James Fallows does it again, with a detailed look at why predictions that China will follow either the Soviet or Japanese paths to economic disaster don’t hold water. There are too many sharp differences between China’s economic situation and theirs.

It’s nearly 1.30am and I don’t have the fortitude to do a detailed analysis of the article now, except to say it makes some points that should be obvious to us all but somehow seem to slip off our radar screens. Like, the USSR’s manufacturing capabilities were a pathetic joke by the time they went under, while China’s are at this moment among the most robust in the world.

And that’s all I have time for. I just want to get word of this piece out there so you can read it for yourselves. One snip from the very end, after the writer has enumerated some rather startling possibilities for creativity (and for profits) the crisis poses for China and dashed the shaky comparisons of China with Japan and the USSR.

CHINA IS DOWN. It is not out. This has important implications for America.

If China were truly like the old Soviet Union, the coming mass unemployment might be the shock that finally turned the people against their rulers. If it were truly like Japan, it might spend a decade or two chugging along but not aligning its systems to new international realities. In either case, Americans might feel sorry for China’s still-impoverished masses—but less worried about its competitive challenge.

I suspect that China will be like neither. Most of its people will still be very poor. Most of the jobs they hold—when they have jobs—will still be near the bottom of the global value chain. But they will not, I believe, be in fundamental revolt against the country’s governing system. And the companies they create, manage, and work for will be constantly trying to improve their position on that value chain. Two years ago, after reporting on factories in Shenzhen, I described an economic symbiosis in which Chinese workers assembled many of the world’s products—while inventors, designers, shareholders, and consumers from America or other rich countries got the lion’s share of the financial returns. It is the announced policy of the Chinese government, and of many Chinese companies, to keep more of the rewards in China.

Outsiders can rightly criticize the Chinese government if it tries to sneak in new export subsidies or push the RMB’s value back down. But no one can criticize its ambition to increase the rewards for its people’s work. Many Chinese companies will fail or make mistakes under today’s intense pressure. But many are using the moment to prepare for their next advance. The question for Americans to think about is how we are using the same moment.

Kind of reminds me of Chas Freeman, willing to challenge sacred cows and acknowledge that whether we like the Chinese government/system or not, there are some things it’s doing that are worthy of our attention. Who know, we may even learn something from them.

I was in Dongguan on business several times in late-2007, back when life was fun and good. I wrote about an unforgettable event I saw there, and about the level of energy and excitement I saw. So much opportunity and hope. Limitless possibilities.

Not anymore. If this post is to be believed, and I have no reason to think otherwise (except perhaps that I want to not believe it), Dongguang has become a bit less inviting.

As I was out at a factory in Dongguang today I saw lines of people looking for work outside most of the factories we drove past. This is just one that we happened to stop in front of in traffic long enough for me to snap a quick photo. I counted 25 people or more outside multiple factory gates. I haven’t seen this since 2005.

Second, a security note. Two other people (who shall remain nameless), while in a different part of Dongguang today, saw a group of people on the side of the road hack another person to death (at least they think he died) with a machete. They kept on driving, sped up even, to get out of there as quickly as possible.

If you have money or are alone I would highly recommend that you DO NOT go out at night in any of the industrial areas outside of Shenzhen. This would include Songgang, Dongguang, Longgang, Bao’an, Guanlan, Shiyan, Huizhou and other areas with tons of (unemployed) migrant workers and not a lot of policing or economic development.

I’ve seen fights, I’ve seen people get robbed and beaten, I’ve seen a woman and child get run over by large dump trucks, I’ve even seen a dead body on the street (at least I think it was dead), I’ve had family tell me about kidnappings they’ve seen, I’ve had family robbed at knife point and I’ve been pick-pocketed numerous times myself. I’ve had clients tell me about huge gang fights they’ve see while making side excursions in shopping malls! I even chased down and dragged to the police station two guys who tried to steal my bike once. But I’ve never seen anything like this before.

Desperate people do desperate things. And right now in the manufacturing cities, times are as desperate as they can get. Except it will probably gets worse before it gets better. As many have said, there is no way this crisis will end without blood on the streets. The big question is whether this violence will spread from random acts of murder and robbery committed by hungry, desperate workers to an actual assault on China’s government. I think the government will be stable and will survive, for better or for worse. For some interesting perspectives on this question, see this post and its comments.

It’s going to be along, painful, frightening year. The Chinese people know that, and seem to believe their government is handling it as best they can. There’ll be more and nastier demonstrations, there’ll be more deaths and more despair. There’s won’t be a revolution, at least not from this crisis. People have planned and saved for it, and they are far more frightened of the chaos a revolution would bring than of the continued rule of a dictatorship most of the country credits with vast improvements in their lives. And again, that is not necessarily my personal viewpoint, but it is certainly the viewpoint of the man on in the street, whether in the Central Business District of Beijing or the train station in Kunming.

Silk Road link via Fool’s Mountain

First let me admit that I like the taste of this restaurant’s cheeseburgers, one of the foods I often find myself craving after days or weeks of only local fare. “Let’s Burger” opened just a few months ago in Sanlitun and I think I walked in by happenstance on one of their very first days in business. It’s run by a fellow from Hong Kong I chatted with that day, telling him his place filled a need in Beijing for a decent, non-fast-food hamburger.

There is such a need, but I decided Let’s Burger doesn’t fill it, and I don’t plan to go back again.

One of the first things that bugged me about the place is that there’s no free water, a courtesy nearly every restaurant here offers, from the cheapest to the most expensive. And you have a choice only of Perrier or Evian at prices horrific to contemplate. And this is the real rub: a can of soda is 18 kuai, which is highway robbery. This is a hamburger house, not a 5-star hotel. A glass of bad-tasting “house wine” is 38 kuai. A mango smoothie is nearly 40 kuai. (In America, that would be expensive.)

And then there’s the price of the burger itself. At first, 58 kuai for a cheeseburger seems kind of sane, since you always pay more for Western food here. However, it is not a meal in itself. It’s too small. Fries slap on an extra 25 kuai, so a burger, soda and fries will come to an unacceptable 101 kuai, or almost $15 USD. I might be willing to pay that around the corner at Blue Frog or Union Grill because you get your own private table and real service and they take your order from a menu – i.e., they’re real restaurants. Let’s Burger, OTOH, is cafeteria style. You stand in line, order off a big green board behind the cashier, they hand you a number and someone comes and drops the food at your table. You pick up the drink yourself. There’s no ketchup or anything else on the table; you have to get up and get it yourself.

This is not a good time for businesses to not give customers their money’s worth. I decided after leaving Let’s Burger hungry this afternoon that I’d never go again. They’ve got a great location, a decent enough product and a great opportunity to fill a need. A shame to see them blow it by being greedy and short-sighted. 101 RMB with no table service….

Pardon the rant. I was just soooo pissed this afternoon.

More than two and a half years ago I wrote about the inevitable collapse of China’s luxury malls. A brief reminder:

Anyone who’s walked around Shanghai’s more prosperous areas (and Beijing’s as well) is well familiar with the glut of luxury stores, with Bulgari and Gucci boutiques everywhere you look. This always fascinated me – the sheer number of such places in areas where I knew there couldn’t possibly be enough customers to ensure sustainable long-term profitability. I would sometimes stand outside the shops and watch for as long as half an hour (I didn’t have much better to do on the weekends). I remember seeing the shopkeepers going to fantastic lengths to look busy. One of them kept dusting the shelves obsessively. Another kept a book (or maybe a magazine) discreetly under the counter, at an angle where she could read while keeping an eye on the front door. One kept rearranging her hair. Another must have had the best-filed fingernails in all of Asia. This wasn’t a scientific study, of course, but based on what I saw with my own eyes I was convinced the high-end luxury goods stores had been overbuilt, and that eventually they’d either have to pack up and leave or keep eating what had to be painful losses.

Today I visited Beijing’s most stunningly dysfunctional, catastrophic mall, called The Place, and all I could think about was what I wrote back in 2006. Made to look kind of like Versailles on the outside, The Place is an irrational maze of stores and eateries that seems to have been designed to turn off and turn away customers. It has stairways that lead nowhere, unmarked elevators that take you to surprising places, not to mention a generally chintzy feeling created by all the faux marble and Grecian columns; it always looked pompous, but now it’s looking seedy and run-down as well.

The Place is around the corner from my office, and this was my first trip back in about two months, I was shocked at what I saw. Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. The two good restaurants there, Ganges and Master Kong Chef’s, were still thriving. The few others that remained seemed to be just hanging on.

That same night I went by The Village, which seemed so cool when it first arrived and now seems so unnecessary aside from the Apple store and a couple of restaurants. Same thing as The Place: lonely clerks looking plaintively out the store windows, eyes begging you to come in and buy something. But no one does. There is simply too much stuff, too many stores, and no buyers. Do you have to be a rocket scientist to conclude this is unsustainable? And to top it off, they are now finishing the second Village mall down the street, across from the Poppa Bear of all disaster malls, 3.3. All I can say is, WTF??

I’m predicting The Place and many of its sister ghost malls, shunned by customers overwhelmed by so many malls to choose from, each selling the same crap that no one can afford nowadays, are going to experience a catastrophe, if they haven’t already, and will ultimately become burnt-out, boarded-up shells. In turn, this is going to throw a lot of fuel on China’s current financial crisis. Real estate will be further cheapened, and the general misery unique to times of deflation will set in. Brother, can you spare a dime?

All I want to know is how we got here. I told them this was coming 2.5 years ago and no one listened. The day of reckoning, the moment of truth is here. Even if things pick up, these malls are hopeless. Like the Mandarin Oriental, they will need to be razed and replaced with something useful, like affordable middle class housing (wishful thinking on my part). If not, Beijing could become a city pockmarked with looming dinosaurs, huge husks of once breathtaking buildings, now vacant and decaying, like so many of the Olympic structures.

I kind of understand why this overbuilding happened, as the economy became a vicious inflationary circle. Now we are experiencing the down wave, and it’s just starting. As we crash, The Place and many other useless mega-malls like it will serve only as reminders of the excesses of good times that we fooled ourselves into believing would last forever. Their time has now come. In fact, their demise is long overdue.

We ran into some light rain in Chengdu after nearly 10 days of perfect weather; Xi’an however, is cold and wet, sleet turning the sidewalks into slippery black puddles. I didn’t come to Xi’an to sightsee (I was here before in 2003 to do that). It’s been about research for a new project I’m working on, and in terms of actually reaching some of my work goals, it was the highlight of the trip. (In terms of fun, it loses by a long shot to Yunnan.) I actually think I’m getting somewhere. Along with the work, Xi’an has also been about the best dumplings and yangrouchuanr I’ve had in my life, anywhere.

Short thoughts about Chengdu and Chongqing: Chengdu is as relaxed and as civilized as they say. Chongqing is a teeming, frenetic, hysterical mass of development and anarchy and impossibly random construction. Needless to say, I loved Chongqing, and liked Chengdu. The latter was a little too civilized for me, with things closing relatively early and the city generally lacking the breathlessness of Chongqing, or even Kunming.

Back in the real world…. Suddenly work opportunities have jumped from few to several, not all of them set in stone, but at least things are looking positive for the future. At the same time, I hear from my twitter friends recently that out-of-work Westerners are arriving in droves to Beijing to take advantage of the relative work glut, real or imagined. A lot of the young Westerners arriving FOB don’t know anything about China’s visa policies, or anything else about China, but this is the Last Great Hope, according to my friends. It’ll be interesting to see how they fare, and what their presence means for freelancers here like me (like lower fees and greater competition for work as China becomes the biggest buyers’ market on the planet).

There’s no question now that MNCs are continuing to place even more hope and investment in China, accelerating their efforts to the clicheed fever pitch as they strive, maybe a bit desperately, to tap into “the final frontier.” The thinking seems to be this is the last possible bright spot on a planet consumed in a morass of economic chaos, confusion and despair. (Their thinking, not necessarily mine.) Time will as usual tell if they’re right, but as far as bets go, this one doesn’t seem too insane to me.

I wanted to meet friends for business in Guangzhou and Shanghai next, but time is running out and I really want to see Pingyao. On the other hand, it will be freezing in Pingyao, and Guangzhou will be a relative paradise of tropical breezes. And I really should see those business associates in Shanghai. So once again I’m using my blog as a sounding board to help me figure out what to do next.

Update: I’m probably going to go back to Beijing early. Enough travel; ever since Lisa went west and I went east two days ago I’ve sort of lost interest and feel it’s time to get back to Beijing. Work to do, promises to keep, etc.

Here in China it’s a wretched time for Pu’er tea investors, but otherwise things aren’t necessarily as grim as the newspapers might lead you to believe. At least that’s the claim of this China business blogger who just returned from a depressing trip to angst-ridden Minnesota. He says China’s woes are being exaggerated, and the sky’s not falling over here like it is over there. Interesting perspective, especially on the factory closings.

Yes, there are thousands of factories closing down in China … but have you seen what those are like? Many of them are shoddy Taiwan- or Hong Kong-owned enterprises making commodity junk of questionable quality and pushing it into the market at dangerously narrow margins. If this is you, then yes, you are a statistic and should take immediate action to remedy this situation – I suggest quickly removing yourself from the commercial gene pool. But since junk companies are not this blog’s key demographic, I need to assume you are smarter than this.

We can all be cautiously optimistic about China in 2009. Yes, 8% GDP growth is lower than the 12% we have been experiencing in the past few years, but it is about 9% greater than what most of the rest of the world is experiencing. So find your happy place, and dig down to locate your opportunity in China. Its here. It is not going to be reaching out to grab you; you’re going to have to look for it. But I am guessing that your opportunities among the native Minnesotans – as nice as they may be – are going to be limited. They are too busy looking at their 401(K)s that are sliding quicker that a Lutheran in Sunday-go-to-meeting-shoes the morning after an ice storm.

No, your opportunities are here. And with caution aplenty and wariness radar on full blast, you will find them.

While he’s more optimistic than I am, his post definitely made me wonder whether we’re getting caught up in pack journalism when it comes to the collapse of Guangdong and China’s manufacturing backbone, and whether things are really as dire here as some are saying (or as some would like to see). I just had a conversation with a reporter who told me they’re surprised at just how stable things are here, at least thus far. They said the job market was still remarkably stable; we are not seeing the white-collar layoffs endemic to present-day America. At least not yet. And I don’t hear from people in China what I’m hearing from literally all my friends and family members back home – that their life savings have been reduced to a fraction of what they were a year ago, and that they’re rearranging their entire lives.

I know, there’s a whole lot to worry about and a whole lot of pain down the road for China. But maybe those horror stories from Shenzhen and Guangzhou only tell a part of the story? And maybe this really is the best place to be right now. I’d sure like to think so.

Bloomberg reporter William Pesek has a great column in BusinessTimes warning of the dangers of getting sucked into the euphoria over China’s booming economy. His comparison with the Internet bubble is perfect:

There’s no denying China’s potential – an economy growing by 8 per cent and powered by 1.3 billion people hungry for capitalism. Multinational companies are seeing dollar signs when looking at maps of China, and big ones at that. So are Asian governments as economies ship more and more goods there.

The emphasis in all of this has to be on the word ‘potential’. Though China could indeed be the biggest economic success story in modern history, much could go wrong with its move from socialism to capitalism, not least of which are tens of millions of job losses as the economy is opened. There’s no guarantee.

Investors should keep that in mind. So should US President George Bush, who this week meets Chinese Premier Wen Jiabao in Washington. While China is an important economy, its true influence is far more about tomorrow than today.

China is the economic equivalent of Internet companies during the late 1990s. Investors and corporate executives have no time to discuss the risks. Such a ‘China.com’ is run by geniuses and it’s all good. It’s Asia’s New Economy and anyone who doesn’t see that is a fool.

Do you remember when we were told by the analysts on CNBC that there was a “new economy,” an age of perpetual low inflation and near-zero unemployment, when stocks would always be high and kids in t-shirts would chart the couse as venture capitalists dumped staggering amounts of cash down the toilet?

Then think about China. There is a perception of a booming China that will provide the world’s engine of growth for generation after generation. It is unstoppable. It is a juggernaut. It’s The Next Big Thing. It’s the sure bet, just like eToys was.

It really is booming, at least relatively, but for now, so much is about the future. So much of it is investment money being spent by companies that want to be there when the floodgates open. And I really hope they do; I want the people there whom I love to succeed and be happy.

But when I see all of the businesses rushing in as though it’s a sure thing, when I see people speculating, people neglecting to do research into the fate of most foreign traders who’ve tried throughout history to tap The World’s Biggest Market — when I see the irrational exuberance, I can’t help but wonder about the foundation on which all these hopes are based. Just like the dot-coms.

We’re all smart people, we know what profits are and basic business plans. Yet a lot of us got sucked in. And a lot of us are getting sucked in again, failing to consider that China just might not be quite the miracle it appears.

I wrote about this topic on Living in China [note: I think the link may be dead – sorry] a few weeks ago and will soon do a follow-up. I want to believe otherwise, but this just may be a story of mass hypnosis on an almost unimaginable scale — just like the dot-coms. Like tulips in Amsterdam. We humans are certainly capable of falling for this sort of thing, and it almost inevitably disappoints us.