China’s Hypergrowth
I started writing this as part of a 2022 wrap-up type post. But this topic just has too much meat. China is the single thing I read most about this year. I want to learn both about the history and the current leadership because it is both a unique and interesting culture and has been given the title of heir apparent to the superpower throne.
Make no mistake, the China system of the last 20 years has worked extraordinarily well by this measure — it has lifted hundreds of millions of people out of poverty to the middle class. In 2000, only 3% of China was middle class. As of 2018, 51% of the country is now enjoying a middle class life.1 The average resident has also enjoyed relatively more freedom during this period. These financial and societal outcomes have created a strong sense of national pride among citizens of the country.
A critical step2 on the way to China claiming the superpower throne occurred this year. In November, at the National Congress, president Xi Jinping was “granted” an “unprecedented” third 5-year term. Those are the words commonly used to describe the event.
One could argue Xi has taken this power more than he was granted it. And, it is only unprecedented in so much that the precise manner Xi has taken this power is different than how Mao Zedong did during his rule from 1949 to his death in 1976. The result is one man with near absolute power.
Xi’s destiny was written years ago when he was able to get the two term limit removed in 2018. As of 2022, the third term was a foregone conclusion and a crucial one at that. China’s future is now solely in one man’s hands unlike any time since since Mao’s death.
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COVID-19 had a massive impact on China in some very obvious ways — the ongoing discussion around the origin of the virus, China’s initial reaction or lack thereof to the virus, the economic impact, the strict citywide lockdowns, etc. COVID has also impacted the leadership’s strategy in ways not as immediately obvious.
The virus has been a fantastic conduit for the implementation of novel surveillance technology, e.g., COVID passports, GPS tracking and a “social credit” score. More broadly, the “zero COVID” policy, e.g., strict citywide lockdowns, has until recently been proof for the CCP to point to when it says it knows what is best for the citizens of China because the country has managed to suppress its death toll.3 The zero COVID policy worked in the sense that the people of China have felt safe, and have specifically given credit to their government for providing that safety. This has lead to citizens voicing a sense of pride that they’ve collectively handled the pandemic better than other countries.
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The Champ Strikes Back
Meanwhile, back in the U.S., democracy has been on the proverbial ropes after a tumultuous 2020 presidential election. But just like the personification of the U.S. himself, Rocky, the democracy came out swinging in November. The 2022 mid-term election results favored the more moderate political candidates.
The transition of power from one U.S. party (Republican) to another (Democrat) went through. While not without some hiccups, the representative democracy remains in tact.
China does not have a representative democracy, of course. But over the last several decades, the Chinese Communist Party itself has seen multiple leadership transitions. The transitions in power from Deng to Jiang to Hu, although not democratic, were seemingly orderly.
The China system was working. Now, with the removal of the term limit, all the eggs are in the Xi basket. This begs the question — is Xi the man for the job?
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China As Start-up Country — A Google Analogy
Google was founded in 1998. When the company began trading publicly in 2004, with non-founder Eric Schmidt in the Chief Executive Officer seat, it was valued at around $30B. Schmidt got the gig because he was the right leader to take the company from start-up to sustaining company. One could argue he was given the keys to the best business ever to be created. Just don’t crash the car, Eric, and you will keep the money printer running. He did just that adding, say, a half trillion in market capitalization.
In October 2015, Sundar Pichai became CEO. While the company was at this point a behemoth, one could argue Sundar has been in the same situation as Schmidt — just keep the money printer’s power switch flipped on. To date he has done just that and to the tune of adding a full $1T to $1.5T in market cap.
Did Sundar build something that resulted in that $1T+ in value creation? Or was the growth engine of Google built 1998 through 2004, pre-IPO by Brin and Page?
For Schmidt and Pichai, it has been about managing the entity within some guardrails. For China, its original v1 growth engine was built by Deng Xiaoping. Deng is Brin or Page. He, you could say, is the founder of modern China. He opened it to the west while maintaining, to some extent, “China values” as they have famously become known.
Leadership was then handed to Jiang Zemin and Hu Jiantao from 1993 until 2013. These are the Schmidt and Pichai corollaries, respectively. And like Schmidt and Pichai, their leadership reigns are characterized as massive growth stories and overall success.
In 2013 Hu Jiantao voluntarily transitioned power at the end of two extremely successful terms just as Jiang Zemin did before him.
Xi Jinping was handed the keys. Through 2020 or even 2021, Xi’s strategy remained relatively consistent with his predecessors — “capitalism with Chinese characteristics” as it has become to be known.
Over the last 12 to 18 months, Xi has shifted to a more Maoist strategy. A shift back to a more consolidated center of power. That culminated in November with the abolishment of term limits. China is now, effectively, an autocracy.
There is no Google corollary to Xi. Going forward it’s Xi as Elon Musk. If you bet on Tesla years ago, it was really a bet on Musk. Same goes for Space X. If you are bullish on Twitter in December 2022, you are bullish on Elon. If you bet on China in December 2022, it’s fully and completely a bet on Xi.
The difference is Musk has a track record of building something from scratch, defining a strategy, and executing against that plan. He even had a track record prior to Tesla. Xi has been talked about for the past 5-10 years as if he has that track record of extraordinary success.
What if it was the groundwork of Xi’s predecessors that provided him a surprisingly cushy gig?
Hypergrowth has a way of hiding the skeletons, whether that be in an emerging company or emerging country.
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As I write this in late November, there are ongoing public gatherings throughout China. These gatherings are being portrayed as partial or full protests and as different than any other protests in recent years. Some are even comparing the current situation to the events of 1989 that lead up to Tiananmen Square.
The odds are, sadly, that little comes from these uprisings. As is the nature of an autocratic society. Even if that is the case, it’s not overstating it to say, Xi finds himself in the most precarious position since Tiananmen. If GDP growth does slow dramatically, the hypergrowth cushion starts to evaporate.
While a relatively small group of 2020 U.S. presidential election deniers were not allowed to move the U.S. to a more autocratic style of government, Xi was able to do just that in China.
In the battle for superpower supremacy, going forward we have a more cut and dry democratic capitalism versus autocratic socialism match-up.
If Xi is the next “great man” of history, China is in a great position. But, if he is not, the safety net under China’s high-wire act has been removed in giving Xi full control. The proof will be in the execution over the next handful of years.