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Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It

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I have been interested in China since 1998 when a good friend married a Chinese national and encouraged me to visit and make up my own mind about the Middle Kingdom. I have read 15 books about China and visited three times in the last 14 months. Zachary Karabell is the first author to put together a comprehensive historical and financial framework that explains what has been going on in China for the last twenty years with on-the-ground personal experiences and portfolio management insights from his several years as running a successful China mutual fund. He explains how Kentucky Fried Chicken, Avon and Federal Express achieved success but I was more interested in his not-as-well known company examples which included [...], [...], China Life Insurance, and Huawei Technologies.
Deng Xiaoping's economic reforms in China have been going on for thirty years. Everywhere I went and talked to young Chinese (through an interpreter who spoke Mandarin) they mentioned Deng's remarks "to be rich is to be glorious" and "Black cat, white cat, what does it matter as long as it catches mice?" The well educated twenty to thirty-five year old Chinese men (and women) know that the 21st century is their century. These "Chuppies" - Chinese yuppies - were everywhere in Shanghai and Hong Kong. Their internet phones and laptops were ubiquitous and more advanced than mine. The only thing I did not understand was the fascination with massively multi-player online role-playing games in internet cafes.
My only quibble is that the term "Chimerica" (which was coined by Niall Ferguson) would have worked better in the title instead of "Superfusion".
I highly recommend this book. Also, if you haven't been to Asia, go to Hong Kong and Shanghai. Those skylines with their new 100 story buildings put New York City to shame.

"Here begins our tale. The empire, long divided, must unite; long united, must divide. -- Moss Roberts (translator) <Romance of Three Kingdoms>"

Last Wednesday (Oct. 7, 2009), Alcoa surprised Wall Street by reporting a profit for the most recent quarter after three consecutive quarterly losses. CEO Kleinfeld said, "China clearly is back and back very, very strong and pulling some of the Asian markets."

This is just one of many examples showing how "China" is positioned in this worldwide financial meltdown and recession. While some blamed China as the cause of this crisis for its currency policy and cheap goods, others hope China will be the very engine that pulls the world, especially epicenter of the crisis, the United States, out of recession.

Zachary Karabell, an American author, historian, money manager and economist, is the President of River Twice Research, where he analyzes economic and political trends. With several 4-5 star books at hand, Karabell wrote a new book to tell us the story behind China's rising economy and its "superfusion" with the United States.

First, the book started with the economical background in China and Unite States. China was poor after decades of command economy and isolation. Deng Xiaoping was determined to open China to foreign investment. United States was at the dawn "New Economy" and big companies were lagging and searching for opportunities around the globe.

Then, the author moved on with stories of three big names (KFC, AVON, FedEx). They invested in China heavily without much short-term return but aimed for the future. In the meanwhile, China utilized foreign capital for development while it still kept financial system partially isolated.

At the turn of new millennium, China's economy started to rocket accompanied by huge return for foreign investment, rising Chinese influence, interdependence between China and United States and tension with the western public, especially what happened along with the Olympics last summer.

After citing several key economical data and political events, Karabell concludes that China and Untied States have become "Chimerica" with closer and closer economical tie between each other despite increasing tension between the nationalities. And the prosperity of the world economy also depends on this "superfusion".

As a reader who grew up in China for 20 years then moved to USA for graduate school 4 years ago, I am immersed in the author's knowledge behind geopolitical public opinions and his subjective view on controversial political ideology on either side. To name a few, I nodded when he talked about the diplomatic dictatorship of USA over other countries including China. I smiled when he mentioned the increasing nationalism among Chinese against the West. I enjoyed his many stories behind major economical/political events happened in either country, such as Tiananmen Square, WTO talk, the Bra War, 2008 Olympics, etc.

I noticed one point on which the author might be wrong. In Chapter 10 (P. 201-2), the author states that "One of the failings of domestic Chinese banks was that they were not attractive for individual deposits." However, AFAIK, the fact is the opposite. Lacking a profound social security system, as well as medical insurance, or unemployment protection, Chinese people have to save a "LOT" in case of any major thing happens. In 2002, National Savings Deposit Balance is 10 trillion Yuan (USD$1.2T), which equals GDP of China in that year. In 2008, the number is CNY21.8T (USD$3.2T). People dare not spend their savings. Thus, the problem is not lack of deposit, it is "Too much deposits". This also suggests a great potential for domestic consuming once extensive social security system assure everyone in China.

