China's Mid Autumn Moon Cake Festival Marks A Moment to Reflect on the New Reality in Global and China Affairs

Let’s cover a few business and market bases in the world’s new reality as the Mid Autumn Moon Cake Festival kicks off here in greater China with Chinese families enjoying life happier and richer than they ever have in decades.

1. The Schwarzenegger Leading Economic Indicator

California Governor Arnold Schwarzenegger stopped by for his China visit last week and what does he want? Well he wants what everyone else wants, China’s riches to make their way to his California turf. Who can blame him? This is indicative of an understanding many in the West still don’t get; that China is far, far richer now than they care to let themselves realize, including gobs and gobs of cash, a USD $4 to $10 Trillion gray market, and $15 Trillion in pure un-mortgaged home equity just amongst the lower and middle class that hasn’t even started making its way into the domestic Chinese economy. Good grief, we should be celebrating Thanksgiving, not mooncakes, because if China was not as rich as it is now, the rest of the world would be in far worse shape than it is. Yet when we try to talk to an American on American soil that they need to be thinking about China in today’s world, the best we get is a sort of polite nod.

2. China: Its the Slave Labor Advantage Not The Value of the Yuan That Matters

The economics of business here in China are not as rosy as it might seem with the vexing problem of rising labor rates and other inflation eating into ROI and startup cost models, profits and consumer pockets. The West’s problem with China isn’t the exchange rate of the Chinese yuan. The fact that China is building out its country on slave labor wages, as America and Europe did in the past, speaks much more directly to the core advantage China has now and is milking for all its worth. however, rising labor rates are going to slowly eat away at that huge advantage in the global marketplace. The Chinese will allow internal domestic inflation including continued rising salaries much sooner than they will allow appreciation of the rmb.

In fact, Governor Schwarzenegger wants a high speed rail to zoom everyone from Los Angeles to San Francisco. Nice idea but way too late on American soil. Here in China, they’re adding towering building projects in every city and expanding a spidery web of 13,000 fresh kilometres of high speed rail to the existing network of 7000 kilometres, whilst paying the construction workers something like USD $1.50 per hour. It is said that even just the Shanghai-Beijing high speed rail will create 500,000 jobs. Give that a try in the West whilst having to pay the workers more like USD $20-$30 an hour and its easy to see the problem.

Indeed, starting with Bank of Japan’s surprise interest policty shift, our spinning globe keeps changing even with China on holiday this week. Here’s a set of fresh views and commentary on China and other global affairs to ponder for the coming days. Lately I’ve received several inquiries about commenting and remind you to simply register if you’d like to add your comments.

1. Deliberately Under Pricing Goods? It was suggested in a recent article at www.rickackerman.com, one of the most intelligent places to go for views on the global economy and investment markets, that “….Chinese (for one) are deliberately under pricing goods in order to put our manufacturers out of business.”…

For what it is worth, I find this is rarely a topic of discussion or concern amongst foreign expat manager community hobnobbing here in Shanghai, including the monthly American Consulate Briefing each month here in Shanghai, and I’ve never seen the topic written about in any monthly biz magazine. It just doesn’t seem in anyone’s mind space while continued lack of ease/transparency/restrictions on WFOE’s to do business, and rising labor costs remain today’s top concerns for businesses in China.

2. Trade wars are coming and I’m afraid its going to get ugly. The Chinese are holding the strong hand and as I have stated from the beginning, they are not going to back down, they are going to play every strength they have for further dominance, strength and expansion in every possible way they can. If the U.S. can become the world’s superpower in a span of 50 years, so can they and let’s ask why not?…or at least even up the field as an equal player. What will U.S./Euroblock/China GDP’s be in 10 years; much more equal than now for certain. Rick posed the question in response to my earlier published article on whether China’s riches can save the world from a meltdown Can China’s Miracle Keep The West Afloat?. Maybe yes, maybe no, probably yes, and definitely enough to at least weather the storm for themselves and rise to further global economic power. That’s the future new reality coming like a locomotive like it or not. This is all part of my eternal reminder that China is so rich with cash, assets and home equity; You can’t imagine and that is fatal flaw in the “Chanos” type of bubble warning analysis on China found out there.

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3. America: Bigger Trouble Than Ever but Also Better Than Ever!

