China’s Doing it Right

A trend that I expect will continue going forward is the superlative economic growth that is occurring in China. The country has been experiencing 10% GDP growth, but estimates call for some slowing this year and in 2008. Even still, the annual GDP estimate of over 9% remains well above anywhere in the developed world. I expect this trend to hold.

 The government is clearly backing and pushing the economic renewal that has seen China rise to become the world’s second largest economy based on GDP. The country is a member of the World Trade Organization and has its sights on using its cheap labor force and costs to sell its products worldwide.

 Within the country, the growing middle class and mass migration from the countryside have created a massive consumer hungry society that would probably have made Mao quite agitated, to put it mildly.

 But the industrial and economic revolution is on. China, unlike the former Soviet Union, has created an economic system that is working. After seeing the failure of the Soviet Union in managing its economic development to a modern system, the Chinese learned.

 Russia under Boris Yeltsin was a mess, opening up the country’s economic system, but giving away its massive assets in an unstructured manner. The issuing of company vouchers under the former Russian regime was foolhardy, as the majority of Russian citizens had no concept of what to do with the vouchers. They were meant to be exchangeable for shares of Russian companies but many of these companies were non-operating and had no valid valuation.

 But some who were smart or cunning enough recognized the value of the 40 million vouchers issued and, in an ingenious manner, began to buy vouchers in the open market for very little. In the hands of many, the vouchers were essentially worthless, but some were able to accumulate millions of vouchers and then exchange the vouchers for control of asset-rich Russian companies.

 Of course, after Yeltsin left, new President Vladimir Putin came in and, after careful review, deemed giving away state control assets to be illegal. Putin is going after those that benefited greatly from the suspect transactions.

 The moral is China did it right. The government continues to control what happens in Chinese business. While this may be suffocating, it does allow for an orderly economic system under Communist rule.