Since 2012, I've been a frequent visitor to the People's Republic of China. With 52 red stamps on my passport to prove it, I'm still mystified by the incongruities that jump out at me as a Westerner.

I’ve come to accept that plenty of contradictions about China will never make sense to the Western mindset. Yet China, whose Communist Party government turns 70 today, marches on, contradictions and all. 

The same China that’s famous for its human rights violations is the China that lifted more than 800 million people out of poverty as per capita GDP rose from $89 in 1960 to roughly $10,000 today. The China where rural kids burn trash to keep warm is the same China that minted two billionaires per week in 2017, and where life expectancy rose from 43.7 years in 1960 to nearly 80 years today.

However you see China, these days, you must see China. It cannot be ignored, especially by investors. 

Let’s see how China’s economy as we know it happened, from its rocky early decades through to present, and on to where it’s going.

1949: Inflation Fighter Mao

Ideology tends to birth major leaders, but so, too, does inflation. Chiang Kai-Shek’s Nationalist government had turned to the printing press to finance the 1937 war with Japan and the 1946 civil war against Mao Zedong’s communists. According to data from the libertarian think-tank Foundation for Economic Education, in 1937, 3.6 billion yuan were in circulation. By 1948, 5.1 quadrillion (the next number after a trillion) were -- and that’s after a 3,000,000-to-1 reverse split. This, plus Nationalist corruption, helped turned popular support Mao’s way.

1958-1962: Great Leap Forward

Mao wasn’t an economist. Nor was he an agriculturalist. During the Great Leap Forward, as many as 45 million people died from Mao’s failed attempt to convert small family farms to communes while simultaneously getting them into steel production. Chinese living standards, as measured by purchasing power parity, fell 20% from 1958-1962, according to data from Angus Maddison cited by the Congressional Research Service.

1966-1976: Cultural Revolution

He buried 460 scholars alive. We have buried 46,000 scholars alive. You [intellectuals] revile us for being Qin Shi Huangs. You are wrong. We have surpassed Qin Shi Huang a hundredfold.

Mao wasn’t much for intellectuals, which both he and Qin Shi Huang, who became China’s first emperor 2,000 year ago by standardizing currency, script, and units of measure, saw as threats to power. Mao’s campaign to eradicate both cultural relics (and the traditionalism they beget) and academic intellectualism caused industrial production to drop by 14% in 1967.

1979: Deng Opens the Door

Black cat.. White cat... color doesn’t matter as long as it catches mice. A contradiction between socialism and the market economy does not exist.

Deng began China’s real economic miracle with his 1979 Open Door Policy. Critics point out the irony of communist China’s “miracle” coming from its taste of capitalism. But China fans will say that China’s results stem from effective hybridization of two systems.

For example, a hallmark of hybridization has been state-owned enterprises (SOEs), which initially dominated China’s economy, then were reduced, only to be strengthened again under Xi Jinping. Democratic nations say sovereign help in the form of reduced competition, preferential financing, or subsidies gives China’s firms an unfair boost. China says that’s the point. 

Thanks in part to these boosts, the Middle Kingdom is becoming middle class. Consulting firm McKinsey notes that 76% of China’s urban population will be considered middle class by 2022 (defined as earning between $9,000 and $34,000 per year, which affords a decent life in China). In 2000, just 4% made this cut.

However we see it, from 1978-2018, China’s real (i.e. adjusted for inflation) GDP increased by 9.5% annually – enough to double every 8 years. And while real GDP is slowing, from 14.2% growth in 2007 to an IMF-estimated 5.5% growth in by 2024, even slow numbers by China’s standards are breakneck by the rest of the world’s.

2013-Present: Xi Jinping era

President-for-life Xi Jinping has maintained China’s hallowed above-6% GDP growth (generally assumed to be stretched by analysts), but at the cost of debt: 

Building of ghost cities and roads to nowhere has eased, select companies are now being allowed to default, and Western economists are finally coming to understand that a state-controlled economy can absorb bad debt in ways that a market economy can’t – though some still suspect China’s banks of having up to 10 times more bad loans than they report.

