AMA 48 – “The End of Cheap China” with Shaun Rein

shaunDespite popular belief, China is no longer a cheap place to do business with labor costs and real estate costs soaring. Join Jason Hartman as he interviews Shaun Rein, author of The End of Cheap China and Managing Director of China Market Research Group in Shanghai, about debunking common myths, such as China is stealing U.S. jobs. Many companies have begun doing business in China, due to what Shaun refers to as “capitalism on steroids.” Tune into www.JasonHartman.com for more details. Labor costs have increased in China to the tune of around 20 percent, and the government is trying to increase wages yearly over the next five years. Another factor affecting manufacturing costs over time is that fewer of the younger generation wants to be employed in manufacturing jobs, wanting to realize their white class dreams. China is also pushing middle class development to offset the manufacturing issue.

Shaun Rein is the Managing Director of CMR, the world’s leading strategic market intelligence firm. He is one of the world’s recognized thought leaders on strategy consulting.

He is a columnist for Forbes on Leadership, Marketing, and China and for BusinessWeek’s Asia Insight section. He is often featured in the Wall Street Journal, the Harvard Business Review, The Economist, The Financial Times, Newsweek International, Bloomberg, Time, and the New York Times. He is regularly interviewed by American Public Radio’s Marketplace and NPR. He frequently appears to deliver commentary on CNBC’s Squawk Box, Bloomberg TV, CBS News, and CNN International TV. Before founding CMR, he was the Chief of Research for venture capital firm Inter-Asia Venture Management. He also was the Managing Director, Country Head China for e-learning software company WebCT where he also ran the company’s Taiwan and South Korean operations. He also served as the Assistant Director of the Centre for East Asian Research at McGill University. He earned his Master’s degree from Harvard University focused on China’s economy and received a BA Honours from McGill University.

Narrator: Welcome to the American Monetary Association’s podcast where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman: Welcome to the podcast for the American Monetary Association. This is your host, Jason Hartman, and this is a service of my private Foundation, the Jason Hartman Foundation. Today we have a great interview for you. So I think you’ll enjoy it. And comment on our website or our blogpost. We have a lot of resources there for you. And you can find that at AmericanMonetaryAssociation.org or the website for the foundation which is JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

Start of Interview with Shaun Rein

Jason Hartman: My pleasure to welcome Shaun Rein. He is with China Market Research Group and he has got some fascinating perspectives on China, on what it means to the rest of the world economy, and he is the author of the soon to be released book The End of Cheap China and I’m looking forward to having him on the show today. Shaun, how are you?

Shaun Rein: It’s a pleasure to be here, Jason. Thank you for having me.

Jason Hartman: My pleasure. Now, you’re in Shanghai as an American would pronounce it?

Shaun Rein: Yes, I’m in Shanghai, the business financial capital of China.

Jason Hartman: Where it is very expensive, from what you tell us, to have an apartment or a condo, right?

Shaun Rein: Actually, business in China is no longer cheap. So an office rent in the central part of Shanghai is actually more expensive than a lot of places in The United States right now. And actually my consulting firm is thinking about opening an office in The United States to save cost.

Jason Hartman: Now, isn’t that contrary to popular belief? So, the end of cheap China, what is going on there and what are the factors that are changing the game?

Shaun Rein: So, I decided to write this book, Jason, because I wanted to cut through a lot of the hysteria and myths that are being perpetuated in The United States about China’s rise. The first thing, you see people like Paul Krugman who say that China’s actually stealing jobs from The United States by keeping its currency, the RMB, artificially low, just doesn’t really hold up to basic scrutiny.

So I wrote the book and I looked at a couple of things. The first is that China’s no longer a cheap place to do business anymore. Labor costs and real estate costs are soaring which is actually making it more expensive to produce in China than say in Indonesia or Vietnam. So China’s really winning and outcompeting The United States for manufacturing jobs because of efficient labor pools and really the best world class infrastructure in the world.

And the second thing is I just wanted to give tips for American businesses and policy makers and how to stay ahead of the curve, how to adjust and evolve to China’s rise so that they can profit from it rather than be left behind and end up sort of a nibbling country like The United Kingdom is now.

Jason Hartman: It’s pretty interesting, though, Shaun, how you talk about labor cost increasing pretty dramatically in China. I think you’ve mentioned around the 20% mark which is a huge increase but the floor to start with, the bar was set so low, is it really that big a deal if wages go from a very low number of $10 a day to $12 a day?

