(Bull on the Bund, Shanghai)
We’ve been in China for less than a month as part of our Silk Road journey by land, a time, highly inadequate to make any strong conclusions. Yet, within that time, we’ve crossed the full country west to east, taken only public transport, stayed and dined in ‘everyday’ hotels and restaurants (a lot of street food as well!). All this gave us a chance to engage with locals on a completely different level than by only visiting the financial sector in Shanghai or government officials in Beijing (and staying in 5-star hotels – the way I used to do it as a professional investor). All this is obviously anecdotal ‘evidence’ but what struck me is:

1) the service sector is absolutely booming

2) prices are generally on the same level as in Europe/US

3) the locals can afford them

I consider myself a practical economist (UPenn/Wharton but having acquired 90% of my ‘economics’ from the markets and from tons of reading), so I am not making any claims, but it is actually possible, despite misgivings in the West, that China may indeed be growing at the official rate they have been reporting.

We, ourselves, in the West, are grappling with the accounting of an increasingly digitized service economy. Well, the size of Chinese e-commerce is multiple times that of the US, which means a lot more data. Moreover, because of the structure of society (centralization) they have managed to gather and analyze that data, and perhaps, make better conclusion than we could possibly make.

So, it is possible that we are indeed looking at Chinese growth too pessimistically, which does not negate the fact that all this may indeed be built upon a credit bubble. That would be hardly a surprise given that US growth has been built on a huge private credit bubble since the days of financialization in the early 1980s. Indeed, the locals we spoke to, think there are currently three big bubbles in the world: US stocks, Japanese bonds and Chinese real estate.

My point is that China could be shifting to a consumer-based society much faster than we anticipated and thus is also becoming much less dependent on exports and foreign growth – China does not need to rely on the rest of the world that much anymore. That was more than obvious on our travels in the country: foreign tourists, at best, are tolerated – the local Chinese tourist industry is very well developed and is flourishing. This is a big change from 10 years ago, for example, during which living standards have more than doubled.

It is amazing, in fact, the magnitude of Chinese middle class growth. When combined with the digitalization of society, totally embraced by the government, and the Great Leap Forward may finally happen.

(*Overtake England in 15 years”, 1958, Shanghai Propaganda Poster Art Centre)

The fact that some of these trends are developing much slower in the West due to a lot of private legacy interests, which stand in the way, and governments which imagine they are running out of money, increases the risk that this latest trade ‘war’ would prove to be a spectacular own goal.