Its easy to understand that there is a fresh 100,000,000 strong group of ruined American middle and lower middle class citizens whose lives have essentially been taken from them by circumstance. I’m saying it too nicely; they’ve been raped and pillaged by the dark side of American style capitalism and have every reason to fear their government leader’s choices. (never mind who to blame for the moment) To date, over 40 million of them are now taking government handout food stamps to put food on the table, and the ranks of those on the newly materialized long-term unemployment line continues to rise steadily with no relief in site. Where oh where is the American leadership in government quickly agreeing to save its banks with trillions but not to also save its people with a few hundred billion at least? Hell, throw a dying middle class dog a bone, will ya? No such thing in today’s America where politicians are an impotent, self-serving lot, and as banks in America are doing nothing more than taking the freshly printed booty from the Federal Reserve and in fact, just sitting on it, collecting interest and HFT fees as their profits, to the tune of trillions of USD, rather than lending it out to already over-extended businesses who are slowly sinking in the quicksand of deflationary America.

Wait, you said “America’s Better Than Ever”? You see, that’s the thing, yes I did and yes it is. The wealth didn’t disappear, not yet anyway; it was just transferred. While it is easy to feel sorry for the plight of the middle-class sinking American, let’s rejoice in the new found riches of the richer and richer other 100,000,000 million Americans. Their lives are somehow weaved into the healthy, thriving part of the U.S. economy; the rich and middle-upper income rich are richer than ever in history. Corporate earnings are not a disaster, P/E ratios are not astronomically unreasonable. Corporations are sitting on healthy piles of cash. The comfortable citizens have continued to accumulate more and more wealth and they are filling the cabins and suites of cruise ships and five star resorts (so are the Chinese and the Chinese spend four times money than Americans whilst on vacation by the way), they are buying and spending and enjoying the good life with a manageable amount of debt. That is also the truth and the fact of today’s American life.

So as my friend and respected master NLP trainer Daniel Smith likes to point out, we generalize, delete and distort information way too much. I am suggesting that America has become a world more split in two than ever before and that the newly widened gap between the rich and the struggling since the financial crisis of ’08 is going to define the new American reality for the next two to three decades or longer. It is the new America; better than ever for the haves, and worse than ever for the have nots.

4. The Leadership and Communication Skills Gap: Growing Pains in China

Where are the leaders in America stepping up to the plate to help America out of its jam? Where are today’s business leaders in China? Where are the business leaders with vision and mission in China who have the ability to manage companies and communicate to their people and motivate and engage their people effectively? Well, they are in short supply here in China and that’s probably the #1 block to continued growth. It is a natural reality that an expanding economy and business environment is going to feel good old-fashioned growing pains. I have a Global Fortune 500 multi-national client whose middle level promoted managers don’t know anything at all about managing anything. In fact that’s the state of affairs for most companies here.

These managers, China’s batch of fresh, new corporate management leaders were excellent doers for the past several years, not managers, and by the sheer force of ongoing growth and expansion, they have been promoted to start “managing” bigger departments. They were on a team of six, now they are managing of a team of 60 and they, in fact, don’t know how. Worse, they go to what I call complete waste of time general lecture courses on communication and leadership which have been arranged by the HR training department. Four days of learning “situational leadership” and then they are thrown back to the grind of daily work and people stuck in corporate gridlock where no one in the organization including themselves wants to make a decision and be responsible if its the wrong decision.

So how does a leadership seminar in the annual training budget help that problem when the core underlying rules and values running the company are flawed in the first place? It doesn’t and that’s China’s top HR-focused problem today, along with that shortage of workers driving salaries higher and higher as they’ve learned to switch companies once a year to pack their resumes and get raises without the idea of loyalty anywhere in sight. Each year, Hewitt unveils their annual employee driver research report which do a beautiful job of helping us to understand that these problems are getting worse not better.

5. China: Parking Lot Full. No Vacancy. Park on Sidewalk.

There are no more parking spaces left in China as China has become the #1 world’s automotive market, yet the party has barely begun. So how to manage that reality? In fact, I often cite genuinely well-deserved compliments to the various decision-makers of the Chinese government as they have in fact done an exemplary job of managing the unprecedented growth of a country that happens to have 1.3 billion citizens. Try depositing an extra 1 billion citizens in America and let’s see how well the government orgs do at managing and building what’s needed. Meanwhile, the automotive expansion has led to apartment complexes with no parking space to have their walkways lined with cars, open spaces including sidewalks have become gridlocked parking lots where pedestrians literally can’t pass. Tears come to our eyes as we walk along the quaint French Concession and Bund area side streets of Shanghai now permanently lined with cars like the hedge built along the park trail.

6. Catalysts To Change – The Black Plague, Heroin and Debt

My coming book is entitled Catalysts To Change, it is a book in response to the question “What do a dying mother in a hospital bed, Renaissance Europe and the Birth of Jazz have in common? The brief answer is that they are each events in life or short periods in history related to a sudden movement, a transformation of consciousness and awareness, which though painful in many ways, led to blossoming and awareness; new invention, growth, creativity, innovation and better life.