Shaun Rein: Here’s the thing, Jason. It’s not only just minimum wage has gone up. Last year 21 of China’s 31 provinces increased the minimum wage on average by 22%, but the government is trying to increase wages long term. So what they said is in the next 5 year plan that the minimum wage to go up 15% a year for the next 5 years. They’re also starting to enforce social security benefits a lot better. So what you see in the last 2 years, probably on average the typical factory costs per worker has gone up 70%. So, in a 5 year period, it’s going to be extremely expensive to do business here on manufacturing.

The second thing is Chinese younger workers just don’t want to work in factories anymore. Because of the one child policy, as workers retired there are fewer young people who are willing to work in factories because they want to realize their white collar dreams.

So even though it’s still relatively cheap to produce here than say in The United States or Germany, you have this consilience of trends and issues that’s gonna make it extremely expensive on a worldwide basis in 5-10 years. So companies are going to have to adjust.

Jason Hartman: It’s interesting that you say the Chinese government wants to see wages go up at a rate of about 15% annually. And what kind of growth rates are they looking at? Are they looking at 6 to 8 percent growth in each of those years? Of course those are goals, targets and projections, but that’s about double the growth rate any way you slice it, right?

Shaun Rein: Well, we expect GDP growth to grow about 8.4% in 2012 and we expect it to be in the 8 to 10 percent range for the next 5 years. Part of the issue is we’re close to hitting the mid income gap in China which is around $6000 US dollars. And, usually when that happens, the rich get richer and the poor get poorer. So the government is really trying to ensure that you don’t have a great disparity of wealth. So they’re really trying to boost up and create the middle class. That’s where you’re going to get a more sustainable and vibrant economy and you’re going to reduce some of the ills of the manufacturing sector such as massive pollution that is really starting to hit the health care system and just the general wellbeing of everyday Chinese. So they really have to push for this middle class development.

Jason Hartman: When we were talking just before we started the interview and I told you about my friends there that are starting companies in China and so forth and doing business over there and how they talk about how capitalist it is. I had Jim Rogers on the show. Of course he’s been quoted as saying China is far more capitalist than America nowadays. And your phrase is it’s capitalism on steroids. Tell us about that. And I think a lot of the listeners know about that but maybe how it interplays with the fact that, technically speaking at least, China is a communist country.

Shaun Rein: Sure. Well, I do like to say that China’s kind of like capitalism on steroids because everybody here wants to make money. There’s this electric optimism in the business community and it’s because people are just so dirt poor even 15 years ago. Everybody here knows somebody who 15 years ago was working on a pig farm or picking rice who made it big, who’s now driving a Mercedes or BMW and has multiple villas. So this created this community and this real can-do attitude throughout the entire country.

And everyone’s just rushing to try to make money. The problem with that is there’s some downsides. I think culturally there’s too much of a focus on money right now and there are a lot of entrepreneurs who might be willing to cut corners in pursuit of the dollar and that’s why you see problems in the food supply. The food supply system here is a mess and I actually have a whole chapter on some of the dangers on that in my book and that’s causing problems both internally but also globally because so much of the food supply chain in the world originates or has a part of it in mainland China. And that’s why Americans should be concerned about QC and food here.

Jason Hartman: Chapter 1 in your book says that there are more Chinese billionaires than American billionaires. And what I have read is that wealthy Chinese are looking to move their assets out of China, at least to some extent – I doubt there’s a hard number on this because it’s probably pretty hard to quantify. But a lot of them are of course coming to The US and buying real estate, buying businesses, opening bank accounts here and so forth. Do you see that there’s a flight of capital from China, at least on maybe a personal level if not a corporate level?

Shaun Rein: I don’t actually see a flight of capital, Jason. This is one of another myth that’s been taking place and sort of seize the western media in the last year. It is true that many mainland Chinese on the wealthier side are trying to immigrate to The United States or Canada or Australia and picking up foreign passports. We actually interviewed 3 dozen uber-wealthy Chinese with investible assets of more than $10 million US dollars. And the majority of them said that they did want to look abroad and secure a foreign passport but the reasons are a little different than what you see in The Wall Street Journal or by Gordon Chang of The Coming Collapse of China fame.

