by John D. Evans

 The world is always changing, some economies are growing quickly and some are in a state of decline. This is also true for all industries within an economy. Everything: a country, an industry, a company (a person) has a ‘life cycle’. In addition, people are always migrating looking for a better job or way of life. The only constant in this world is change.

Having now lived for significant periods of time in each of America, Europe and now Asia, I look back at the various changes that each region went through and how they managed the economic and industrial change. Economists tell us that economies follow a regular development pathway: 1. agrarian, 2. industrial and, finally, 3. service-based. This change in the structure of an economy not only tells us the new industry composition but also what employment skills are required and where.

I remember America from 1975-85; a time of deindustrialisation. The automotive sector was facing serious competition from Japan. Steel factories and other heavy industries were moving to Korea and other parts of Asia. There was a great loss of jobs in the ‘rust belt’ of north-east U.S.A. But then the economy recovered quite well and we saw the rise of the service sector, financial and accounting services, and then the big tech industry ‘boom’. From a purely macro level, America largely transformed from an industrial economy to a service based economy in about 20 years. Areas of wealth were no longer Detroit but around San Francisco Bay. The fall and rise of industries and the change in the composition and location of labour. Being a ‘market economy’, these changes occurred without a lot of formal government capital intervention (though it was by no means completely absent).

In ‘the West’, real estate development is a big part of the economy, as it is everywhere, to support both business and the residential accommodation of labour. We also have a lot of ‘speculative build’, where very large capital expenditure (often largely financed with debt) is built on the hope the builders have forecast the future demand correctly (“build them and they will come”). This is very risky business, particularly when debt financed. To support large, new office developments or whole cities, a lot of infrastructure is also required: roads, sewers, Metro system, etc. In the West, we frequently have the real estate being developed by the private sector but often much of the infrastructure (Metro as an example) is built by the public sector. Sometimes the private and public sector coordinate their respective developments well – but sometimes they don’t. How long did it take for the Jubilee Line to be built to Canary Wharf?

train1In China, things are both the same and different. We appear now to be seeing the start of deindustrialisation. Maybe it was due to previous overbuild rather than a normal life cycle but, whatever, it is now happening. China is trying to grow its domestic service sector and with IT and technology being a big part of that process. This also has major impacts on what employment skills are needed and where. Economic difficulties are growing in Shanxi whereas prosperity is increasing greatly in Hangzhou.

State ownership and control is much higher in China than in America and thus it is normal to expect the government to play a more active role in this change in the composition of industry and the location and nature of the labour force. So we see monies being poured into ‘zombie companies’ to provide some further support for existing staff – just as car companies in Detroit received Federal aid at the time. And highly beneficial incentives are being provided to ‘innovation start-up companies’ to get listed on the new Shanghai Equity Exchange (SEE) – just as Internet ecommerce got tax and other exemptions for many years in the U.S.A. to promote its growth.

To me the two experiences seem somewhat similar in both America and China. The major difference is the Chinese government is acting as principal in the provider of capital whereas in America the government was (relatively) more a facilatator via changes in regulation and tax incentives. This has interesting ‘risk and return’ implications. If the state is principal then it is putting the savings of its citizens more at risk than if those risks are isolated in non-public entities and to those who choose to take on those specific risks. But, as in most large economies, the federal government is likely the largest and strongest credit and, thus, the one with the most financial strength to underwrite these major, long-term economic developments.

The ‘unborn cities’ (I agree, a far more appropriate label than ‘ghost cities’) represents the Chinese market (government) view of where labour will need to relocate to. The only difference to America is that, as per the above paragraph, in China relatively more government money is going into financing the infrastructure (often indirectly but still government money). Some would argue that government ‘speculative build’ is more risky at the micro level, than private sector speculative build because the market is more sensitive to real price signals and thus, in theory, lower commercial risk. That may be true but there is another important difference.

In China, the building of commercial real estate and the supporting infrastructure is being planned and provided for by the same entity, the state. As a consequence, the development of infrastructure in China is much more in sync with the industrial and residential development. I just look out my window in Suzhou at the numerous buildings rocketing up at break-neck speed, but see the new Metro system being built in lock-step. That clearly adds to efficiency there.

If you have never lived in China, I do not believe you can really appreciate the scale of what is happening here. And I think that is why so many foreign observers view the economy here as ‘completely different’, because the scale is so large. Growing up in North America there was an expression: ‘everything is bigger in Texas’. Well it is really a lot bigger in China.

I am not trying to understate the differences between the western market system and the China industrial policies, of course there are real differences. But if you look at some of the industrial and labour trends, and how the economy is dealing with this change, we also find a lot of similarities in industry life cycle and the migration of labour.

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John D. Evans is Senior Executive Director and Founder at 1 Yuen Network Technology (Shanghai) Limited and financial markets practitioner.

First published on February 26, 2017, this is a discussion of an article on BBC Future, dated 23 February 2017 and written by Richard Gray.

Photo: Qingquan Steel plant, Tangshan, Hebei province