About economical superfusion of the world, the author predicted that Chinese manufacturing as well as consuming will be the key to world-wide prosperity. It will also result in a shift of power from the West to the East. A lot of other economists and specialists also predicted this for various reasons. But their views on the fate of USA vary. I agree with Karabell that this shift would not necessarily mean a bad/downturn future for Americans. Actually, they will benefit from this global superfusion and remain prosperous. For further reading, I recommend a book "The Future for Investors". Dr. Siegel discussed this issue from an investor's point of view.

Overall, this is a very good book for understanding the geopolitical and economical interactions between China and United States during the recent decades. It also sheds light upon current world economy issues from a unique angle. I recommend you read this book if you are interested in international affairs, world economy, and/or Sino-US relationship.

In the end, let's go back to the quote in the beginning taken from "Romance of Three Kingdoms". Our world has been long divided ever since; maybe it's time to be united, without conquering. For computing, AMD says, The Future is Fusion; for humanity, Karabell suggests, The Future is "Superfusion". Time will tell...

Recent economic travails have triggered intensive questioning of the financial system created by the United States and warped by Wall Street. That has led many to reconsider America's place in the world and wonder whether this is indeed the twilight of American power. At the same time, both China and the U.S., after years of seeking closer integration, have begun to question that wisdom. Author Karabell, however, argues that their fusion has advanced too far for either to extricate itself without severe harm. Over the past two decades, China and the U.S. have become one integrated hyper-economy - 'Chimerica.'

To bolster his point about how the U.S. and China economies are intertwined, Karabell contends that without Chinese reserves bolstering U.S. Treasury bonds in the past 18 months, it would have been far more challenging for the United States government to rescue a crumbling financial system. And without American consumers having bought Chinese goods over the past years, China would never have accumulated the reserves that allowed it to spend hundreds of billions of dollars to support the economy during the worst of the financial implosion. (On the other hand, without the low American interest rates afforded by Chinese funds, the U.S. may not have had a housing bubble.)

China began with a trade economy limited to 5% of GDP in the 1970s - it was isolated, and self-sufficient as best possible - like North Korea today. The process of turning outward began about 20 years ago. First came about ten years of experiments with private enterprise in special enterprise zones. By the late 1990s, "State-Owned Enterprises" (SOEs) were allowed to lay off workers, select banks could pursue delinquent firms for repayment, and many restrictions on size and scope of private companies were lifted. As many as 50 million lost their jobs. At about the same time the government also lifted its once-stringent restrictions on internal travel and migration. Its urban population went from 25% in 1990 to nearly 40% at the end of the millennium - nearly 200 million moved.

This then led to people requesting they be allowed title to own homes, and the sell-off of many state assets. Infrastructure needs jumped. SOE managers became increasingly held to performance standards, given wider latitude, and rewarded or punished for results. China's leaders also learned from watching Russia's early 1990s problems after dictation from the U.S. and World Bank, and decided that China needed to go slower, in stages. (Eg. lower tariffs slowly, not all at once.)

A major early boost to China-U.S. trade was President Clinton's decision to stop making trade contingent on its human rights situation. Reasons: 1)The Chinese weren't budging. 2)The instability hampered businesspeople in both countries. (We really need to stop insisting we know what's best for everyone - it's arrogant and ignorant, even self-defeating. We need to recognize that, as Karabell points out, what China did in the 1990s took the states of western Europe more than a century and the U.S. more than five decades.)

Karabell then tells how KFC and then Avon fared in China. KFC now has about 2,000 locations, representing less than 7% of Yum's branches globally but 25% of profits. Its three-story 700 seat flagship store near Tienanmen Square opened in 1987. A two-piece meal + drink cost about the average Chinese weekly wage. Six years later, KFC had less than 12 stores in China - starting out slow was also its guide. A few Chinese items have been added to the menu, and a 'Chicky' mascot proved much more effective than Col. Sanders (viewed as a stern grandfather figure), especially with children. The firm focused on premier locations near tourists, partly because advertising was practically non-existent. While meal costs are less than comparable U.S. offerings, so are costs - overall meals are about 3-4X as profitable as in the U.S.

