China’s economic miracle
Notes from the frontier of
The first thing you notice is the dust.
It starts as a tingle in the eye, and then it migrates south. You masticate it, radiate it, marinate in it. The air is so packed with it that a water truck has to spray the streets just so people can see, announcing its arrival with a warbly rendition of “It’s A Small World.” The dust comes from the factories’ fumes, the construction crews’ clouds, and most of all, the mountains of mud that frame the Yellow River’s torpid trail.
This is Lanzhou, the old Silk Road outpost that has matured into a metropolis of almost 4 million as the capital of Gansu province in China’s still-poor northwest. And as your lungs can attest, it is one of the most polluted cities in the country.
It is here, on the frontier of China’s economic miracle, that its future will be written. Beijing and Shanghai have already crammed 200 years of economic history into the past 35 — and have glossy, gleaming new buildings to show for it. The cities’ incomes are on par with Eastern Europe’s today — think Lithuania —and will match Western Europe’s in a not-too-distant tomorrow. But Lanzhou is a different China. It is part of the second-poorest province in the country, with incomes more in line with Angola’s, or a little more than a quarter of what they are in Beijing. Whether Lanzhou and cities like it climb closer to first-world status or get stuck will be the next chapter in China’s comeback — or not.
The first chapter came in 1978, when socialism gave way to socialism with Chinese characteristics, or what is more commonly known as capitalism. It
started when 18 farmers in Anhui province had the counterrevolutionary idea of divvying up their communal land, tilling it individually, and selling for profit anything over and above their state-set quota for profit. It worked. In fact, it worked so well that the government noticed and, in a fit of post-Mao pragmatism, decided to de-collectivize the rest of the country’s farms as well. Factories followed. After that, the Party set up Special Economic Zones along the coast as incubators for what kind of policies actually worked, where even foreign investment was allowed. The boom was on.
China has not followed a new playbook for getting rich. It has just followed the old capitalist playbook better. It has moved millions of people from the farms to the factories, sold masses of manufactured goods to the world, and invested everything else in education and infrastructure — making its people even more productive. But the free market did not achieve this by itself. Beijing supercharged it by keeping its currency artificially cheap and throwing cheap loans at companies to subsidize their already-cheap wages. The result has been an export machine that, together with the country’s building binge, has pulled more people out of poverty than at any other time in human history.
But even this economic model has its limits. You can only be a low-cost manufacturing mecca so long before wages rise too much. And you can build only so many roads and bridges before you do not need new ones. Or play copycat only so long before you catch up. Indeed, the first two are already problems. For the first time in 30 years, there are not as many workers moving to China’s cities as before, which has given current workers the bargaining power to demand bigger raises — and sent low-cost jobs to even lower-cost Vietnam. The government has made up for this slack by plowing about as much money as possible, if not more, into infrastructure, but it is becoming clear that this is not enough.
In the not-so-long run, China needs to start producing highercost goods that it can still make money off of with its higher-cost labor and stop relying on foreign consumers instead of its own. If it does not, places like Lanzhou will stay stuck in the past — backwaters where today will be better than yesterday, but tomorrow never quite comes.
Building for the future
The second thing you notice are the cranes. They are everywhere. Just-started buildings, just-finished buildings and the skeletons of ones somewhere in between have invaded Lanzhou’s cityscape. From above, they look like 30-story sentinels fanning out from the riverbank to extend modernity’s foothold in the city. There is a uniformity to it all. The last three or four generations of buildings, going back to the early 2000s, all share the same basic blueprint: rectangular towers with indentations in each side where balconies jut off. Earthy reds have replaced the blue-andwhite-tiled exteriors of a decade ago, but other than that, the future has not changed much. It is just more expensive now.
Who can afford to live here? That is not the right question. The right question is: How long until people can afford to live here? Whether it is Beijing’s ring roads, Shanghai’s subway lines or Lanzhou’s high-rises, China has not built what it needs today, but what it will need tomorrow. That is not hard to figure out when you have an economy of 1.3 billion people growing this fast. The answer is always “more.” And in Lanzhou’s case, that not only means more apartments, but also more ways to get around. There is the half-completed high speed rail, linking it to Urumqi in the west and soon Xian in the east. The elevated tracks being erected to connect Lanzhou to the airport an hour outside the city. The chasm downtown where workers are busy burrowing the city’s first subway stop. And the recently completed express bus lanes, with their mini-terminals like little islands in the middle of the road.
