An Aussie tourist’s observations of his recent China visit

INTRODUCTION

An Ecinya confidant has just returned from a brief visit to China and we asked him to record his observations for the benefit of himself, ourselves and our readers.

China is fascinating and perplexing and its virtues are magnified by admirers and dismissed by critics. Equally, its flaws are exaggerated by critics and treated lightly by admirers. Change is a constant in China, but controlled within the context of careful planning. China has learned more from the West than the West has learned from China. There are no revolutions, just evolutions, but when measured against the often schitzophrenic, chaotic, way of doing business in the West (boom, bust, boom, bust) the pace of change seems rapid. There appears to be less unintended consequences in the China of the past 30 years than in,say, the USA of the past 30 years. Our own study-tour in 2005 was enlightening, interesting and enjoyable and our Aussie tourist has added to the positive perspectives that emanated from that trip, over 6 years ago. We hope to return sometime over the next year.

Our belief is that China at its best has much to offer the West, and the West at its best has much to offer China.

It should be noted that in Purchasing Power Parity terms China’s GDP is circa US$11.2 trillion, a sum equivalent to GDP per capita of US$8,390. By way of comparison the GDP for the USA is circa US$14 trillion resulting in per capita GDP of circa US$48,010. Australia’s per capita GDP is circa US$41,140, from real GDP of circa $US1.2 trillion. Greece, the subject of much media attention at the moment had a per capita GDP of US$27,780 prior to recent downgrades. Clearly, GDP in isolation is not a sufficient criteria to debate the economic well-being of nation states. However, these numbers add a small slice of perspective as our Tourist’s excellent notes are digested.

Ecinya also provides the following to create a context –

Historians (and observers generally) are bound by right to be exact, truthful and absolutely unprejudiced, so that neither interest nor fear, dislike nor affection, should make them turn from the path of truth, whose mother is history, rival of time, storehouse of great deeds, witness of the past, example and lesson to the present, warning to the future. In this history I know that you will find all the entertainment you can desire: and if any good quality is missing, I am certain that it is the fault of the dog of an author rather than any default in the subject.

Cervantes – Don Quixote (Part 1, Ch. 9)

Co-existing with China will be one of the great challenges facing the West in the twenty-first century. Indeed some see it as likely to be the greatest challenge, with China having the potential to develop as a super power capable of matching the West, in particular the United States, economically, politically, militarily. Whether or not that happens, there seems no doubt that, given the collapse of the Soviet Empire, China is likely to emerge as the main counterweight to any continuing Western dominance in world affairs.

‘The West and China Since 1500’ by John S Gregory , ex La Trobe University, Melbourne, 2003.

 

THE TOURIST’S ESSAY

China Notes June 2011

The following observations are from our six day visit to Shanghai and Hangzhou. They are based on what we saw, told by our guide and from answers to our questions. 

Throughout our visit we had our own guide and driver. It would be difficult, more time consuming and far less productive to visit China without this support. We have been able to travel this way because of China’s relatively low wages. Our guide told us that a worker’s wage in Shanghai is 3,000 to 4,000RMB per month. At the current exchange rate of 6.67RMB = $A1, this converts to $A450 to $A600 per month.  I am unaware of the significance of any additional bonus payments and or of taxation and social security costs and benefits, so that relative wages may not be as different as a raw comparison of the numbers would indicate. A working guide of wages being one sixth of Australia’s seems near the mark.

A check against supermarket, clothing and restaurant prices suggests that the Shanghai worker’s wage has only half or a bit more of the purchasing power of an Australian earning $50,000 a year.

Clearly there is a segment of the population doing a lot better than average. Almost all of the world’s luxury brands are available in both cities we visited. There is no problem buying a Porsche or Masserati.  On the road the Lexus 350 sedan seems to be the luxury car of choice. Of the cars on the streets, most are basic and made in China. According to our guide car ownership is growing, but too expensive for the average person. The registration plates in Shanghai cost 40,000RMB. Petrol is the equivalent of $A1.20 per litre.

Property prices are very high relative to incomes. Our 28 year old guide lives with his parents in a twelve year old, two bedroom, 88 square metre apartment on the 5th floor of a six level walk-up building. With Shanghai’s traffic congestion it can take up to 2 hours to commute by bus. A combination of bus, walking and the Metro train reduces this to an hour and a quarter. Our guide jokes that most people travel by BMW, Bus – Metro – Walk. He told us the apartment is worth 1.7millionRMB, or $A255,000. An equivalent 2 bedroom apartment in Parramatta or Liverpoolwould not sell for much more. The real issue, as told to us by our guide, is that this price is the equivalent of 35 years wages. Way too much he says, and he thinks prices will fall. Prices of premium apartments with river views are at least the equivalent of the most expensive apartments in Sydney, over $A30,000 per square metre for 100 to 200 square metre apartments.