Avon went to China in 1990. Struggling in the U.S. (women had growing opportunities), and targeted at the middle-class here, its initial 1,000 Chinese representatives were highly educated and skilled (they lacked alternative opportunities). One of its first was a 40-year-old pediatrician earning $120/month. Working part-time, she soon sold $5,000 in products, pocketed $1,500, and thought of going to Avon full-time. Avon also boosted its success by tailoring products to the tastes of local women, and producing them in China as well. However, the Chinese government was suspicious of multi-level sales arrangements (fear of high prices and Ponzi-schemes) and disliked the large-meeting recruiting drives (feared anti-government activities). Direct sales were then banned in 1998. Avon switched to retail sales and continued to do well. In 2006, the government allowed direct sales to resume.

Trade deficits are a sensitive problem in a number of nations. The topic is acerbated by unclarity of statistics. Assembling a G.E. appliance in a Chinese factory it owns is not likely to be classified as an import when the product arrives in Long Beach. However, if the same product had been outsourced to a Chinese company and produced on the mainland, it would be classified as an import upon arriving here. (Thus, our trade deficit is understated; this may partly explain why it has grown so fast. Other reasons include a preoccupation with terrorism and Iraq.)

Karabell claims that one reason Chinese leaders have been so adamant about not allowing China's currency to trade freely is they believe this would lead to a collapse of the currency as in Russia during the early 1990s. The problem centers around concerns over the large proportion of non-performing Chinese bank loans. However, Karabell's explanation of the link was unclear and ineffectual. Meanwhile, the Chinese government is working to 'clean-up' the problem.

By 2007, more than 400 of the S&P 500 derived 40%+ of their profits from outside the U.S. International sales also are faster growing. (Karabell doesn't explain whether this is from sales to outside nations, or profit allocations to offshored work.)

"Superfusion" ends with Karabell recounting Britain's need for large loans after WWII. The U.S. took advantage of the situation and required Britain to open up its empire to trade, thus ending the British Empire and forcing it to take a backseat vs. the U.S. Karabell believes the same may happen to the U.S. vs. China, and recommends we re-orient ourselves away from current military and security challenges (eg. Given their intertwined economies, do Japan and Taiwan need the U.S. Navy's 7th Fleet in the Pacific to protect them from China?) to a greater economic focus, and working closer with China. (Despite Karabell's excellent material, I still believe we need to restrict free trade with China.)

China, the USA's largest creditor, buys billions of dollars in U.S. Treasury bills. That allows us to keep interest rates low. Low interest rates encourage Americans to spend more money than they have. Americans especially like to consume low-priced Chinese goods. So China has been happy to fuel this cycle of investment and consumption. Thus our two countries have become partners, says Karabell: "The Chinese and U.S. economies have fused to become one integrated system. Americans should embrace this fusion."

Karabell downplays the fact that the relationship is more a codependency than a partnership--like drug dealer and addict. Now the USA has overdosed on debt, while China keeps saving, investing, and growing. China's premier Wen Jiabao stated that he is worried about the safety of China's investment in the USA. How long can the "partnership" last? Karabell underestimates the potential for conflict and the impediments to the happily integrated system that he envisions.

Zachary Karabell's book,"Superfusion", is a stunningly blunt but realistic assessment of America's current position in the global economy as well as China's ascendancy. There are several important themes that emerge from his book.

While practicing their own version of American capitalism, the Chinese are succeeding in transforming their economy and society to achieve a level of economic stability and potential economic hegemony. There are myriad political implications.

Meanwhile, the United States, the epicenter of capitalism, seems to have abandoned the spirit of the capitalist construct. Turning inward and decrying free trade, behaving in a reactive fashion to the recent global economic crisis; if continued, these behaviors do not bode well for our relative economic position. We are in danger of not only looking askance at the Chinese but looking away from our own political and economic shortcomings.

The nation-state model and the impetus to maintain economic and political sovreignty at all costs is perhaps outmoded. It seems counterintuitive to the inevitable dynamic of globalization and all the complexities that implies. Political and business leaders at every level must recognize that it's a small planet replete with competing ideologies and political and economic constructs. Capitalism, however implemented, will allow civil societies around the globe to flourish.

Chimerica is a phenonmenon that developed over the last 20 years. Both the United States and China were largely unaware that it was happening, much less the "unintended consequences" of the relationship. Zachary Karabell's book is an informative history of this phenomenon and a call for better understanding of our intertwinement. It is a call we must heed.

