Rumor, Manipulation and Change: 5 Founders' Views on the Chinese Economy

Rumor, Manipulation and Change: 5 Founders' Views on the Chinese Economy
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I’m sitting at the Long Bar in Shanghai’s Puli Hotel among an eclectic mix of global entrepreneurs, artists and fashion-industry elites. I’ve been in China for almost two weeks: I've survived typhoon Chan Hom, and traveled to six cities in five days. And along the way, I've made it a point to speak with as many people as possible about the Chinese economy and what they believe the future holds. 

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What have I found? That the pessimism is as palpable as the distrust of government statistics on China’s economic growth. Here are five founders’ views I heard on the Chinese economy and on that nation's recent stock market crash.

1. Financial typhoon

Mr. Bai is the owner of Xingjia Plastic Manufacturing. He is a cynical pot-bellied man who believes that a “financial typhoon” is upon us. Mr. Bai explained to me that “American importers pay Chinese factories in U.S. dollars; the dollars go to Chinese banks in exchange for RMB [Yuan Renminbi]. The government has to print new RMB to buy those dollars.”

"Look at your ¥100 notes," Bai cautioned. "They’re all brand new. They’re just printing money.” He was right: All of my ¥100’s were fresh off the presses. His point was that there is an imbalance and that in the near future the RMB will collapse against the dollar -- a stance contrary to every other opinion that I’ve read or heard.

Bai continued: “It used to be that government officials were on top; factory “big bosses” were No. 2; managers, No. 3; and workers, No. 4” in the socioeconomic hierarchy. But things are changing. “In the future, 'big bosses' will be lower than the lady that scrubs my toilet,” he uttered. Bai said he believes that people won’t blame the government once the storm begins; instead, they'll point fingers at business leaders.

Because of all this, Bai is a Canadian passport holder with significant foreign assets, including a home in Toronto. He has an exit strategy in place --  for when the storm makes landfall.

2. “Monitoring” GDP growth

Mr. Yan, the founder and CEO of an aluminum extrusion plant one hour outside Shanghai, expressed little confidence in the government’s official figure of 7 percent growth. “They say the economy grew by 7 percent," he said. "I say we shrank by 7 percent!” Anger might have been clouding his judgment, so I pushed him on whether he actually believes that. He retorted: “Look around at all of the empty factories!” Over 25 percent of the factories in his area have closed their doors in the last three years, he said.

He then went on to say that his business was down 15 percent this year and that the only reason it wasn't down further was “because Vietnam can’t get up and running fast enough to take the rest.” Yan said he now supplies the factory in Vietnam that is taking his business, providing the precision parts that they can’t yet produce themselves.

His assistant, a Ms. Wang, told me later that the reason her boss doesn’t believe the government statistic is that his friend is a government official. That official was recently put in charge of a new department set up to “monitor” local GDP growth. By "monitor," Wang said, they meant "manipulate" data to ensure that growth in the locality appeared to be 7 percent higher. She said Yan and his friend believed this is happening nationwide.

3. Falsified numbers

Mr. Yu, the founder and CEO of Yandong Metals, a supplier of fire-resistant aluminum paneling used in subway stations and railway tunnels, sounded optimistic. That optimism however, did not extend to the economy or the Shanghai Composite. Like Mr. Yan, Yu said he didn't believe that the economy is growing at 7 percent; he said he believes the real growth rate hovers around 4 percent. Yu also said he believed that the government should stop putting out growth targets; that “leads to falsified numbers,” he said.

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Further, he said he’s optimistic because his product is for the China market, and part of an industry controlled and subsidized by the Chinese government. Yu pointed to the Chinese government's reaction to the global financial crisis: As factories were shuttered and millions lost their jobs, the government went on a spending spree. It made massive investments in the country’s infrastructure in order to get people working again.

This resulted in the fastest expansion of high-speed rail networks in history, along with new airports, highways and subway systems. Yu said he believed that in order to keep people working as the economy sputters along, the government will make yet another massive investment in infrastructure. This obviously bodes well for Yandong Metals; indeed, new subway lines are already being planned.

4. “Turning around the omelet”

Fernando Menendez is the founder and CEO of Global-Step Consulting, a Shanghai-based firm that assists clients both in importing to and exporting from China. He said he is optimistic despite doing business both in Spain, which is in financial turmoil, and China, which is in the midst of a market crash. Menendez said that the economic slowdown and stock market crash have had little impact on his business. Despite the slowdown, China is still growing, he said. Whether the rate is 4 percent or 7 percent, both figures are better than those of Europe and the United States. And people want in.

Menendez recalled how he started out in the export business, bringing Chinese goods to Europe. During the financial crisis, exports to Europe went into steep decline, and he was ready to give up. It was then that an old Spanish saying came back to him: He needed to “turn around the omelet,” or reverse the situation. It was then that his company began consulting on bringing European goods into China.

This “turning around the omelet” philosophy has meant diversification for Global-Step. While European imports of Chinese goods have slowed, Chinese imports of European goods have continued to rise. “There is literally a hunger for Western products, particularly food, wine and children’s items,” Menendez said. The reason for this is those recent horror stories regarding food safety in China. He said he believes that the “demand for Western products in China will not be rivaled in any other country," that the population and size of China's middle class is "simply too large to ignore.”

5. Changing China

The pessimism on the economy I found was stronger and more widespread than I had previously encountered. Among manufacturers of goods bound for the West, this feeling was strong. It was also unsurprising to anyone paying attention. In its last five-year plan, the CCP clearly stated its desire to reduce the country's reliance on export manufacturing, while increasing domestic consumption and growing the service industry. 

Turns out that the Chinese economy is larger than its manufacturing sector, stronger than its stock market and more dynamic than it is given credit for.

Mark Secchia, founder of Sherpa’s, Shanghai’s equivalent of Seamless, summed it up best by saying, “The market crash has not had a measurable impact on our business. It is possible it has had an effect, but the manifestation is hidden amongst other positive influences.” 

The bottom line is that while manufacturers are facing real business threats, the service industry and other parts of the economy are growing robustly. The changes taking place are painful for many, but as with all economies, the changes must take place for progress to continue.

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