It is a scary thought that China and the United States are the leading the world through multiple, unprecedented catalysts to change in this decade. It was the Black Plague which wiped out millions in Europe which led to the new thinking now known in the history books as Renaissance Europe. It was heroin addiction which in fact fuelled the creativity and invention of a new musical form now known as jazz. As part of my work I am a performing jazz pianist and so appreciate this part of the paradigm in particular. Today’s version of the black plague and heroin addiction is the fresh, new multi-trillion injection of US debt that has been deposited into the world’s financial system. You cannot begin to imagine how much a billion is, let alone 100 billion or one trillion, let alone ten trillion and that is the size of the debt we are talking about. The world will never be the same as the impact of this new financial reality unfolds around the globe in the coming decade. If by the way you would like a simple preview of the future, just imagine that currencies around the world starting with the USD will continue buying less and less in value of what we consume each day. In summary, and in reference to our daily lives, that is how the situation will manifest.

Call it deflation, call it currency devaluation, call it inflation. Call it what you want, the result is the same and that is my oversimplified yet realistic view against our Nobel-prize winning and Harvard-degreed economists who, as Joshua Ramos points out very well in his book The Age of the Unthinkable, are impotent in their ability to tell us what will happen next across the world of global economics. The expert advisors can’t tell our world’s leaders what to do because Per Bak’s “sandpile” is the new model of how today’s interconnectedness system responds. They simply can’t predict the unpredictable moment in time when and how a sandpile finally collapses under the weight one more grain of sand. Its not that the machines have started to think on their own, its that the system has thrown out the expected rules of engagement. Buying gold is probably a very good idea as is having your assets in Chinese yuan if possible.

7. Gridlock and Arrogance

The leader of one of California’s top business organizations confessed to me that he recognized American arrogance as a problem doing business here in China. At this stage of the game, I think that classic American “know it all” arrogance should have been proudly worn in the past because the fact is that America did have an incredible multi-decade run to be proud of, ending up as the world’s superpower, doing an enormous amount of good for the world along the way. That is the truth. The U.S. Pavilion at the World Expo in Shanghai ain’t as fancy as the French one or the German one. It offers a series of video experiences. That’s it. But it touches your heart, it shares with you exactly the true American spirit and sensibility that created what America is supposed to be about. It made me feel good about being an American while also frustrated and sad about where America has gone.

However, today a bit of humility is in order. Like it or not, there is a lot to be learned from the diligence and principles found in China’s way of getting things done well and getting them done fast. While western countries will take a project and lock it up in a committee for a year or two, a group of Chinese leaders get together and redefine the western sense of the word “fast-track”. One day its “we need a bridge”, within the month there’ a signing ceremony with the city mayor and workers are out digging and six months later there’s the bridge. Its a lesson to learn.

When I walk along the street in China, I find a lady sitting on the curb; she’s ready and prepared to shine your shoes for $.50. She does it to feed her family, to keep a minimal roof over her head. I always pay her extra and realize how impressed I am by that work ethic, that idea of “merchant street lifestyle” amongst a citizenry of people who tolerate much worse conditions than spoiled middle class Americans. America has a lot to learn from Chinese principles and rules in daily life and now is the time to learn it because America is not going back to its good old days.

8. My Way or The Highway

Thanks Dad, I mean, Frank Sinatra. Ok, thanks to both. My father was very successful in the financial and insurance services industry and he used to tell his team “its my way or the highway”. There are times when that is exactly what people might need to hear and in today’s world of enlightened leadership, it assumes you are also providing them with what they need to get it done your way instead of hitting the road.

The hurting American middle and lower middle class we spoke of earlier is hurting. They need a new economic philosophy for the common man and I believe that the roots of the philosophy they need to face moving forward are found in the daily work habits and attitudes of people here in China and other parts of Asia. Like the lady who sits ready along the curb to shine shoes, or the man with his giant tricycle selling vegetables and the motorcycle guys who sit on the curb outside the subway stop to make a buck giving you a quick ride home. I admire that street life hustle which permeates the Chinese way of life and believe some of those principles are exactly what Americans need to wake up to in the new reality of today’s world.

So while another daily batch of 500,000 Chinese visitors were once again wandering around the World Expo in Shanghai today along with the hundreds of millions of Chinese families at home together tonight to celebrate the traditional Mid Autumn Moon Cake Festival, what was your day like?

Mario Cavolo
Shanghai

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