We are all now aware of the emergence of China as a world economic force. The purpose of this article is to examine the real motivations of China and India.
The Chinese had the advantage of watching what happened to the Japanese. The Japanese found that when you messed with America in a war, you lost. However, the Japanese backed off and, without any natural resources and only a limited population, they mounted a second attack upon the United States of America in the arena of economics. They rose from nowhere to become the second largest economy in the world.
But the one thing the Japanese did not have was a population large enough to accomplish what the United States had done in the same circumstances. When the United States began to produce things, they not only exported them—initially the only exports were limited ones to Europe—but they had an internal consuming economy, courtesy of no lesser personage than one Mister Henry Ford. The Japanese did not have that critical mass and therefore never achieved the status of number one economic power; they accomplished their economic power from export alone.
The Chinese observed this and observed yet another phenomenon: the Russians. After the fall of the Wall in 1989, Russia chose to change its government before it changed its economy. That didn’t work.
The Chinese knew by the end of Mao’s reign that their system would not work for the long term; they began to make minor modifications. Then, having observed both the Japanese and the Russians, they allowed minor pockets of free enterprise to flourish within China. They established the so-called state-owned enterprises (SOE) where they would compete in the world economy. The socio-political system that established the SOE’s kept them from being full-blown successes, but they realized their potential. When the 90’s arrived, Japan was on the decline, and the United States was becoming involved as the world’s only superpower. There opened a door and the new regime in China, that wishes to maintain political power, said, “OK, we have an opportunity. We have the cheapest labor force in the world and we have the world’s largest single source of power outside the sun (for those of you who don’t know, I refer to the Three-Gorges Dam).”
With the new, post-Mao people in charge, the Chinese still want to maintain their position of power. They set up a two-pronged offensive. First, the economy must be raised to a level of generating internal consumption. You do that by establishing a strong export business and building revenues. While you are building revenues, you’re building average annual income of your citizenry and constructing the infrastructure to mass production. You are involving the citizens in the economic process. You are creating—in essence—a new middle-class. China has announced something we would have called a WPA. They are building 85,000 kilometers of six-lane super highways over a 30-year period. They are building twenty-five atomic generating stations. They don’t have to worry about the EPA. They have many advantages which we do not have. They are exploiting every one of these advantages to its utmost. They are well on their way to achieving their primary goal of generating capital through export. At the same time they are building infrastructure to support what will become the largest economy in the world and they will have the consumers to support that economy.
Someone brought up the point that there are places where the cost of labor may be lower than in China. That is a true statement, but to utilize low-cost labor, you must have some infrastructure. Let’s take an example: Bangladesh. The labor is cheaper in Bangladesh, but there is virtually zero infrastructure where that low-cost labor could be put to use. Also, the government of whatever country we might be talking about must be motivated to make use of this cheap labor. Right now all arrows still point back to China and India.
China already is the number one steel producer in the world (2004: 340 m tons, 2005: 400 m tons.) The Chinese purchased 70% of all cement in the world. They are the second largest importer of petroleum in the world. In the past eighteen months, they have gone from selling no microchips to the world to being well on their way to an announced goal of 20% of the market. And they will get there. China said they would sacrifice profits to take market share. In that statement is contained the essence of what this paper is all about.
In the western world, we are driven by the motive of profit. You must make a profit on steel; you must make a profit on automobiles, etc. Both China and India have a different desire: their main motive is employment for the people. When the people are happy, the leaders keep their job. That’s what this is all about. It doesn’t make any difference what you call yourself, as long as you tell everybody else what to do. You can call your system communist, call it anything you want; as long as the guys running it have the power and keep it, they don’t care what you call it.
Here we see an entirely different motivation for what the Chinese are doing versus what we are doing. They have no need to make a profit. What they need is capturing more market share and putting more of their people to work. China has a virtually unlimited workforce. There are a total of 1.3 billion people recognized to live in China. Recently, I have spoken to a gentleman engaged in international commerce, who is not a US citizen, who just spent 2 years in China. He informed me that the Chinese population is somewhere between 1.7 and 1.9 billion people. The government removed the one-child policy approximately eight months ago. I would expect that we’ll see a new baby-boom in the maternity wards of China over the next 90 to 120 days.
