Time for the West to Get Real on China

HONG KONG — Like a funhouse mirror, China reflects back what its viewers want to see — and it always has.

Sometimes, it has been the relentlessly positive view of the land of ever expanding markets the Lancashire mill owner dreamed of in the 19th century when mentally adding an inch to every Chinese shirttail, or the land of ubiquitous penetration that smartphone analysts extrapolate on a straight line from today’s 40 percent. Other times, it has been the unremittingly negative view of a Yellow Peril washing over the earth as in the 19th century, or a cascade of falling dominos spreading Communism in the 1960s.

We’re just coming off a period when it was, by near unanimous acclimation, China’s century. Posh Western families gave their children Chinese nannies to sing them Mandarin lullabies to better prepare them for a Goldman Sachs intern competition 20 years hence; hipsters moved from Brooklyn to Beijing’s Sanlitun party district to notch their belt with cool experiences; banks, brokerages, private equity houses, consultancies, and media companies bulked up their Beijing and Shanghai offices to harvest the seemingly inevitable riches.

But how much of the investment and planning was ever based on hard analysis instead of emotion and momentum?

One need only read back a bit in the archives to see some people making decisions based on Chinese economic data, then writing long screeds decrying the value and accuracy of said statistics, then panicking when those self-same statistics looked bad, then criticizing those statistics again, and finally — as we saw this week — saying the current market carnage would only stop when Chinese statistics took a turn for the better.

Much of this is China’s own fault for making its system and workings so opaque. That opacity and lack of transparency is precisely what has created romance and stirred the emotions. Emotional investments, however, revert to the mean in the same way financial investments do.

That reversion is precisely what we are seeing when a pundit for a major U.S. news network claims he’s never heard the name of the man who leads the world’s most populous nation and its second largest economy. That’s what we see when a leading U.S. presidential candidate claims the Chinese president only deserves a fast food hamburger instead of a state dinner. And that’s what we’ll see when — and you can count on it — board room after board room will demand papers on whether “our China investment is worth it.”

One need only look to Japan for the model (much as Beijing’s leaders might hate that comparison, particularly as “Victory Day” approaches on Sept. 3). In the 1980s, Japan was “Number One” — its wise bureaucrats could do no wrong in working with industry to steer the economy; the stock market moved ever upwards. Inevitably, U.S. students flocked to introductory Japanese courses; financial institutions and media companies bulked up their Tokyo presences; and all was rosy and bloomy — until it wasn’t. Today, though Japan is still the world’s third largest economy, the romance is off and few global companies give it an equivalent share of attention and investment.

China has many real things going for it. Its huge population surely will produce more, consume more, and build more. Its cities will grow in number and size, as will its infrastructure needs and dreams. Both its currency and diplomacy will take on greater roles in the world. But what can’t be manufactured is the romance; what can’t be forced is the dream.

The future reapers of all that China has to offer will be the realists, not the dreamers. And that, while a painful transition, will probably be a good thing.

Image: Ed Jones/AFP/Getty Images