What we find is the first 2 main reasons why they want to get a foreign passport is they want to secure better access to education and health care for the children. The second thing that’s important to key is that while many people are getting say a Canadian or American passport, they’re actually keeping their businesses in China. They’re still trying to make a lot of money here.

But the third most final reason why they really want to get a foreign passport is just convenience. A mainland Chinese passport really is inconvenient. It’s very difficult to travel around the world. To go to The United States you have to wait months to get a visa. Well, if you have say an American passport, you can go anywhere in the world and you can still open and do business in China. So it’s more a measure of flexibility and at the end of the day just sort of an insurance policy. People are confident in here but if something goes wrong, it’s always better to get out because if something goes wrong politically, generally communist countries don’t have easy transitions.

Jason Hartman: Speaking of things going wrong, talk to us a little bit about civil unrest. You don’t hear a lot about it but then sort of on the sly you hear about riots and things like that. I guess they’re quashed pretty quickly there. It’s not like Occupy Wall Street where they sit around for months. What’s going on with that?

Shaun Rein: I actually have a chapter on this, too. And basically I think there may be 200,000 cases of civil unrest in China every year. Those numbers actually are not really increasing. Many of these cases are very similar to just an everyday protest in Wisconsin. These are not protests where people are trying to destabilize the entire government system. They tend to be targeted at one local corrupt official or it’s their way of expressing the satisfaction with something in their lives.

So it’s more isolated, much more like a protest that I used to engage in when I was in high school in The United States. It’s not we’re trying to overthrow the entire system. China’s actually fairly stable. I totally disagree with John McCain who thinks China’s prime for an Arab style spring.

A couple issues on that. If you look at the political system here, there’s a lot more diffusion of power than a lot of Americans think. There’s mandatory retirement ages. You don’t have one single family that are controlling the whole system. So even if people were mad, it’s not like you have the Gaddafis in Libya or the Mubaraks in Egypt that you could really target and try to overthrow. There’s a lot of people involved. And the second thing, there are over 60 million party members in China which means everybody here has a friend or a relative in the party system. So I think there’s a lot more stability than people think. Obviously we need to improve the quality of life for everyday Chinese and cut down on corruption here because those are serious, serious issues. But I don’t see it causing an Arab Spring systemic threat.

Jason Hartman: It’s sort of surprising, Shaun, that corruption is such a problem there. I mean, the government there is so swift and harsh in dealing with corruption. I remember the guy that was overseeing the melamine in the pet food or something. Didn’t they shoot that guy? I mean, I kind of loved that by that way. I’ve got to say, in some ways I think The US could learn a few things frankly, as long as they’re sure they’ve got the right guy. That’s my only caveat. But it’s pretty risky to be corrupt there, isn’t it?

Shaun Rein: It is risky. If they catch you, the punishments are much more serious here than in The United States. You’re often put to death or put in jail forever for what would be considered relatively minor white collar crimes in The US. I think the issue is the corruption is so systemic, it’s at every level, that a lot of people feel that they can get away with it. And I think there is some truth to some critics that maybe you don’t get caught unless you fall on the wrong side of a political struggle.

Jason Hartman: Yeah, interesting point. Modern Chinese women, they’re different, aren’t they? First maybe before we go into that subject, is there a shortage of Chinese women?

Shaun Rein: Well, I think this is another one of the great myths about China’s society which I tried to cut down in the book and I have a chapter on them. And, basically, my image before coming to China was that Chinese women were served like concubines, treating like cattle and that they had a horrible life. These were the images that were shaped to me by The Last Emperor, Bertolucci’s movie. But actually Chinese women are moving up extremely fast, both in terms of power in the household and society. In the 1950, they only accounted for about 20% of household income. That went up to 35% in the 1990s. And now women account for about 50% of overall household income and that’s actually going to continue to grow. There are more women getting University degrees than men right now.

And one of the keys is that as China shifts from being manufacturing oriented to service and consumption. Women are the big winners. They’re actually getting better jobs than men. So I actually track in the book a lot of couples, say migrant workers who come to a city like Shanghai. The man can get a job making $120-$150 US dollars a month in construction, but women are able to get jobs making $3-4-5 hundred US dollars a month as a maid or working in legitimate massage parlors or doing assembly of higher end goods. And so what we find is men are making less than women in many migrant households. And so you’re changing family dynamics because women are the major breadwinners.

