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Battling Some Myths About China

There are myths that China lacks a social infrastructure or that its cities are so polluted they can't keep growing. I've been in China for two weeks and I see China's best days ahead of it.

There are a lot of China bulls and bears out there today, but there is also a lot of misinformation. Many people have never even been to the country but have no problem prognosticating about its future.

I've been in China for the last two weeks, and based from my on-the-ground experience, I'd like to offer my reaction to some of the common myths I've heard making the rounds in the American press. (I've also posted some of my musings on China at

Realmoney.com

).

Myth:

There is a lack of social security, health care and unemployment insurance that threatens the country's future growth.

The Chinese do have basic social support structures in place for retirement and health care. Indeed, that's part of their value-add to the populace; China is there to help them when they need it. However, it's certainly not a European cradle-to-grave type of program. It's correct that China (and Hong Kong) do not have unemployment benefits. If you get laid off, you're on your own.

The social security in China is one master account that citizens draw against. One can go online at anytime and see how much money he has to use for doctor visits or retirement. Some of workers' income is taken off to contribute to this account (similar to Social Security or FICA in the U.S.). Once the account is drawn down, it's gone, so there's an inherent incentive not to abuse it. If a citizen faces extended medical care needs, he would need to pay out of pocket very quickly.

Indeed, one of the very interesting growth areas I see in China over the next decade is private health care. As the middle-class grows in China, and as the baby boomers retire, people will need better health care. Isn't it ironic that China is speeding towards providing a much more beefed up private model of health care just as America is moving to governmentalize more of its model?

Another interesting point about benefits is that a Chinese citizen can only receive these in the Chinese province in which he was born. A person might move from Shenzhen to Beijing to take a job, which is fine to do, but if he gets sick or wants to retire he would have to return to Shenzhen to get the benefits. This discourages the type of mobility we think of as normal in the U.S.

Is the current level of benefits sufficient to keep the Chinese economy growing? In my view, it is.

Myth:

The cities are so polluted they can't keep growing.

There's no question that there's a lot of pollution in China cities. The worst parts are off the beaten path, although you certainly see a lot of choking pollution and smog in the major cities. In Beijing and Shanghai, they talk about the number of "blue sky days" they have in a given year because they're still relatively rare compared with the usual hazy or smoggy days.

However, I would argue that China sees the problems this pollution presents to its future growth and is why the Chinese are leading the world in investing in clean energy like solar, wind, and hydroelectricity. While the U.S. talks a lot about no longer being addicted to oil, it's the Chinese that are really taking the steps to get to that reality. They're not getting there because they are a bunch of tree huggers. It's enlightened self-interest. They need power to keep their economy growing and they need to be able to breathe.

Myth:

A lot of the working-age population is soon retiring, leaving a shortage of workers.

This is true. China is facing the same demographic shift in the next 15 years as the U.S. The baby boomers are retiring and the first generation since the "one child" policy was enacted will assume the mantle as the main bread-winners for Chinese society.

Does this mean there will be an imminent decline in China' standard of living because there won't be enough warm bodies to do menial labor? I'm skeptical.

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First, this shift will take time. None of us make investments over 15-year time horizons. The China boom is still well-positioned to continue for some time.

And even when the current main generation retires, we're talking about a country of 1.3 billion people. There will be a lot of warm bodies around still to fill key roles. There will be many more poor folks from the country making 1000 yuan a month who will be enticed to move to the urban centers to get a higher wage.

Myth:

China has grown so much. It can't keep growing at 10% a year in GDP?

As I've said before in

TheStreet

and

RealMoney

articles, I believe the "official" Chinese numbers about the economy are significantly understated because of the amount of cash transactions that are floating around the economy in the gray market. So it's likely that China's gross domestic product has been growing at an even faster pace than what has been reported.

So doesn't that mean the pace of growth has to moderate at some point?

Well, sure, there is an upper limit to the pace of growth and it's hard to grow at 10% a year forever. However, the China bears need to recall that even after a decade of torrid growth, China's average income across the country is $4,500 per annum ($10,000 in the bigger cities). Even when you adjust income for purchasing power parity (because goods and services are cheaper in China), China's GDP per capita is one-eighth that of the United States.

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So China has grown a lot in 10 years to be in its current position with still a lot of runway for future growth ahead of it. What's more, the Chinese have invested heavily in critical infrastructure that is second to none in the world (e.g., airports, rail, toll highways, telecom, and power grids) which will help them accelerate their growth. Oh, and they have almost no debt per GDP compared to the West.

I think China's best days are still ahead of it.

I'll address some additional myths on Thursday over at

RealMoney.com

.

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Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson