have suffered enormously by blindly following Western systems.

This is why 91% of the Chinese people say they trust the CCP/CPC — Edelman Trust Barometer 2022.

Moving up the Value Chain and 360-degree growth

China has consistently moved up the manufacturing value chain, constantly making more and more complex products. This is applicable for every single product. For example, once the Chinese just worked for foreign companies and did the labor-intensive jobs for assembling iPhones. Now, for example, Chinese companies like BOE, CATL and BYD make expensive parts — screens and batteries — for the iPhones. Chinese companies have also integrated automation and robots to remain competitive and productive. Also, there are now Chinese companies like Luxshare that can compete with manufacturing/assembly giants like Taiwan’s FoxConn.

The key to success is a 360-degree growth in the entire society. For example, China built 1000s of colleges over the last two decades to make sure the next generation of highly educated population can keep the country growing. To ensure food security, farmers’ productivity was increased with technology and land reforms; to facilitate trade, world-class seaports, highways, railways and airports were built; to build a digital society, fiber optic cables were laid all over the country and 5G was quickly adopted (there are 450 million 5G mobile users in China in 2022); to foster a healthy society, millions of doctors were trained and employed in newly built hospitals, and so on.

IP Theft and Technology Transfer

How China acquired so much intellectual property can be debated forever. Some was due to technology transfer, of which some was voluntary and some was forced. Perhaps the Chinese government bribed some elite American and European bankers and financiers who, as major shareholders, control major corporations. These globalists presumably told the CEOs to divulge trade secrets, blueprints, formulas etc. to the Chinese.

China also outright bought Western corporations like Volvo, Lenovo, GE Appliance etc., which led to acquisition of valuable IP. Sometimes, really smart engineers, scientists and innovators from Japan, South Korea and Taiwan were lured with financial incentives to help China — the semiconductor firm SMIC being a good example of this. Many Chinese scientists who have been successful in the US and elsewhere were also attracted to come back home. These are mostly legal, although sometimes there are violations of IP laws.

Finally, blatant IP theft through espionage and cyber attacks also helped China. Exactly how much each strategy contributed to China’s success will be unknown and debated for a long time.

R&D and Innovation

China has also made tremendous progress in science and technology. Since 2016, China has ranked #1 international patents (submitted with WIPO, a UN organization). In publication of scientific papers, China became #1 in 2020 in terms of total publication; and then in 2021 and 2022, China became #1 in the Top 10% and Top 1% of the most cited science papers. China is also #1 or #2 in R&D spending now (depending on how you measure). Although no transformative or radical innovations have come out of China, it ranks #12 in the Global Innovation Index, and overall, its achievements have been substantial.

Infrastructure and Subsidies

While Westerners take infrastructure for granted, China had to invest enormous amount of efforts and money to build a world-class infrastructure in the last 30 years and transformed itself from zero to hero. It has built the world’s longest networks of highways, subways, and high-speed rail (40,000 km as of 2022). China now has about half of all skyscrapers in the world; and 65% of 5G base stations. China produces twice as much electricity as the US and Chinese cities are glittering, fancy, clean, safe and well organized.

Lax Regulations and Incentives

In the beginning, China was focused on just jobs and growth, so ignored environmental regulations. Numerous industries dumped toxic waste into air, water and land. Pollution threatened China’s future. However, China changed it around. Now, cities like Beijing and Shenzhen don’t show up in the top 200 most polluted cities in the world. China is now #1 in renewable energy and has aggressive goals regarding climate change.

Another way to attract foreign and domestic companies was to create all sorts of incentives — subsidies, tax cuts, cheap land/labor/utility etc.

Industrial Socialism and Technocracy

I have written an article on how China has used industrial socialism, which was used by Germany in the 19th century to become the manufacturing powerhouse in Europe. The government takes over large, foundational industries to provide low-cost raw materials, efficient infrastructure, and cheaper labor (through public education, socialized healthcare etc.), which makes the industries competitive in the global market. Chinese banks are owned by the government and are more interested in helping the country grow, rather than making profits. All this combined with technocracy — a system of logical, apolitical, and non-ideological problem solvers — helped China advance quickly.