And so there are issues, though, about a gender imbalance and I think that’s a serious problem in some rural areas but it’s actually getting better because now women are making more money than men and so the demand for strong hands to work the fields is not as big as it used to be 20 or 30 years ago.

Jason Hartman: So they’re more modern, but there’s not a shortage?

Shaun Rein: There really isn’t a shortage. You see in the urban areas – I think in some rural areas there are. And that’s actually why some local government officials turn a blind eye to the prostitution that’s taking place because they want the men to be able to have an outlet.

Jason Hartman: No comment on that but that’s interesting. So one of the chapter titles that I find to be really amusing in your book here is why Chinese consider Kentucky Fried Chicken helpful. Is that because of the problems in the supply chain, in the say food issue?

Shaun Rein: Let me ask you a question. Are you scared of the “Made in China” label?

Jason Hartman: No.

Shaun Rein: Well, you should be.

Jason Hartman: I’m not looking at it as far as food but certainly most of the other products in my house are made in China.

Shaun Rein: This is how I feel. I love China. I’ve been here 12 of the last 15 years. But I’m scared of the food supply here. And actually my firm, which is a market research firm, we interviewed 5000 consumers in 15 cities last year. And their biggest concern in life, ahead of being able to pay for medical care cost for their families or education for their kids was food and product safety. People here are really, really scared about eating something and dying.

So when we interview consumers, because I actually work with KFC as one of our clients, when I go out and we’d find why do you go to KFC? One of the major reasons they go is they view it as healthy.

Now, I think Chinese know that KFC is not healthy, that if you’re going to eat cooking oil it’s going to hurt your heart on the long term, but they trust KFC is going to use good quality cooking oil and ingredients and it’s not going to be toxic because people are petrified about eating food on the streets where a lot of the restaurant owners using cooking swill-oil. Or they inject formaldehyde or other dyes to make things appear healthier and taste better. So, yeah, there is a real concern of food supply here and I think Americans should be concerned about products that are made in China for food. It’s definitely getting better. We’re lightyears ahead now than we were 10 years ago but it’s still a serious problem.

Jason Hartman: But when you say product safety, you’re really talking mostly about food safety, right?

Shaun Rein: Food and I think even there’s always been concern about lead and some of the coating of the toys. Those are problems from 5-10 years ago, but frankly those problems are being reduced. Chinese consumers are demanding better quality products and now they have the money for it. So it’s happening as factories are really getting better. And then the poor quality ones are just shutting where they’re moving to Vietnam. So the stuff that’s being produced in China, in hardcore physical products that are being exported to The United States actually is much better now than it was 5 years ago. Food still remains a serious issue.

You saw the Chinese government even shut down 50% of the nation’s dairies in 2011 because there’s too much poor quality milk and people adding additives like melamine to the system.

Jason Hartman: Boy, that is scary. So I guess what we’d say is KFC isn’t healthy, it’s safe, right? That would be the distinction is safe versus healthy.

Shaun Rein: It’s safe and hygienic.

Jason Hartman: Okay, good point. What about real estate? People are always talking about real estate in China. And the first thing I’ve heard that I’d like to ask you about besides the more mainstream real estate topics are that I’ve heard that there are just really giant cities that are basically vacant. Is that true?

Shaun Rein: Yeah, there are ghost towns here. But the reason why I’m not concerned about them is that they’re not being held by the developer – not for sale. These empty buildings basically have sold out to end consumers who’ve put down 50-70 percent to buy the homes. They’re not highly leveraged in The United States. So, even though they’re empty, it’s not causing a problem because there’s no debt in the marketplace and so there won’t be panic selling. Basically, wealthy consumers here won’t know where to put their money. You don’t have the same financial instruments for investing like you have in The US. Many people here don’t trust the equity markets because of rampant fraud. So they basically put their money into housing and they’re willing to hold it for 10-15-20 years. So the real estate sector in these ghost towns might indicate economic inefficiency, but they don’t really cause concern from me about a systemic threat.

Jason Hartman: Well, I think it’s really interesting and actually very positive that Chinese favor tangible assets like real estate, something they can see and touch versus paper assets that are writhe with fraud like the stock exchanges and the equity markets, yeah.