Shanghai has a population of 23 million, similar to all of Australia. There are over 6,000 buildings, mostly apartments, of more than 20 levels and most built during the last 20 years. In terms of average building age Shanghai is very new compared to other major cities of the world. The business district of Pu dong, located across the Huangpo river from old Shanghai has all been built in the last 20 years. There are many magnificent buildings.

The infrastructure of Shanghai is very impressive. The freeway system, its tunnels and bridges, is more advanced than any other city we have ever visited. The underground Metro railway is equally impressive. Whilst new construction continues in Shanghai its pace does not seem exceptional.

It was when arriving in Hangzhou, a city of 7 million people, that we saw building activity on a scale beyond anything in our experience. We saw many high rise apartment complexes of thousands of individual apartments under construction. Construction was underway on the outskirts and in the centre of the city. Our guide told us, and it was readily apparent, that traffic chaos is much worse in Hangzhou than Shanghai. An underground Metro is now under construction.

The road we travelled the 180km from Shanghai to Hangzhou was a 6 or 8 lane toll road. The light traffic once outside the cities saw us travel much of the two and a half hour journey at 110km per hour. For much of the time the toll road runs parallel to a most impressive piece of infrastructure – an elevated high speed rail line. The journey time for the journey from Shanghai to Hangzhou is 45 minutes. Built on concrete beams supported by high concrete columns, it is an amazing structure. Oncoming trains were passing us every ten minutes or so.

Another elevated high speed train has recently been completed linking Shanghai and Beijing. The statistics for this project are staggering. It is 1,318 km, and according to our guide, the journey time is 5 and a half hours. According to Wikipedia construction started in April 2008 and the project, including 28 stations, was completed in three and a quarter years at a cost of $US32billion. This is about $A25million per km, slightly less than the budgeted cost per km of the 22km Pacific Highway Kempsey bypass.

Returning to the low relative wage costs of China compared to Australia one very apparent consequence is low labour productivity. Everywhere there are more people employed. In department stores employment is perhaps 3 to 4 times that in Australian and in restaurants at least double. Looking at farms, from the vantage point of the toll road, the plots are small and mechanisation levels low, indicating much lower labour productivity than Australia.

Hangzhou is a major tourist destination for Chinese people. West Lake and the temples located in the hills to the west of the lake are impressive tourist attractions. During our visit there were few westerners in sight. Observing people walking on the pathway at the edge of the lake we thought how similar they were to people we would see at any western tourist site.  Dress in this area of China is very Western.

Environmental issues in China are often discussed in Australia. We are unsure of the situation. On one hand we experienced a lot of haze but how much this is pollution and how much a weather phenomena we are unsure.

 

Concluding too much from our observations is a dangerous exercise, but here are some thoughts,

1.      China has developed very rapidly, continues to develop rapidly, and may do so for many years.

2.      China’s economy is directed towards the construction of housing and infrastructure, with personal consumption restrained. Comments by our guide suggest that this balance is now questioned, at least by some people.

3.      Expenditure on leisure is much lower in China than in western countries. There is far less professional sport.

4.      No matter how I look at it China’s achievements are impressive. The leadership and management behind the country’s transformation must be equally impressive.

5.      Labour productivity could increase significantly in China in the years ahead giving China the opportunity to maintain high GDP growth.

6.      As well as the focus on physical infrastructure, China and Chinese families are focused on education. The university entrance examinations coincided with our visit. These are keenly contested and the basis for the allocation of university places.

7.      English is now taught in primary schools from the age of 5.

8.      What can go wrong? The most obvious to me is a property crash. Property prices are high enough for this to occur, but that doesn’t mean it will! A market driven collapse in construction will be bad news for China.

9.      The export dimension of the Chinese economy has not been visible to us in our visit to Shanghai and Hangzhou. It is stating the obvious to say that the market share of Chinese products in export markets cannot increase indefinitely. As such the growth of the export sector must slow.

 

Investment implications:

1.      Australia is a major beneficiary of China’s economic miracle, surely one of the great advances in the history of mankind.

2.      China’s focus on buildings and infrastructure has underwritten the resources boom in Australia but leaves us very exposed to any setback in China.

3.      At some stage this will occur, but when?

4.      Even a slowing in the growth of new construction will be negative for commodity prices at a time of increasing supply.

5.      A property crash in China would be very bad for Australia.

6.      Let us enjoy the good times, but with increasing caution.