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Chadwick: ‘Cash is King’ — In China and the US

Returning this past weekend to JFK airport and emerging from customs after two weeks in China, my teenage son turned to me and said, “Mom, this airport feels like a third world country.” The stark comparison between airports in Beijing, Shanghai and even the western city of Lijiang in China and those around New York City brought home the reality of that venerated corporate adage: Cash is king. China today is a cash-rich nation, while the U.S. is cash starved.

China is building roads, airports, hotels, high rise apartments and commercial buildings at a rate never seen on this planet. Not even our most massive infrastructure triumph, the construction of the interstate highway system following World War II, is on this scale. And hugely impressive as China’s changing skyline is, the building process is far from complete. Standing in the middle of Shanghai, among 3000 skyscrapers, one wonders if the growth in commerce across China will justify all this office space.

Apartments in China
Apartments in China

Many Chinese complain that already apartments are becoming unaffordable. Unlike here in the U.S., the standard down payment on an apartment is 30%. And outside the major cities nearly all transactions, including home buying, are made in cash. Many young professionals, college-educated men and women in their late twenties, all of whom seem to have flips or cell phones or some electronic contraption as a permanent appendage, look to their more frugal parents to help them with the down payment. One wonders if the culture of saving which has been the survival ethic of parents and grandparents will be lost on the new, young, professional generation. English is the second language in China today; students start English lessons in primary school where their teacher selects an “American/English” name for each child. We had guides with the names of Bill, Tony, Java, Rocky, Peggy, Danny and Martin. Colleges and universities are abundant; however, higher education is not free.

Admittedly, Facebook is inaccessible (for the time being, at any rate) and in Beijing internet access is less than ideal. And as an aside, I was astounded to discover that young, educated Chinese have never heard of the Tiananmen Square incident of 1989. Most of them were small children at the time and the event is unrecorded in their history books nor ever mentioned by their news media. The reason for my surprise is that these English speaking Chinese professionals have an air of Western-ness about them. There is a sense of openness, of freedom, of complete mobility (unless, that is, they want to come to the United States). They speak their minds about their leaders. Capitalism is rampant, in fact it is the operating credo of the entire society and it has an American flavor. Young people talk about doing better than their parents, and in doing so, making them proud.

To the older generation, Mao Zedong is virtually a god. To the younger generation, it is Deng Xiaoping they most admire. He carries the title of Leader of Modern China, and with good reason. One supposes that given his near deity status as the re-creator of China’s great rebirth, in the minds of his devotees, Deng could not have ordered the slaughter of 1989. Or if he gave an order to impose calm, China’s ubiquitous and despised party functionaries must have distorted Deng’s intent. Regardless, China has arisen to reclaim its rightful place of greatness, thanks largely to Deng.

So what is the source of the Chinese government’s seemingly endless stream of cash? Despite its system of government, a significant portion of China’s economy – approaching 40% of industry - is in private hands; export revenues do not automatically flow into the coffers of the government. Income taxes are not exorbitant. However, there is one valuable card that the Government holds and is using as a gargantuan source of capital: it owns all the land in China. It has developed a sophisticated profit system as the national landlord, reaping cash flow from a long term asset while not relinquishing its ownership. As buildings go up all over China, the Government is the beneficiary of the ‘sale’ of the underlying land (in fact, it is a seventy year lease, at the end of which ownership reverts to the government.) Talk about a capitalist/monopolist government!

China has an abundance of land and people. And as long as there are people anxious and willing to move from the countryside to the cities (more than 65 percent of China’s 1.3 billion souls still live in the countryside), and if the gleaming metro areas continue thrumming with opportunity for the young and adventurous, I venture there will be demand by the private sector for more land on which to build the apartments and residences of tomorrow. Assuming the country solves its very real water shortage problems in north and central China, that will help keep China supplied with an exogenous source of capital for infrastructure building for many years to come.

However, at some point in time (maybe decades away) as China’s population ages and the ratio of old to young surges, (the result of an entire generation of one child families) the demand for development land will diminish sharply and with it the flow of capital to the state. But today, that source of capital is a bonanza for the government’s ambitious development program and will allow it to exceed the U.S. in its investment in vital infrastructure. At the same time, the U.S. finds itself struggling to maintain an increasingly dilapidated network of roads, bridges, subways, tunnels and buildings. Sadly, there is no easy solution to our public sector infrastructure problem. The U.S. government is like an aging company, losing competitiveness to a more nimble, dynamic newcomer on the scene. Without a giant cash infusion, there is little we can do to fix the problem. China, by buying our Government debt, is at least providing some of that necessary cash infusion. Fortunately, the state of the U.S. private sector, which comprises 75% of our national output, is dynamic, strong and competitive.

Postscript: There is an interesting paradox of history in a comparison between the approaches taken by the U.S. and China in promoting national economic development. In 1862, in an effort to spur settlement and cultivation of the west, President Abraham Lincoln signed into law the Homestead Act. Over the next one hundred years, 420,000 square miles of this country were privatized (10% of the contiguous US landmass) through simple, physical occupation of the land, not through sale by the Government to the homesteaders nor by settler purchase from Native Americans. It was a giveaway, hardly a capitalist concept. In China today, as the people move from the countryside to the cities, the Chinese Government is capitalizing on the demand for land through lucrative sales, hardly a communist concept.

What is clear is that the final test of which country is better off will come in the degree to which the people choose their own future and choose it well. Emerging from JFK airport, I admit to momentary doubt… but only momentary.

Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.