Is China Facing a Growth and Debt Crisis?

"Will China Shake the World Again?” is a recent article written by Robert Preston. Preston is the Business Editor for the BBC. The piece discusses China’s ability to sustain its growth, manage its heavy debt positions and avoid a disaster equal to or greater than the 2007-2008 financial crisis

Preston believes China has an "unbalanced economy whose recent sources of growth are not sustainable.”

In 2007-2008 “…the Chinese government unleashed a stimulus programme of mammoth scale: £400bn…growth accelerated... But the sources of growth…have a limited life.” “…China's growth rate…really looking at 4%."

 “But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts…have increased since 2008 from 125% of GDP to 200%.”

“…investing at that pace…it is a…certainty that much of it will never generate an economic return…debtors unable to meet their obligations…large losses for creditors; the question is not whether this will happen but when, and on what scale.”

Based on my experience working with operating companies in Shanghai and Guangdong, I have to agree. My expectation for China’s future is negative, as their potential for serious growth and continued competitiveness will prove to be very difficult.

Having inspected a number of Chinese owned manufacturing companies in mainland China, it becomes apparent manufacturing knowledge, processes, and systems are woefully behind the times. Contemporary manufacturing in China corresponds to the USA’s 1970 manufacturing capabilities.

Therefore, cost increases from higher wages and inefficient operations are to be expected. Also, unfavorable changes in currency valuation will be a factor. This will result in lower growth, employment and capital availability. This will make it far more difficult to service its debts and fund necessary initiatives.

Judging from my visits, the young and educated Chinese appear much more independent, aggressive and spontaneous. It may make its citizens more difficult to control. Social unrest could be a major issue affecting China's economic development as well.

Click on this link to read Mr. Preston’s article.

Here are some other posts on China:

Is China’s decline permanent?

China to surpass USA as World Leader in manufacturing?

Can Manufacturing Return to the USA?

Sun Tzu - “The Art of War”

Sun Tzu’s book “The Art of War” was written in 400BC. Peter Drucker’s and Sun Tzu’s management tenets for success are essentially the same.

Sun Tzu was China’s first professional General. Prior to him the Sovereign (i.e., King) led his army which was frequently disorganized, under-funded and unsuccessful. He developed strategy and tactics of war but also detailed financial budgets, manpower required, basic training and logistics (e.g., the number of helmets, chickens)

It is a surprisingly practical manual of war with basic advice, such as: “Dust spurting upward in high straight columns indicates the approach of chariots.” “There are five methods of attacking with fire. The first…, the second…”.

In his tenets listed below, I suggest as helpful guidelines for substituting a Board of Directors, an Owner, a Ruler, or a Chief Executive Officer.

1. “There are five qualities that are dangerous in the character of a general..."

• "If he is reckless..."
• "If he is cowardly..."
• "If he is quick-tempered, he is obstinate and hasty - does not consider difficulties. The essential temperament of a general is steadiness..."
• "If he is defensive. One anxious to defend his reputation pays no regard to anything else..."
• "If he is too much of a humanitarian..."

"These five traits of character are serious faults in a general and in military operations are disastrous.”

2. “The ways in which a Ruler may bring misfortune upon the army is by interfering with its administration and operations. He whose generals are able and not interfered with by the Sovereign will be victorious. There are occasions when the commands of the Sovereign need not be obeyed.”

3. “If one ignorant in military matters is sent to administer the army, then every movement will be hamstrung. This engenders doubts in the minds of the officers. A confused army leads to another’s victory.

4. “He whose ranks are united in purpose will be victorious. Thus, command them with civility and imbue them uniformly with martial ardor and it may be said that victory is certain.”

5. “And therefore the general who in advancing does not seek personal fame, and in withdrawing is not concerned with avoiding punishment, but whose only purpose is to protect the people and promote the best interests of his Sovereign, is the precious jewel of the state. Few such are to be had.”

6. “It is the business of a general to be serene and inscrutable, impartial and self-controlled. If serene he is not vexed; if inscrutable, unfathomable; if upright, not improper; if self-controlled, not confused.”

Basically his book describes the development and execution of a strategic plan. His emphasis on doing the unexpected is a synonym for Peter Drucker’s innovation.

A Helpful History Book For CEOs

I came across an impressive book, which would be very helpful to any CEO. It is an interesting historical effort and was referenced in a footnote of a best selling business book “Good to Great”. It proved to be a better book on management in my opinion, than the popular business publication.

Barbara Tuchman wrote “The March of Folly”. In the work, she reviews four historical debacles. The reasons for these past failures, was primarily due to “wooden-headedness and cognitive dissonance”.

Ms. Tuchman's essential definitions:

“Wooden-Headedness”: the source of self deception, assessing a situation in terms of preconceived fixed notions while ignoring or rejecting any contrary signs – acting according to wish while not allowing oneself to be deflected by the facts, the refusal to benefit from experience.

“Cognitive Dissonance”: reject objective evidence and rigidly hold on to strongly held beliefs regardless of rationality of disproof.

“Folly”: the obstinate attachment to a disserviceable goal.

This book gives meaningful perspectives on:

• How to manage,
• Why open and cross-functional communication is important,
• Hubris,
• The true meaning and benefits of “hard-work, homework, hands-on”.

The most interesting of the debacles is the British handling of the American Colonies prior to the Revolutionary War. Not one member of the British Parliament, their staff and the King’s staff had ever been in the Colonies. They did not send anyone to evaluate it.

The British Generals who had been in the Colonies were essentially opposed to a land war, but there was no “cross functional” type communication and their advice was not heard.

The King and the Parliament believed America was small, populated with criminals and other worthless people. In fact it had a population of 2.5 million, was an economic locomotive populated with many well-educated and independent people.

The taxes the British levied totaled only 50,000 pounds sterling annually. Imports from Britain into the Colonies totaled 3 million pounds sterling annually, one-half of which were lost when Americans boycotted British goods.

Completing their homework in a hands-on manner would probably have caused Britain to handle the situation differently and retain America as one of its Colonies.

“Good to Great” by James Collins is the book that referenced “The March of Folly”. Worthwhile reading, it studies how companies built themselves into great companies.

Characteristics of successful companies:

• Disciplined focus,
• No hubris,
• Openness in that everything is discussed,
• A self-effacing CEO only interested in the company’s success - who is not a tyrant,
• Accountability for tangible results,
• Staff the right people – wrong people get fired,
• Only deal in brutal facts and truth, simplicity,
• A culture of freedom and responsibility,
• Have defined what the company is “best” at.