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The Most Underreported Foreign News Stories of 2013

DAVID GOLDMAN (AKA "SPENGLER")

China just made the first soft landing on the moon in four decades, the first in four decades. That drew a yawn from the American media: after all, we did it when the Boomers were in junior high school. It wasn’t exactly a Sputnik moment like 1957, when the Russian leap into space sent America’s military-industrial establishment into overdrive. But China’s technological capacity is reaching critical mass. In a few years we will see the old China of smokestacks and cheap labor fade into the past and a new high-tech China emerge, ready to compete with the West. There’s no single technological feat that defines this development: China doesn’t need to innovate, only emulate. But the combined effect of a whole array of technological improvements adds up to a daunting challenge to the West.

The Plenum of the Chinese Communist Party in November launched a set of reforms that formalize trends already underway. The change is as drastic as in 1978, when Deng Xiaoping reversed Mao’s peasant-based economic policy and launched the smokestack-and-export economy that has carried Chinese growth so far. Household income in China has grown by 16 times – that’s 1,600% -- since 1987, the greatest advance of living standards in history. It has turned a peasant population into urbanites with vastly superior education, health, and expectations.

The Western media focuses on China’s failures, for example the vastly-overblown problem of ghost cities. China is moving 600 million people from the countryside to cities in the space of 25 years, the largest migration in history, the equivalent of Europe from the Urals to the Atlantic. That means building the equivalent of every European city from Cork to Yekaterinburg. There will be a few slipups in a project so massive. But the overall plan is succeeding.

Americans don’t like the idea that a dictatorship might overtake a democracy. I don’t like it either, but a well-run dictatorship can trump a badly run democracy. The media has been so busy feeding our self-love that it has ignored the year’s biggest story.

Here are a few highlights:

· China’s shore-to-ship missiles can sink a U.S. aircraft carrier 200 miles or more from its shores (its missiles reach space and go straight down, and our countermeasures aren’t designed for that sort of threat)

· China will have the most industrial robots of any country by 2014

· Tianhe-2 is the world’s fastest supercomputer

· Beijing Genomics Institute has the world’s largest DNA sequencing capacity

· China had 505 million Internet users in 2011 and expects E-commerce to double between 2012 and 2015

· “Starting from almost no live surveillance capability 10 years ago, today the PLA has likely equaled the US’s ability to observe targets from space for some real-time operations.” (World Security Institute)

China already spends nearly 2% of GDP on R&D, about equal to the European Community. Some of that is wasted but a lot of it isn’t. China now mints twice as many hard-science PhDs as the U.S. Many of them are mediocre products of diploma mills, but a lot of them are as good as anyone out there. In computation, missile technology, satellites and Internet technology, China has reached world class. In other fields -- high-performance jet engines and chip design, for example -- it lags behind. But China managed to persuade Turkey, a NATO member, to buy its anti-missile system rather than a Western competitor’s by quoting a lower price and offering to teach the Turks how to manufacture it themselves.

After China imposed an Air Identification Zone overlapping its neighbor’s airspace, American commentators became concerned about China flexing its military muscle. China’s military stance and its economic policy are inseparable and have been for years. As Richard Bitzinger wrote in 2008, “The Chinese have aggressively pursued a dual-use R&T strategy that stresses the development of advanced civilian technologies – particularly in the areas of electronics and information technologies, aviation, space launch vehicles, satellites, and advanced manufacturing – that can be spun-off to defense products and production. Over the past decade, Beijing has worked hard both to encourage further domestic development and growth in these sectors and to expand linkages and collaboration between China’s MIC and civilian high-technology sectors – and it appears to be paying dividends.”

Reuters reported on Sept. 16, 2012, “Beijing presses ahead with an ambitious program to privatize most of a vast arms industry employing more than a million workers at more than 1,000 state-owned enterprises. The long term goal is to transform some of the leading contractors, such as China State Shipbuilding Corporation (CSSC), Aviation Industry Corporation of China (AVIC) and China Aerospace Science and Industry Corporation into homegrown versions of American giants Lockheed Martin and Northrop Grumman or Britain's BAE Systems.”

Here are a couple of examples of what tech will do to the Chinese economy.

By 2020, every city in China will have free public WiFi. Instead of putting fiber optic cable into every home, China will build hubs serving local areas that beam high-quality Internet television into homes, at a fraction of the cost. A peasant will be able to get off the bus in any Chinese city, buy a WiFi handset for $50, and do her shopping, banking, and communications on the web. China will leapfrog the Wal-Mart and Bank of America model of brick-and-mortar growth and go straight to the Amazon model.

China’s high-speed rail network has produced a jump in productivity as businesses reach customers, goods reach markets, and labor meets employment in record time. China now plans to build high-speed rail through Southeast Asia, and eventually all the way to Istanbul — along with broadband Internet and pipelines. It’s the biggest infrastructure buildout in world history and it will transform the Asian economy. Southeast Asian countries already are making plans to turn their peasants into high-value-added farmers sending fresh goods by 200-mile-an-hour train to the Chinese market.

This is history’s great exemplar of creative destruction. China will destroy the smokestack economy that Deng built just as Deng destroyed the peasant-centered system that Mao built. It is creating a new tech-driven economy.

A lot of this is growing beneath the surface, like mushrooms. Chinese stocks have underperformed the indices of the industrial nations. One reason for this is that the companies on the destruction side of the ledger are all listed, and investors can’t yet buy the companies on the creation side. For example, Bloomberg reported Dec. 20: “Chinese stocks traded in New York fell the most in a week, led by telecommunications operators, after Alibaba Group Holding Ltd. said it’s seeking to offer phone services. The Bloomberg China-US Index of the most traded Chinese stocks in the U.S. dropped 1.5 percent to 103.94 yesterday. China Unicom (Hong Kong) Ltd., the nation’s second-biggest wireless carrier, retreated the most since October and China Mobile Ltd., the biggest operator, slumped.”

Alibaba is China’s Google, Amazon and UPS rolled into one, and you can’t buy it – yet. (The main reason that Yahoo’s stock price doubled in the past year is that it owns a chunk of Alibaba). Alibaba will take business away from the established mobile carriers, but that’s not yet reflected in equity prices. The two most dynamic Chinese companies — Alibaba and the telecommunications equipment giant Huawei — aren’t tradable. Yet the build-out of national broadband and the explosion of e-commerce are the cutting edge of the new Chinese economy. Linking mobile phone service to e-commerce is a disruptive idea that should contribute strongly to economic growth through the expansion of domestic demand. But it’s hard to capitalize this growth on the equity market, at least for the time being. Hard, but not impossible: the China tech sector returned twice as much as the NASDAQ 100 during the past six months.

The Chinese government has a two-fold problem: starving the unproductive state-operated sector of the economy of capital and empowering competent private owners. In the broadest terms, it seems that the government wants to keep credit tight, but open the sluicegate for IPOs. Outside the traded market, some trillions of dollars of shadow market capitalization are incubating. Investors may be raising cash by selling the traded market in order to have dry powder for IPOs during 2014.

Tight credit and an open IPO market is a viable approach. In a tech-driven emerging economy, there are many entrants and many failures. Creative destruction calls for equity rather than debt financing (one winner can compensate for ten losers in a stock portfolio but not in a bank loan book). We expect a boom in Chinese stocks, but not necessarily in the stocks now available for purchase. We’ve argued all along (per our “Two China’s” thesis) that aggregate equity indices are an entirely misleading measure of China’s direction, and that the burgeoning tech sector is the place to focus.

China’s tight money policy is exactly correct: it starves the tumors in the SOE sector and sets the stage for a broad reorganization of the economy. As shadow market capitalization turns into traded market cap, entrepreneurs will have the capacity to shift productive assets away from sclerotic management into competent hands.

What should America do about it? Acting tough doesn’t help. We have to be tough. There’s only one thing that matters, and that is doing what we used to do best: innovate. The economic environment — budgetary, fiscal and regulatory — is more hostile to innovation than at any time since World War II. We need more defense spending, not less, but spending geared to the scientific cutting edge -- the kind of focus that gave us the moon shot and the victory over Russia in the Cold War. China is not good at innovation. If our rate of innovation proves to China that its system cannot keep up with us, that system eventually will change. Complaining about China’s system while we shoot ourselves in the foot, though, makes us an object of contempt. One senior statesman of an Asian country dismissed Barack Obama as “your NGO president.” As long as we have leaders who run the U.S. government as if it were a non-governmental organization at the UN, we will get nowhere.

We’ve been in tough places before, but we’ve never had this kind of competitor on our heels. It ought to be a Sputnik moment. And the press should start reporting it.

David joined PJM in August 2011 after nearly 10 years of anonymous essaying at Asia Times Online and two years of editing and writing at First Things. He’s also the author of How Civilizations Die: (And Why Islam Is Dying To. In September he joined Reorient Financial Group, a Hong Kong based investment bank, as Managing Director and Head of Americas. He blogs at Spengler.