This spending spree has not only transformed the city’s skyline, but also people’s bank accounts. If, that is, you have the right connections, or what the Chinese call “guanxi.” It is true that the Party has tried to crack down on its own self-dealing, but that has not changed the fact that money trickles up in China. The first time I was in Lanzhou, in 2012, visiting my wife’s family, a cabbie told us he was doing this only until he had saved enough money to pay the kickback he needed to get a construction job on the bus lane project. It would apparently take a bribe of one year’s wages to get the three-year gig. The boss, he said, had driven one Mercedes before work began but now had three Audis. This kind of inequality, where I saw the occasional Porsche Boxster sharing the road with threewheeled motor carts carrying construction supplies and oneyuan, or 15-cent, buses brimming with students, retirees and everybody in between, is at least part of the answer — and maybe a big one — to who is scooping up the condos that are sprouting up. It is not the oil refinery and petrochemical plant and railway workers who make up the bulk of Lanzhou’s labor force. They can afford only older apartments subsidized by their state-owned companies, as is the case with my wife’s grandparents. They have lived in Lanzhou for 60 years, and they got their two-bedroom at a below-market rate shortly after private property was reintroduced in the late 1990s.
This is not what the Party wants. Its plan has always been for China to move from a managed economy to a market one, from a building economy to a buying one, from an industrial economy to an innovation one. That is the only way it can keep growing fast at the same time that incomes are growing faster — which they are now. At least half the restaurants we went to in Lanzhou had help-wanted signs for jobs that might have paid 400 yuan a month 10 years ago, but 2,000 yuan a month today. (Room and board, insofar as a bunk bed in a space barely big enough for one qualifies, is usually included). That is what happens when 35 years of the one-child policy forces businesses to fight over a pool of workers. The idea is that a couple more years of 7 percent growth will put enough people to work with high enough wages that they will be able to afford rents that are out of reach now. But the economy is slowing down so much now that even this might not do the job.
To get rich is glorious
The third thing you notice are the shops. They are not empty, but there are not exactly full of customers, either. At least not of paying ones. Clumps of highschoolers, clad in their characteristic tri-colored track suits, slide from one storefront to the next. Twenty-somethings dressed in blue jeans and T-shirts emblazoned with random English phrases — “Speed Limit 55 MPH” — amble around. A Tibetan street hustler, a peripatetic smile searching the most inviting contours of his face, lures passersby into trying his ball-toss game. The restaurants at least are bustling, especially the noodle shops which Lanzhou is famous for, but not much else is. The Nike store, sitting beneath Kobe Bryant’s glowering 50-foot visage, is empty other than the employees. It is the same in the department stores across the street. Salespeople outnumber shoppers.
Lanzhou’s people are either too scarred, too strapped or too stretched to spend. Retirees, the oldest of whom have lived through the Japanese invasion, the civil war, the Great Leap Forward and the Cultural Revolution, will always squirrel away as much as possible. Half a lifetime of expecting the worst and still being disappointed has taught them that you can never have too much of a personal safety net, even if, like my wife’s grandparents, that means trudging across town to save a few yuan on groceries.
The government, after all, does not provide much of one. People are pretty much on their own when it comes to saving for retirement, health care, their children’s high school and college tuition, and, if they have a son, the house that has become a prerequisite for “I do” in a marriage market with many more men than women. (Economists Shang-Jin Wei and Xiabao Zhang estimate that this last part accounts for as much as half of the increase in China’s household savings rate between 1990 and 2007). So even if people in Lanzhou have money, they do not feel like they have enough.
But this does not mean they do not want to spend. They do. China’s rising middle class want to live the life they see in ads. Most just cannot afford to. The ones who can, from the richer coastal areas, take their shopping seriously enough to travel thousands of miles for it. That is because Beijing slaps steep taxes on luxury goods at home. So China’s nouveau not-quite-rich have turned their trips to Europe’s cultural capitals into pilgrimages to its priciest shops. Indeed, the Louis Vuitton stores in Paris are so swamped with Chinese customers looking to take advantage of what, to them, are bargain-basement prices that foreigners are limited to three purchases per passport. To get rich is glorious, as the motto popularized during the reign of Chinese leader Deng Xiaoping said, and what could be more glorious than being rich enough to buy a designer handbag?