Barbara Barone
Phoenix AZ

Zachary Karabell, president of River Twice Research, is one of the few original thinkers out there who also has a sense of humor. So there's more than one? Zach has brought his considerable talents to bear on the current state of the Chinese-American relationship in a new book, Superfusion: How China and American became One Economy and Why the World's Prosperity Depends On It. International trade has fused the two countries into a single economic unit that accounts for a quarter of the world's population and a third of its GDP, despite wildly different cultures, much like the loose confederation that makes up the European Community. The Middle Kingdom now has reserves of $2.3 trillion, which is overwhelmingly invested in the US. Where else can it go? That enabled them to step up and play an important role in the bail out of the US financial system this year. But it is an imbalanced agglomeration, with Americans over consuming and under saving and the Chinese doing the reverse. This has to stop, lest the symbiotic relationship tears itself apart. The tit for tat, storm in a tea cup, where the US imposed punitive import duties on Chinese tires and the they retaliated with a ban on American chicken feet (yes, they eat them, yuk!), is a recent example. The reality is that old, boring industries that once might have fought tooth and nail for protection are now migrating to China en masse and finding new life. Bet you didn't know that General Motors sells more cars in China than in the US, some 1.6 million this year? Don't hold your breath waiting for China to float the Yuan, as it is one of the few tools that give the Mandarins in Beijing direct control of a huge, disparate economy. Chinese military spending is so parsimonious that it won't remotely comprise a threat to the US. What little they have is directed at potential regional aggressors, like Japan, India, and Russia. The greatest risk to the existing relationship is that Chinese growth continues so rapid, that it pits them against the world in resource bidding wars, which could get ugly. With crude at $82 and copper at $3, has that already started? The book is well worth a read for some excellent "out of the box" analysis. Does anyone have any good recipes for chicken feet?

Superconfusion
A review of "Superfusion" by Zachary Karabell

By Matthew Robertson
Epoch Times Staff

Karabell, Zachary. "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It," 340 pp., Simon & Schuster (October 2009), $10.88, ISBN:141658370X

History will not be kind to books like Zachary Karabell's. In the very modestly titled "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on it," Mr. Karabell explains that the economies of the United States and the People's Republic of China are actually one economy, that the U.S. Navy is an anachronism, that U.S. and Chinese officials will one day sit down together and jointly decide their countries' (sorry: country's) interest rates, and that, in this inverse-communist utopia, the nation state will simply wither away as humankind joins hands and strides into a future of free markets and eternal prosperity (except for the florid peroration, he really did write all those things).

Mr. Karabell's work seems a perfect demonstration of the adage that only really smart people can come up with the really stupid ideas. A Harvard Ph.D. who works as a business adviser and economic analyst, Karabell's view of the future between China and the U.S. is among the rosiest on offer. And who would not want to recline back onto that soft bed of pink petals, where everyone means for the best, conflict doesn't exist, and economic interdependencies take care of everything? Of course, the thorns are the trouble--but Karabell conveniently ignores those.

The book begins with the massacre of students on Tiananmen Square and runs through the last two decades of economic change in China. Chapter titles are slick, their length slim, and the footnoting minimal--the focus is on a fresh interpretation of a well-known set of facts. Or, rather, a subset of facts: enormous and crucial parts of the New China puzzle are elided in this narrative. It would not hold together otherwise.

Mr. Karabell's principal argument is that China's massive holding of U.S. debt, the uptick in U.S. business in China, China's entry into the World Trade Organization, the growth in mutual trade, foreign investment, etc., mean there has been a fusing of the Chinese and U.S. economies--a "Superfusion," a "Chimerica," that has gone largely unnoticed, he says. These interdependencies are likely to be insuperable, we learn.

On at least one point Mr. Karabell gets the economics horribly wrong, where on pp. 201-202 he claims that Chinese do not deposit much of their savings in banks (in fact they deposit huge amounts of savings in banks, which is incidentally very useful as the Communist Party's play money).

Where others see factional warfare in the Communist Party, Mr. Karabell sees "ambitions of individuals... subordinated to the common good." (p. 164) Where others see Zhu Rongji saying that China is not a rival of the U.S. as no more than plain-old lying, