China needs home-grown entrepreneurs.

Chongqing at night

Chongqing at night

The changing economy of the People’s Republic fascinates me.

I remember about five years ago I told a friend of mine I that China’s government would soon be forced to create policy enforcing IP laws and creating an environment more conducive to small businesses, entrepreneurial endeavors, creativity and innovation. I told him my suspicion was that we could look to Chinese banking systems to see when these types of changes were most likely to take effect. I said that in a few years China’s export manufacturing industry would mature. Its growth rate would slow. The booming real estate industry would also outpace the rate of qualified buyers entering the city. Furthermore, a lot of China’s real estate boom has been helped by subsidies in the form of instant property value: unlike the rest of the world, many Chinese in their 50s and above were given houses by the government. When the developer comes to negotiate with the homeowner they offer either cash or a new home. A successful family that had already turned their old communist-era apartment into a rental property and bought their own place could take the cash and buy a car, invest in stocks, buy a home for their children, etc. Nobody had to pay back home loans.

Just by looking around Chongqing, I would guess that the majority of those old apartment blocks have now been torn down. There are still people who own loan-free property but the apartments are fairly new and offers to buy a whole complex by a prospective developer are becoming increasingly sparse. Unsurprisingly, the lack of loan-free equity lying around that supplemented the construction boom has successfully slowed prices even in a city like Chongqing, whose GDP grew at 13% in 2013, making it the fastest-growing city in China.

Export manufacturing has also slowed. This was to be expected. As costs along the accessible coast have risen, low-cost manufacturing jobs have either moved inland or to other neighboring countries like Vietnam.

China still needs growth. The leadership generally looks at GDP, which is not always the best indicator of a stable economy. However, I still think it’s reasonable to argue that in order to have an economy large enough to support a population 5 times the size of the US, China needs a national GDP equal to at least 3 times the size of ours.

In order to grow that large with export manufacturing and real estate both slowing down, China will need to support a more entrepreneurial domestic economy. I currently teach English to the children of China’s wealthy. I regularly ask them to pretend they are a member of the standing committee and tell me what changes to policy they would enact in order to create a more innovative and creative economy that eventually will be able to compete on an even playing field with the west. It takes them awhile, but generally they come down to entrepreneurialism without too much prodding or hinting.

Five years ago I said we’d see Chinese banks start offering more small business loans to Chinese general population as a start of the development of a more open, even playing field that would then lead to IP law enforcement. Instead we’re seeing policy changes opening up certain areas (Shanghai has a district like this) to low or tax-free zones for more and more businesses. The higher-ups are lowering regulations. But without access to funds, a private credit rating system, and assurances that Mr. Wang’s new invention won’t be stolen by the more connected Mr. Chen, we will not see the type of growth this country needs to beef up its domestic economy. Without that strengthening, I worry about how this country will continue to grow to a size and scope capable of supporting a solid middle class. But I remain hopeful I’ll see these things soon.

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