Trade War

Originally prompted by President Trump’s dissatisfaction with the U.S.'s $540 billion annual exports to China in 2018, relative to China’s $120 billion in exports to the U.S., the trade war has expanded to address a range of issues from IP theft to state subsidies. Xi likely doesn’t mind buying more soybeans or whether canoe paddles are taxed at 12.5% or 25%; China’s soul searching is around whether U.S. demands around state subsidies and IP transfers are at fundamental odds with how its socialist model works. 

The Future: Does China Own It? 

Try sending a Chinese person an email. Try using your credit card in China anywhere other than a hotel. Try paying with cash at a big-city restaurant. Not impossible. But hard.

Email has been replaced by WeChat. So have credit cards and cash, for that matter. “China speed” partly arises because a country building from scratch can leapfrog legacy technologies (taken an Amtrak lately?), partly because China’s populace is pragmatic and fast-adopting (already, 83% of China’s payments are mobile), and partly because the government sees betting heavily on technology as a way to get ahead while demonstrating the superiority of the Chinese model. 

5G

China’s authoritarian system and ownership of the country’s three main telecom companies have allowed it greatly to expand 5G wireless coverage which is at least 20 times faster than 4G, enabling better connectivity among all sorts of devices from driverless cars to smart appliances. Whereas the U.S., where 5G is developed privately and beholden to both federal and state regulators, has been left to play catch-up. 

Artificial Intelligence (A.I.)

The Chinese government recently outspent the U.S. government 200-to-1 in artificial intelligence, in keeping with China’s plan to become the world leader in AI by 2030 (the U.S., meanwhile, has reduced science funding). Americans shudder to think of China’s Big Brother-style network scoring people via surveillance cameras, social media, and financial records. But values aside, China, with abundant data and few restrictions on how that data is used, at least has the petri dish for refining certain AI faster than the democratic world. 

Technological Self-Sufficiency

McKinsey notes that despite being second in the world for research and development spending, China still imports six times more intellectual property than it exports. China still relies heavily on foreign technology in semiconductors and healthcare, for example, and technology transfer writ large, whether by theft (estimates of China’s annual IP theft from the U.S. run as high as $600 billion), policy (China traditionally forced foreign firms into technology-sharing partnerships as a condition of market access – a requirement that the U.S. and others claim violates the World Trade Organization rules China agreed to in 2001), or purchase, has been a pillar of the post-Deng Chinese model. 

Made in China 2025 is China’s attempt to climb the manufacturing ladder to self-sufficiency in key technologies. The debate around the program is a microcosm of the debate around the overall Chinese model: China says it’s simply trying to modernize. The U.S. gripes that the tools of that modernization include heavy state subsidies and aggressive technology transfer, adding that China’s blurred lines between company and state make use of acquired technology to advance powers and values not aligned with the U.S. likely.

Made in China 2025 Industries

1. Information technology
2. Machine tools and robots
3. Aerospace
4. Ocean engineering and high-tech ships
5. High-tech rail
6. Electric cars
7. Electric power equipment
8. Farming machines
9. Advanced materials
10. Medicine and medical devices

Conclusion

A strange thing about China’s birthday is that I’ve seen anti-communist Chinese celebrating it. Westerners separate people, governments, and histories, but the Chinese mindset tends to identify “China” as a fusion of the current government, thousands of years of history, and the Chinese people today. 

As their China turns 70, the people’s biggest concern for the moment is not the trade war, Hong Kong, or their country’s role on the geopolitical stage. It’s pork prices, which have spiked from the African swine flu. Pork is oddly integral to Chinese society, and the creation of China’s strategic pork reserves in 2007 was the government’s effort to ensure that its people – who can go without freedom but not without pork – feel their priorities are cared for in ways that don’t necessarily make sense to the Western mindset. Leadership’s acknowledgement that “China” is a fusion of people and traditions together that, as much if not more so than the government, have made China what it is today. Popular opinion may be that as long as the government itself doesn’t lose this sight, China may celebrate its 140th birthday. 

Investopedia