Shaun Rein: Exactly. And they’re willing to hold onto these for 10-20 years. One of the differences between Chinese real estate and American is most homes in America come furnished or finished and so when you buy it you have to spend a lot of money in regular ongoing maintenance and you have to pay annual taxes. In China, there are no annual taxes on most homes. And most homes are sold as an empty concrete hull. It’s shell. Basically, when you’re a homebuyer you actually have to put in the pipes yourself, put in the tiles. So, it’s really quite cheap for somebody just to buy a home and hold it for 10-20 years.

Jason Hartman: Yeah, that’s an interesting point. It’s almost like buying a piece of vacant land. And you didn’t mean furnished, you meant finished. So, in other words, in these Chinese homes that investors are buying for these long term holds, there are no cabinets, air conditioners, pipes. There’s nothing to really steal or vandalize, so it’s simpler that way, too, right?

Shaun Rein: Yeah, there’s nothing. It’s literally just an empty concrete hull. It’s like a New York subway and that type of concrete. And so what happens is nobody, even if they’ve paid for the home, nobody wants to be the first person to move in. Say there’s 300 units in a building, you move in, you then have to deal with 299 other people renovating. It’s noisy, you’ve got the workers who are doing the renovation living there, and so the concern is will people ever end up moving into these ghost towns or are they always going to remain empty? They might remain empty for 10-20 years but my bet is that some developer will come in, buy the units, knock down the buildings and put up even nicer ones.

Jason Hartman: And finish them all at once, the way they do in the states, right? That’s really interesting. So, what is going on with prices and I’m not talking about vacant cities, I’m just talking about normal markets where you have occupancy and so forth. What’s happening in Chinese real estate?

Shaun Rein: Real estate market is not collapsing. It is softening and I think we’re getting to a far healthier range because before everybody was just betting that real estate would always go up and so they were grabbing money and putting in. But what you’ve seen is no panic selling. So even though prices have softened, those prices are more from the real estate developer selling to the consumer, but the second hand market, consumers selling their own homes to other consumers, those prices have remained very steady because, again, you don’t see underwater mortgages.

So, we’re in a much healthier state in real estate than we were a year or two ago. So I certainly see a soft landing in that sector. Again, the key is not how much average income is in the country or how high prices are. It’s really the people who are buying the homes – can they afford them, which they can, and are they overleveraged, which they’re not.

You also don’t see hedge funds in China buying up tons of units and then splitting up the mortgages into CDOs and selling it out to other hedge funds who are borrowing $30 for every $30 in hand like you had in The United States which caused the financial crisis there. Here it’s still banks pretty much are holding the mortgages. The financial system here is really very plain vanilla and very outdated but that’s actually helped the country from being able to avert a financial crisis.

Jason Hartman: Yeah, I don’t know if that’s a bad thing, Sean. I love how these pundits in America call all this stuff Wall Street has done as financial innovation. I think it’s really just ridiculous some of these products they’ve invented and these “innovations”. Those things are the problem. They cause all sorts of mal-investment and bad behavior. Everybody now focuses on ways to game the system rather than to actually create legitimate value in an economy. So when you say an outdated system of banks that actually have to hold loans and probably underwrite loans on more legitimate basis, the way it used to be in old fashioned America, is that all bad? I’m not sure.

Shaun Rein: I totally agree with you. I mean, it’s sometimes frustrating here. Actually, as a consumer, you can only take out about $7000 US dollars or so in cash without applying an advance and getting permission. So sometimes it can get annoying to try to get financial transactions done. But because it is outdated like that, it’s beneficial because you don’t have runs on banks and it is a lot more stable. The whole system is set up to be simple.

Jason Hartman: It slows it down but that really makes you understand why wealthier Chinese want to ex-patriate their money because they want control of it. That’s way too controlling. I wouldn’t like it if my bank said I could only get $7000 out at a time. That would really bug the heck out of me.

Let’s talk about China for a moment on the international stage. Not in terms of superpower stuff – I’d like to get into that next maybe – in terms of its business dealings around the world with Africa and you have a chapter talking about the end of American hegemony. Tell us about how China acts there. We hear the American spin on it over here but it’s always been interesting to me when I travel – and I’ve done a lot of travel, I’ve been to 64 countries – when I read newspapers from different parts of the world how different the angle is and maybe it’s a lot more accurate reading it outside the corporatized American media.

Shaun Rein: Chinese investment abroad is a double-edged sword. So I do talk with people from Africa and Canada and Australia and Pakistan about China’s investment. And many people do welcome it. I was talking with some people in the mining industry from Perth in Australia.

