Five Things I Know About China

By P.J. O'Rourke

Everybody's worried about China. Its economic situation is complicated. But China isn't "The Mysterious East." It isn't impossible to understand.

A few years ago, I traveled around China with two savvy companions, looking at the fabric of the Chinese economy and the nuts and bolts of China's economic growth.

I mean "fabric" and "nuts and bolts" literally. We spent our time at textile mills, steel mills, manufacturing plants, and clothing factories.

I was with old friends from Hong Kong – Tom, an engineer who has been in the steel business on the Chinese mainland for 30 years, and Tom's wife Mai, a Hong Kong native fluent in English, Cantonese, and Mandarin.

When China began adopting some aspects of capitalist economics in the 1980s – a shift known as the "Open Door" policy – Mai and her brothers started a textile machinery brokerage firm.

Mai's job was to take mainland start-up entrepreneurs to Europe (where they encountered their first fork, escalator, etc.) and arrange for them to purchase used spinning, weaving, and dyeing equipment from the faltering textile companies of Belgium and France.

The three of us journeyed to Shanghai, Hangzhou, Nanjing, Wuxi, up the Yangtze River through the Three Gorges to Chongqing, north to Xi'an and Shaanxi Province, and south to Guangzhou.

I came back from China optimistic about its future. And I'm still optimistic. But even at the height of China's growth boom, I felt what might be called "alert" optimism. An investor in China needs to be wide awake, with good information, solid advice, patience, an eye on the nation's complex (and sometimes self-contradictory) political system, and insights about the nature of the people and enterprises that will make China grow.

To me, five things about China were clear:

1. The Chinese are more like Americans than anybody, including some Americans.

As entrepreneurs, the Chinese aren't just sharp, they're sharp-eyed. They see opportunity where others see disaster.

One gentleman I met – let's call him "Mr. Chen" (I've changed the names of the people I interviewed) – was a polyester-fleece magnate. He got his start as a soldier looking at Russian corpses during the 1969 Sino-Soviet border clash along the frozen Amur River.

He noticed the Russians had synthetic fabrics that were lighter and warmer than the fur the Chinese troops wore.

Mr. Chen knew nothing about textiles, but he convinced senior officers to let him start a small military research project.

When China went capitalist, Mr. Chen used his research to build a fleece business. The People's Liberation Army not only gave him permission, it even provided financing.

By the time I met Mr. Chen, his textile mills were rolling out miles of fleece for clothing makers around the world.

But the secret to American-style capitalism is not only the success of good ideas, it's also the failure of bad ideas. Resilience is needed.

David, the tour guide on our boat trip up the Yangtze, was the son of a truck driver. In the 1980s, the government trucking company began allowing drivers to lease trucks for 10% of the profits.

David's mother scolded David's father for giving up his safe government job to lease a truck. But David's father made $2,000 a year. "We had the first refrigerator in our neighborhood," David said.

Then David's family invested in the new, poorly regulated, easily manipulated Shanghai Stock Exchange. Bad idea. They lost everything.

"They moved to a small village and worked all day and all night to start a tourist resort," he said. "Now they are prosperous again."

The Chinese work hard and play hard. I asked Mai why there weren't many mainland Chinese on our cruise up the Yangtze. "They cruise down the Yangtze," she said. "It's three days instead of four, so they can have their fun faster. Mainlanders are always in a hurry."

And mainlanders also don't stint on hospitality. Tom and Mai's business friends outdid each other with umpteen-course meals. Tom calls it "death by banquet."

The Chinese like beer, wine, whiskey, and throat-searing maotai sorghum brandy, and serve them all at the same time. You don't sip your drink in China. It's gan bei ("bottoms up") no matter the size of the glass.

The Chinese like to laugh. After four or five gan bei toasts at a banquet in Shanghai, Mr. Lui, a real-estate developer, criticized America's involvement in Afghanistan.

I assumed we were talking politics and began mumbling nonsense that sounded like John Kerry.

"Don't talk politics," said Mr. Liu. "Talk price. What do you spend on the war in Afghanistan? Maybe $300 billion? Maybe $400 billion?"

In fact, the total, so far, is almost $900 billion.

"Afghanistan has a $20 billion GDP," said Mr. Liu. "Has your president never heard of a P/E ratio? Why didn't he buy the country from the Taliban?"

And China has an American frontier egalitarianism. Every dinner included the business leader's secretaries, aids, assistants, and drivers, seated at the same table and eating, drinking, and talking with equal gusto. (Although the drivers were excused from gan bei.)

2. China is a frontier.

The wilderness begins just a few miles outside the cities. Although it's an economic wilderness. I didn't see any forests or prairies or wild animals.

A coal, coke, and iron-ore broker from Xi'an, Mr. Tian, took me on a 150-mile trip to show off the coke oven he had built in rural Shaanxi Province.

Except for a few high-tension wire towers and the highway, we saw what Marco Polo saw. Every bit of land was terraced to the hilltops. Even in burial grounds crops grew right up to the gravestones.