Corruption and Competence

Interestingly, there is not only a lot of corruption in China but many corrupt politicians are also very successful and competent. Party officials, bankers, politicians and bureaucrats often demand/accept bribes while approving loans, subsidies, and infrastructure projects. However, they get the job done in terms of reducing poverty, creating jobs, boosting GDP and so on.

Cultural Values and Ruthless Competition

China has the typical “Asian” cultural values that value education, discipline, hard work, family values etc. Such traditional values create a society of good students and good workers that underpin the success of the country. (There is now some push back among the Chinese youth against the so-called “996” culture).

Another aspect of Chinese capitalism is ruthless competition among entrepreneurs. Since the laws about copying and IP are lax, anyone can copy the business model or the product designs of a competitor. Thus, the only way to survive in such an environment is to come up the best product at the cheapest price. The ruthless competition leads to a lot of iterations and the most efficient products.

Collectivism, Pragmatism and Century of Humiliation

Collectivism is as much an East Asian value as it is a communist ideal. Thus, a lot of the problems are addressed with a whole-of-a-society attitude. The way China dealt with COVID-19 is an emblematic of this approach.

Chinese are also pragmatic. When the extreme communist ideology didn’t work, the CCP embraced capitalism. Deng Xiaoping famously said that he didn’t care if a cat was black or white, as long it caught mice. Similarly, China opened up to former geopolitical enemies like Japan and the US, and learned from every successful country.

Chinese leaders also never forgot the lessons from the past. China’s inward looking dynasties were deviously attacked and conquered by Opium-peddling Europeans and Americans, who leveraged a slightly better military technology and plundered China for the next century. This Century of Humiliation is deeply imbibed in the consciousness of the top Chinese leaders. They know that either China has to get completely assimilated by Western capitalism or try to be an independent, prosperous, and sovereign nation. The latter means eventual conflict for which China has to be prepared by being a leader in economy, technology, diplomacy, and military.

Modernization and Foreign Policy

While it may seem obvious, China’s relentless modernization of every aspect of the society over the last four decades has been remarkable and can only truly appreciated by comparing China to other developing nations. Things like plentiful and consistent supply of electricity, good roads, proper sewage systems, efficient transportation, and other foundational infrastructure systems in China are now like developed nations. In many cases — like subways and bullet trains — China is now far better than the US or Europe.

China has also pursued quite a smart foreign policy by creating organizations like SCO, BRICS, and AIIB. China’s Belt and Road Initiative has projects worth more than $4 trillion over the last decade in 100+ countries; and Chinese-built railway networks link numerous Chinese and European cities. While the US is now actively trying to sabotage China’s ascent, most leaders of Global South are staying neutral. African, Latin American, and even countries that are literally occupied by the US — like Saudi Arabia — are strategizing their future plans based on the assumption that China will be an economic superpower, likely more powerful than the US.

Speed and Scale

Everything is fast and efficient in China. While the successes of small countries like Singapore are impressive, the incredible speed and scale with which China has improved the lives of 1.4 billion people is a miracle. One just has to compare China with Africa or India to appreciate the difference.

Vision and Execution

Chinese leaders somehow had a powerful belief in their system. In 1980, they claimed that China will be a superpower within a few decades. There’s a video interview from 1992 where ordinary Chinese people were prophetic about the rise of China. Perhaps this confidence comes from the history of 2000 years of dynasties.

Of course, a dream is one thing and execution is completely different. Here, China has seemingly accomplished the impossible. At least so far.

Conclusion

Most developing nations are stuck in uneven and mediocre growth, while being totally dependent on the West for finance and technology. If they want to change their destiny, they should study China and figure out what aspects of the “China model” they can copy and implement.

The next decade will be dangerous and the most challenging for China. The big question is if China can avoid financial crises, debilitating economic slowdown, and destructive wars (provoked by the US) while making technological progress — especially in semiconductors.

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