And they love the Chinese investment because they’re making tons of money. But for the people in Perth who are not involved in mining, they’re getting killed. Housing prices and food prices are going up so high that they’re really just not able to live well. And so that’s causing a backlash. I think many politicians are saying do we want this Chinese money or if we want it how do we handle it? How do we ensure that people who are say in retail or in health care and have nothing to do with mining are going to be okay.

So I think China generally has to do a much better job at how it focuses on soft power and how it relates to people of other nations. They’re too big now. They can’t just invest in other countries and say that we’re going to go below the radar because in many of these nations, they’re seriously impacting prices. And so China in general just needs to get a more well thought out, well-planned foreign policy and help some of their companies figure out maybe you can open up charities, maybe you can do stuff for local people rather than just focusing purely on making money.

Jason Hartman: Well, that would require sort of altruistic view of it. Or are you saying that’s just good long-time business sense?

Shaun Rein: It’s just the business sense, frankly.

Jason Hartman: Okay, well that’s legitimate. I agree with you. So what’s going on with China in Africa?

Shaun Rein: This is why I’m very bullish over on the commodity sector is China’s just investing billions of dollars. It’s doing over $100 billion US a year in trade with African nations. They’re going there to countries like Angola to buy up copper and oil and other minerals that are needed to sustain China’s growth. I think at the end of the day the government here knows that the major threat to China’s continuing growth is access to natural resources. So they’re going to be continuing to expand out there. And so investors should be really looking at getting exposure to the commodity sector.

Jason Hartman: Well, I agree with you there. Resources are key. That’s the fundamental underpinning of human life is resources. No question about that – commodities very good. Talk to us a little bit about whether people should consider China to be a threat. And not from the angle of cheap China – maybe we’ll close with that in just a moment – but militarily speaking. I mean, I see stories from time to time about China building aircraft carriers. And I don’t know really what’s going on with this, but military stuff. Do people in the states have to be concerned about war with China or any sort of violence or maybe this conflict with Iran and Israel and nuclear war in North Korea, sort of the proxy issues there? How should we be doing this?

Shaun Rein: I worry about America creating a threat where there really isn’t one. When you start to fear monger, many of your prophecies sort of become self-fulfilling. I think right now it’s very clear that China is not a threat. The Chinese government spends more money on internal public security spending than on the military. A lot of their military spending is more just going for upgrading, for a lot of the housing for soldiers is bad. And I think on the one hand The US wants China to take greater responsibility in global affairs but at the other hand is scared about China then spending money on aircraft carriers so that they can pay for better security on shipping lanes.

So I don’t think that China’s a threat now by any means – the official is looking more internally. I think the officials are trying to make money for themselves and their families and they don’t really want to go into war. But I do worry that there could be more increased tension if The United States continues to scapegoat China for all of America’s economic ills. And I do think that threats could emerge if you continue to attack China politically. But I don’t think that there is any concern for Americans as a looming Chinese military threat.

I mean, I think at the end of the day, most Chinese actually like The United States. And that’s true of the political system. The presumed next president of China, Xi Jinping, his daughter is a student at my Alma Mater, Harvard. And many of China’s political send their kids and grandkids to Harvard and Duke and Yale over the years. So I hope that you’re going to see more rational minds on both sides of the Pacific sort of prevail.

My concern, though, Jason, is that you’re seeing too much scapegoating, especially in a political election year in The United States, of China. And I worry that’s going to provoke trade wars or even worse if mainland Chinese military people say, you know what, we need to shed The United States role as the world’s policemen and as a hegemonic power so we need to stand up to them. But I think the odds of that happening are really more around 1%. I mean, for The United States, I’m far more concerned about Iran as a threat than China. China’s sort of a benevolent rising power but could emerge as something else.

Jason Hartman: You mentioned about people going to all those American universities. Is China coming up? I never hear about Chinese universities. Maybe I’m just totally ignorant of it. I never hear about Chinese higher education. I always hear about people coming to The US for higher education.

They’re working so hard and doing such a good job in so many areas of developing this country in terms of infrastructure, manufacturing of course. What about education, higher education specifically?

Shaun Rein: In general, I’m fairly supportive of the Chinese government but there’s two areas that I’m scathingly critical. One is health care and the second most important is the education system. It’s a total complete mess. I actually have a whole chapter on that because it’s so bad that it could prevent China’s rise into true sustainable economic and political superpower status.

