The President of China is Here – Hu Cares?

by BILL WADDELL

The President of China rolled in yesterday amid quite a bit of media noise but the news stories are largely (to quote Mr Shakespeare) "A tale told by an idiot, full of sound and fury, signifying nothing."  The end of the Chinese miracle has begun and all that remains is to see how it plays out.  Last summer I called it pretty accurately ( which is more an indictment of the ignorance of most business writers than it is evidence of any great insight on my part), and it is playing out according to that script.  What Hu Jintao and Barack Obama talk about over the next few days is largely irrelevant.

China holds a lot of US debt and seeks to use that fact as leverage to keep the US feeding its dysfunctional export economy.  That is pretty thin leverage, however.  They actually only hold 6% of our debt, so the cynical descriptions of China as our landlord are a bit of a stretch.  More important, China has the sort of leverage over us the local bartender has over the town drunk.  The barkeep is all powerful when the sot is desperate for another drink, but the day he sobers up and joins AA the bartender's hold over the drunkard disappears.  Obama and his wacky economic team are still desperate for another drink, but whether congress freezes the debt ceiling or not, the days of insane spending on bailouts and stimulating the economy with borrowed money to build turtle crossings in Florida are over.  The American voters held something of an intervention with the liberals and Hu knows that he can't count on his biggest customer to belly up to the Chinese bar quite so often.

China is left with an economy built on an increasingly fed-up labor force that has been misused and abused, inflation that is on the verge of spinning out of control, rising costs (Chinese products are up 5-10% just in the last six months and will go up further and faster in the next six), and a customer base that is leaving in droves.  The billions China spent on facilitating its export economy – ports, highways along the coast, and over the top development of coastal cities like Shanghai – should have gone to schools, internal infrastructure, cleaning up the air and water and generally investing in increasing the productivity of the Chinese people. 

I have asked the question at probably a hundred workshops and seminars over the last few years – name one company that was doing OK manufacturing in the US whose fortunes have significantly improved by moving manufacturing to China?  I have yet to have someone come up with an answer.  Companies like Apple don't count – they never manufactured here in any meaningful way.  The fact that there are none is proof that China never was a good deal.  With a history of shoddy quality, absurdly long supply chains,ethical standards that give a whole new meaning to the term 'bottom feeder', and subsidizing exports with renminbis printed by the bushel basketful you have to wonder what these guys were thinking.  It fed solely on the short term greed and out of control borrowing of the western world.  Take away those things and China is left with a disaster.  Things are so fragile in China that if the US were to simply increase the import tariff from 2% to 10% to make things equivalent to the Chinese tariff rates, the entire Chinese house of cards would collapse into utter chaos.

Germany has cut spending (and borrowing), focused on manufacturing and has emerged to be the shining star of the world's economy – and China's worst nightmare.  The US is starting to move in the same direction.  Manufacturing is slowly but inexorably coming back to the US. That trend will continue, and China will have no choice but to face up to the fact that only increased productivity, replacing its corrupt leadership with something closer to true democracy, and competing head to head with the world on the basis of quality and value will build its economy in a sustainable fashion.

And there is nothing Messrs. Hu and Obama will talk about today that can change that.