With the end of 2018 marking the 40th anniversary of China opening up & reforming (and with an increasingly loud group of market participants questioning the foundations of China’s economic miracle - and more importantly, it's future), Bridgewater founder Ray Dalio believes now is a good time to reflect on China’s last 40 years.
"Since I have been fortunate to have experienced 34 years of this 40 years in an up close and intimate way, and since I study what makes countries succeed and fail, I have some experiences and thoughts to share..."
The table below shows just a few representative statistics.
These results speak for themselves, but Dalio adds:
"To have such rates of improvements in so many areas and for so many people has made it the greatest economic miracle ever."
And from what Dalio has seen, he believes that the very impressive results that the Chinese leadership and the Chinese people produced came about primarily because of the powerful combination of
a) China’s opening up and reforming following an extended period of isolation that led to a fast catching up (especially in the coastal regions of China) with the advanced developed world, and
b) the power of the Chinese culture and it’ related ways of operating.
Crucially, the billionaire hedge fund manager points out that, if you haven’t spent time in China, you need to get any stereotypes you might have out of your mind because it’s not how it was. This is not your father’s communism. It is “socialism with Chinese characteristics” that has been significantly and very effectively reformed, which has made it much more vital, creative, and economically free.
Dalio's 'romantic' view of a paternal China is definitely not the mainstream narrative:
"From my experiences and from what I am told by Chinese who should know, I believe Chinese leadership seeks to run the country the way they believe a good family should be run, from the top down, maintaining high standards of behavior, putting the collective interest ahead of any individual interest, with each member knowing their place and having filial respect for those in the hierarchy so the system works in an orderly way. One of China’s leaders who explained this concept to me told that the word “country” consists of two characters, state and family, which influences how they view their role in looking after their state/family.
One might say that the Chinese government is paternal. For example, it regulates what types of video games are watched by children and how many hours a day they play them. As a broad generalization, when the interest of the country (like the family) is at odds with the interest of the individual, the interest of the country (like the interest of the family) should be favored over the interest of the individual. Individuals are parts of a greater machine. As a result of this perspective, the system seeks to develop, promote and reward good character and good citizenship. For example it gives people a social credit score that rates the quality of their citizenship. And each person is expected to view themselves as parts of the greater whole.
This management from the top down includes visualizing what China 5, 10 and 20 years in the future should be like and then making and managing detailed multiyear plans to build out that vision, with the goal being to make China as great as it can be. China is run more like a giant company with many subsidiaries, some within the government’s direct control and some within its indirect control. "
But, as the fund manager notes, while Chinese culture has been evolving, it has at its most fundamental level been operating in similar ways for many hundreds or even thousands of years and the results of operating that way are knowable in an approximate way.
"I have recently been researching the rise and fall of reserve currencies, which led me to study the rises and declines of the world’s most powerful countries. That led my research team and me to put together the following indices of the relative powers of leading countries since 1500. These indices are a combination of six sub-indices that measure six different types of power:
1) innovation & competitiveness,
2) domestic output,
3) share of world trade,
4) financial-center size and power,
5) military strength, and
6) reserve-currency status.
...and they show when different countries reached their peaks relative to the rest of the world."
As shown in the chart below, China was either the number one or number two most powerful country from 1500 to around 1800 when it went into relative decline...
That decline continued until around 40 years ago, when, as Dalio explains rather ominously for the American hegemon:
"...the opening up and reforming led to the previously described strong ascent to being the second-most powerful country in the world and on the path to being the most powerful one. I believe that excellent performance was largely the result of China’s powerful culture and its reforms."
Given that impressive track record and how deeply imbued the culture behind it is, we shouldn’t expect China’s most fundamental ways of operating to change much. As a result, Dalio warns:
"while trade deals can be made, attempts to change “Chinese characteristics”, - most importantly to change the top-down government management of most/all aspects of the system pursuit of making China as great as it can be - won’t work."
So, in summary, "it's not the economy, it's the culture stupid!"
And judging by Dalio's take on American culture, it is clear where he thinks this is going...
"Most fundamentally, the US is a country in which individuals, individualism, and individual property rights are perceived to be of paramount importance it is directed from the bottom up (e.g., through “one man, one vote” democracies that empower people to choose their leaders), being revolutionary is considered a good thing, and conflict is valued more than harmony.
Rather than respecting top down control most American have a strong preference to keep government from interfering with their most individual choices. Character development is a personal or family issue, not a government issue (which leaves it largely neglected in areas with broken families, especially if they’re poor).
Rather than there being a long-term top down vision for the country and a plan to achieve that vision, in the capitalist and democratic system such directions are more bottom up determined based on commercial and popularity considerations."
Of course, the world's largest hedge fund manager avoids directly slamming America's 'dream' or supporting China's central planners:
"I’m not saying which system is better. Each culture/system has its pros and cons that I’m not going to get into now.
I believe that the important thing to know are that while there will be trade wars and trade truces they aren’t the most important things. "
However, Dalio signals the following seven things as the most important to follow:
1) China has a culture and system that has worked well for it for a long time so it shouldn’t be expected to change much,
2) the U.S. has the same,
3) these systems (and those of other countries) will be both competing and cooperating, and how well they do that will be an important influence on global conditions,
4) how well each system works in practice will have a far greater influence on where each country stands in the future than the terms of the deals that they strike with each other, so each would do well to examine its own weaknesses and come up with reforms to rectify them, and
5) there is a lot to respect about the Chinese culture and approach that led to its remarkable accomplishments,
6) we would do well to learn from each other, cooperate and compete to bring each other up rather than to tear each other down, and
7) China is a place we need to continue to evolve with and invest in.
"Nothing lasts forever!"