The education system here is terrible. You read in The New York Times how a lot of Shanghai students are outperforming the Americans on test scores. Who cares? I mean, there’s a big difference between being able to take tests and to be able to innovate and create and think analytically, which is why the best Chinese are now all going to The United States to study. You have over about a million Chinese that have gone abroad to study in recent years. My boarding school, there are only Chinese I believe it was who applied 3 years ago. This year there are over 200.

When I was at Harvard in graduate school there were more people from mainland China than from any other nation except for America. And the reason is that the higher education system in China is simply horrible. You have 1000 person class sizes, people aren’t being taught to think critically. And that’s why what you see, Jason, is this big problem in the workforce. When my firm interviewed Fortune 500 firms here, they say that their biggest problem is being able to recruit and retain talent. They’re constantly trying to hire and that’s their biggest problem and obstacle for growth in the next 3 years in China.

But at the same time, 15% of university graduates here were unable to find a job 3 months after graduation. So there’s a disconnect. The market is looking to hire more people but the universities are graduating people who are underqualified. And so you need a major overhaul of the education system here. And it’s not something that the government can wait. It’s gotta go now. Every nation historically that’s a superpower has the best, finest institutions of learning and attracts people from around the world. The United Kingdom had Oxford and Cambridge. The United States had Harvard and Princeton. But China, it has nothing.

Jason Hartman: Yeah, and just distinguish that, though, if you would. Maybe segregate it between grade school and higher education university system. How about on grade school?

Shaun Rein: I think the grade schools are pretty bad, too, because they’re still also focused on just test taking and they’re not training the whole person. I interview in the book many families who benefited from economic boom here. They were the sons and daughters of the lead Chinese communist officials and I even interview one family that’s a billionaire. And what they say is we need to send our kids to The United States because we want to train the whole person.

And China is all about test scores. We want them to learn about art and drama. We want them to learn about morality and sports. And that’s something that really isn’t taught in grade school and high school in China and it’s something that forms the bedrock of the education system in The United States. While obviously America needs to improve, it’s still far better than anything else in the rest of the world.

Jason Hartman: That’s really interesting because I look so down on the American education system so many times. It’s interesting that sort of more liberal arts perspective really that you mentioned. I guess we sort of take that creativity for granted here. It’s just sort of part of the culture. It’s kind of like the air – hopefully you never notice it because it’s clean enough that you don’t notice it.

Lastly, and just wrap up with this if you would, your final chapter is basically the book title The End of Cheap China and what it means to the rest of the world.

Shaun Rein: I talk about in the final chapter what is China’s new role gonna be? Is it gonna be a savior for businesses? In many ways China has become the largest or second largest market for many of the world’s companies like Apple, Intel, Starbucks. Or is it gonna be a major threat? And so I just sort of go through those issues and come up. If you’re going to really capitalize on China’s growth, what are you going to do? Because if you don’t, China’s rise will ultimately be a threat to your corporate well-being.

Jason Hartman: Very good points. Well, Shaun, thank you so much for joining us today. Give out your website if you would. And of course the book will be available on Amazon.com. When is it actually going to be released?

Shaun Rein: The book hardcopy comes out March 27th but you can actually download the Kindle version now – the publisher doesn’t control when Amazon releases the e-version. So downloads of the e-version are taking place and selling like crazy but the hardcopy comes out March 27th.

Jason Hartman: Fantastic. And you can pre-order that but if you don’t have one, folks, get a Kindle. I love my Kindle – that’s great. And what is your website, Shaun?

Shaun Rein: My firm’s website is www.CMRConsulting.com.cn

Jason Hartman: Shaun Rein, thank you so much for joining us today. Appreciate it.

Shaun Rein: Thank you very much for having me.

Narrator: The American Monetary Association is a nonprofit venture funded by The Jason Hartman Foundation which is dedicated to educating people about the practical effects of monetary policy and government actions on inflation, deflation and personal freedom. Our goal is to help people prosper in the midst of uncertain economic times. This show is produced by The Jason Hartman Foundation, all rights reserved. For publication rights and media interviews, please visit www.HartmanMedia.com or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate professional if you require individualized advice. Opinions of guests are their own and the host is acting on behalf of The Jason Hartman Foundation exclusively.

The American Monetary Association Team

Transcribed by Ralph

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