The power from the power lines didn't reach the tiny villages, nor did the pavement or any water pipes. Goats, sheep, and pigs were few.

Mr. Tian grew up in one of these villages. China's subsistence agriculture, he said, doesn't produce the surplus needed to support domestic animals.

Average annual income in rural China is about $620. Half of China's population is rural.

3. China is still poor.

This is good for investors. It shows how much growing China has left to do.

China's $10.4 trillion economy seems huge – until you divide it by its 1.3 billion people.

China's per-capita GDP is $13,224. Botswana's is $17,050.

China's government claims the average wage is $8,575 a year. But it seems to be a struggle to get a job with "average" pay.

In China's booming coastal cities, I heard about foreign workers and illegal immigrants. But I didn't see any workers who looked foreign, except a few well-heeled expats.

Government permission is, technically, still needed to change your place of residence in China. The "foreign" illegal immigrants were from the China's own countryside.

The official minimum wage in China is $3,618 a year. For a Chinese family of four to reach the U.S. poverty line of $23,283, three adults would have to be working two full-time minimum wage jobs each, plus overtime.

A few figures tell the story. But a look out the car window in Shaanxi told it better.

4. China's economic base is primitive.

This is not good for investors. Because the problem is not old-fashioned machinery or out-of-date technology. The problem is a primitive, authoritarian, deeply corrupt, and highly arbitrary politico-economic system that lingers in China.

China's new factories were built with foreign capital to produce foreign exports. There's another side to Chinese manufacturing.

Tom took me to a Mao-era steel mill that his company bought from the Chinese government for $1, on the condition that Tom keep it operating.

The machinery was old-fashioned. Sir Henry Bessemer, who invented the Bessemer converter to mass-produce steel in 1856, would recognize every part of the mill.

What would have baffled Sir Henry was the 2,000 workers Tom had to fire because they weren't doing any work. Not to mention the 300 "ghost workers" who were on the mill's payroll and didn't exist at all.

The mill's workforce is now smaller than the number of ghosts it used to employ.

Tom had to cope with labor unrest. As we were climbing the tower to the blast furnace, Tom said, "Here's where a guy threw a wrench at me."

"What did you do?" I asked. Tom was wearing an Armani suit now, but he had been a Ranger in Vietnam.

"I knocked him down the stairs," Tom said. "After that, I got along fine with the workers."

There was also a family in the nearby village that, by tradition, had "theft rights" at the mill. They stole a railroad train full of iron ore. Tom caught them by following the train tracks.

Tom bought a 150-pound guard dog from the People's Liberation Army. Shasha ("Killer") was still there, delighted to see Tom and wagging a tail that could drive railroad spikes.

Tom's longest-running difficulty came from a mill hand having an affair with a woman working at the chemical factory next door. They got together in an electrical equipment closet. Midst throes of passion, the mill hand backed into high-voltage circuitry and was electrocuted. (His girlfriend survived – with her hair a bit frizzier than is usual in China.)

The mill hand's widow brought her entire ancestral village to block the steel mill's gates. As compensation for her husband's death, she demanded his salary in perpetuity, a job for their mentally disabled daughter, a new house, and payment of her husband's gambling debts.

"I had to call in the Communist party officials," Tom said.

"Did they ship her and her village to a prison camp?" I asked.

"They didn't do anything. They said it was my problem. I finally settled with the widow for a couple hundred bucks."

5. China has a lot of history.

Some of it is good. British scientist, historian, and China expert Joseph Needham maintained that from the first century B.C. to the 15th century A.D., China was the most prosperous and technologically advanced country on earth.

Then, progress stopped for 500 years. The reason was the authoritarian, deeply corrupt, and highly arbitrary politico-economic system.

After the fall of the Qing Dynasty in 1911, China didn't recover. Instead, the Chinese communists imposed a whole new authoritarian, deeply corrupt, and highly arbitrary politico-economic system.

Lately, progress has been rapid. China's per-capita GDP in 1980 was $310. But the most important thing I learned in China is that no matter how entrepreneurial individual people are in China, and no matter how energetically their enterprises are run, there are powerful forces remaining that can hold back the country's maximum potential for real growth.

In Guangzhou, I talked to Phillip, an American who moved to China to restore the antique furniture that had been wrecked and neglected by the communists, and build reproductions using the original types of wood, tools, and finishes.

He showed me his workshop where he runs a training program for young Chinese cabinetmakers.

Phillip said, "After a couple of generations when no one cared about craftsmanship, the craftsmanship is amazing."

I watched a young man making an intricate dovetail joint. Phillip explained that European cabinetry has five principal types of dovetail joints. But Chinese cabinetry has more than 40.

The young man was cutting the dovetail with a hatchet – a hatchet an American Boy Scout would use to split kindling while slicing off a toe.

Phillip said, "There is, however, a Chinese tendency to do things the hard way."

Regards,

P.J. O'Rourke