While things are now good in China, they are getting better. The people are happy, the leaders are happy, they will continue this policy, and they will expand this policy. General Motors and General Electric are running to China to build plants to take advantage of this situation. They think that they will export low-cost products back to the United States and make the profit. Once those plants are firmly established, the Chinese will know how to operate them. It would be a simple thing to impose an export tariff tax and take away the profits of General Motors, or General Electric, or the Philips Corporation of Holland.
Without the profit motivation, General Motors may say, “We’ll take our stuff and go home.” But you won’t take the concrete and steel that you built. And if you think you’ll take the machinery home, I suspect that you had better think again. You will be arrested for removing property that is not to be removed under the contract that you originally signed. And I think GM and GE will examine their contracts and find out that their equipment, once placed, cannot be removed.
So, what happens to the rest of the world, those of us who do have the profit motive? Simply, if there are no profits, our corporations will cease to exist. Not all will cease to exist, but those that are engaged in high employee cost, or in manufacturing of items that are in direct competition with China, such as automobiles, steel, aluminum, light bulbs, television sets, etc. If you make it in a factory, you’ll probably be out of business. This is a very sour note to the rest of the world’s economy, for some time to come.
The only surefire investment opportunity for others in this no-profit world of tomorrow is to have the things that the Chinese must purchase, things that they don’t have: oil, natural gas, copper, certain grades of coal, all of the base metals such as zinc, lead, and in particular uranium. Uranium will be in great demand. The other main class of items they will need is agricultural (7% or the world’s agricultural land, 24% of the world’s population.)
It is best to purchase companies that are not based in the United States to participate in this hard asset investment world. My personal choice is Canada. Australia offers some opportunities. Bond investors should only consider bonds in Canada and New Zealand (New Zealand for an entirely different reason, I might add.) Australia has U.S. type problems and although they have enormous natural resources, some of those problems may complicate their bond picture. Canadian and New Zealand currency will rise dramatically against the U.S. dollar.
The rising cost of energy and the falling value of our dollar in world markets will present another problem for citizens of the good ole USA. Our energy cost will soar beyond belief. Therefore it is mandatory that you have investments in those areas where you’ll have extreme increased cost. Look at Blake’s rule no. 3: “The world runs on oil.” And you have to own some of that oil!
The Chinese government plans to build a pipeline from Iran to China, passing through some of the “-stans,” the former Russian republics. Not long ago, the Shanghai Co-operation Council (SCO, whose members are Kazakhstsan, Kyrgyzstan, Tajikistan, Usbekistan, Russia and China) has agreed and signed a pact of mutual defense - demonstration of this alliance took place August 18 to 25, 2005 (when peace mission 05 was conducted.) The SCO members also agreed to ask the US to withdraw their troops from their new military bases in Central Asia, and to set a time table to this effect.
When you combine these facts with the rising protectionist atmosphere in the US congress, where they have introduced legislation to erect 27% import tariffs against Chinese goods – and we all know that tariff wars lead to a more dire potential than a no-profit economy—it introduces the potential of armed conflict.
When you cut off a nation’s supply of petroleum as we did in 1941 it provokes war.
When I started to write this epiphany, I could see the potential for massive world investment disruptions. Unfortunately, politicians begin to blame other countries for their problems at home. Once they have convinced the voting public that “It’s not my fault. It’s so-and-so’s fault,” it then leads to retribution against the cause. That is when the flames of war are fanned. What I thought was going to be a dire economic prognostication has turned into a suggestion of WW III.
We will do follow-ups to this theme. We will let you know where those will be available. We will let you know when there are specifics that need to be pursued, through some source of media. We will maintain contact.
© 2006 Zapata George Blake
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