China’s eco­nomic mir­a­cle

Notes from the fron­tier of

The Washington Post Sunday - - BUSINESS - BY MATT O’BRIEN IN LANZHOU, CHINA

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.

ALAMY

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.

JACKY CHEN/REUTERS

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.

ALAMY

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