July 12, 2001

Because of the Olympics selection for 2008, China is very much in the news. As a recent traveler to that part of the world, I would like to provide some of my observations on China, its economy, and its capacity to host a successful Olympics.

On the last issue, there is no question. China is large enough to redirect resources to meet any specific objective, such as a successful Olympics. Beijing is adding to its subway, increasing highways (a new loop opened while I was there), and operating increasingly world class tourist facilities.

Dust and smog are constants in this dry but rapidly growing city of 14 million people and 10 million bikes. That could impede performance (not many Olympic records are likely). However, sport societies are springing up all over China. Arenas are under construction in many major cities, and the Chinese athletes are increasingly world class. On their own turf, the Chinese could be the top medal winners in the 2008 games.

That the governmental structure of China is authoritarian should be no surprise to anyone. This has been true in China for more than 2000 years.

The government owns all land. They increasingly do not own the improvements upon that land. Yet, they can, and have, arbitrarily decided to change land use plans, causing economic hardship to some firms and many individuals.

However, the current government knows that capital is scarce despite the enormous savings of its people. They need international investments (which now are averaging more than $3 billion per month). Too many arbitrary decisions will chase the capital away.

The currency is tied to the dollar, restricting monetary policy but also restraining inflation. I did the big mac test in Shanghai and discovered that their yuan is significantly undervalued against our dollar. (As big macs are sold all over the world and most of the ingredients are locally produced, they should cost about the same dollars everywhere if currency values are appropriately adjusted, according to one theory).

This has created an enormous trade imbalance with the U.S. Indeed, China now is selling about $7 billion more per month to the U.S. than we are selling to them. This trade gap is even wider than the one with Japan.

Thus, we see China as an economic powerhouse. This is not true worldwide, however. As the dollar has rallied against other currencies, China has developed increasingly large trade deficits with the remainder of the world.

Furthermore, there is ample evidence of misdirected capital. In Xi'an, completed commercial buildings are empty and many projects have just been stopped with rusting girders. Those sports arenas are sparsely used. Shanghai is building a new convention center toward its airport even though it already has an underused facility near the center of town.

Then there is the enormous Three Gorges dam project. Estimated to cost $28 billion, some local people believe the costs, including the relocation of 1.4 million people, will be more than $50 billion.

Income disparities are dramatic. While the urban middle class worker might earn $500 a month (and support a child and grandparents on that salary), the returns to peasant workers are about a quarter of that even after receiving artificially high prices for their crops from the government . As a result, people are trying to flock to the cities.

In previous years, they could not receive urban housing without acceptance by a work unit. Now they can buy their way in by purchasing a high rise apartment. But the costs probably are more than 60,000 yuan for a peasant who must feed the family and save on 1000 yuan a month. Nevertheless, the cranes are busy building high rise apartments for those who can afford to migrate to the cities.

China's agriculture probably is using close to best labor intensive practices (rice production per hectare is over 60 percent of the best production from Japan and many hectare produce five crops of something each two years). To substantially raise agricultural productivity, China will need to shift to capital intensive production. That will release a population equal to all people in the U.S. to find alternative activity.

Behind all the Shanghai glitz and Beijing fašade, this still is a poor country.


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