Back in China, though, just being Western can be enough for something to be considered a luxury. In Hangzhou, a wellshrinking heeled city 100 miles south of Shanghai, my wife and I ducked into what might have been the world’s most upscale HäagenDazs to get a respite from the humidity. The windows advertised how “indulgent” the ice cream was, but we were surprised to find out that meant two scoops cost $10. To be fair, the ice cream was presented on a silver tray, along with a complimentary lemon water. This was a different kind of crowd. The people next to us were plotting how to get around the government’s restrictions on buying a second home by having their businesses do it for them. Häagen-Dazs has figured out that anything not made in China can be a “Giffen good” there — what economists call something that, contrary to common sense, people demand more of the more it costs. The simple story is that Chinese consumers think Western products are higher quality, especially when it comes to food, and think higher-priced Western products are even more so. The result is that Chinese shoppers are some of the most brand-obsessed anywhere.
But this materialism is only aspirational in Lanzhou. Sure, a few people might be able to fly to, say, Milan for some intercontinental retail therapy, but the closest most of them will get to that is buying a cake with a faux handbag on it. And yes, that exists. The local bakery not only had cakes with firetrucks and flowers on them, but also ones, helpfully identified in English, with Land Rover SUVs and Gucci handbags. Conspicuous consumption never tasted so good or cost so little.
About the only status symbol people in Lanzhou do shell out for is a smartphone. There were plenty of iPhone 6 devices and even more ads for them at “Apple” stores of dubious authenticity. But even this democratic luxury costs the average worker two or three months’ salary. Not so much that they have to resort to a sugar facsimile, but not so little that they can easily afford it.
A fork in the road
The last thing you notice is what is not there. People are not living in ramshackle apartments or wearing hand-me-downs or going hungry. Normalcy has come to Lanzhou, and that should not be taken for granted. Forty years ago, people here would have been lucky to eat meat twice a year. Today, they can get hot pot with all the lamb and beef and pork and whatever else for just 40 yuan, or less than $7.
Still, it is hard not to feel like this progress is not as real as it used to be. Or at the very least that it cannot continue. Even in Lanzhou, there are only so many high-rises and subway lines you can add. What comes after that? The government does not seem to know. It alternates between worrying that the economy is not growing enough and that it is growing unsustainably. That is why it put the brakes on local government borrowing at the start of the year. It does not want its own debt bubble inflating, although it may be too late for that. China’s private debt has increased from 125 percent to 208 percent of the size of its economy in just seven years, according to Bloomberg News. And half of that has come from unregulated “shadow banks” that — sound familiar? — have lent money on the assumption that property prices would keep rising.
This has not left Lanzhou with many ways to grow. It cannot build enough as long as Beijing will not let it. It cannot export enough as long as wages are up. And its people cannot spend enough — even with the desire, they don’t have the dinero to do so. The result is that, according to Wigram Capital Advisors, Gansu’s economy actually shrank in the first three months of the year. It was the richest parts of the country that grew the most. Now, since then, Beijing has let local governments resume racking up debt, so Lanzhou’s cranes should be getting back to work. They had just started to when I was there in May. But the question is whether Lanzhou can keep from falling further behind without digging itself into a deeper financial hole.
The answer might be no. Even if it is, Beijing can always bail out Lanzhou. And by that point, Lanzhou might be rich enough that its people could power a consumer economy, whether or not that includes Gucci handbags and Häagen-Dazs ice cream. That is probably the best-case scenario. But the not-so-good one is that Lanzhou builds everything it needs, and its economy needs even more. That it never moves up the value chain, and its people never move up the income ladder. That it gets stuck.
Your eyes cannot tell you which future it will be. Sure, the infrastructure it is building will help, but Lanzhou also needs to build better schools to prepare people for higher-paying jobs and a safety net that will let them spend more today by taking some of the worry out of tomorrow. Besides, it is not even clear how much it will need everything it is building now. Just because ghost apartments have filled up in the past does not mean they will in the future, especially if the economy slows down more. Appearances can never be more deceiving than they are in China.
That is a lesson I learned when my wife’s family took us out to a fancy dinner at a restaurant with private dining rooms. Off to the side, there were pink chairs embroidered with deer, which would not have been out of place in a 17th-century French chateau, and a bookcase half-filled with copies of a single title. That was Charles Darwin’s “The Descent of Man,” spelled in English, of course. Curious, I picked up a copy. There was nothing in it. It was just a cardboard cutout.
Explosive growth has lifted millions of Chinese out of poverty but also has polluted natural resources and transformed cityscapes. The building boom can’t go on forever, and the low-cost labor pool is shrinking as the middle class swells. On the edges of the miracle, China’s future is being written.
ABOVE: A building under construction is shrouded by smog on a polluted day in Shenyang, Liaoning province, in late 2014. BELOW: A bullet train speeds along in northwest China. With a rapidly growing economy of 1.3 billion people, China has not built what it needs today, but what it will need tomorrow.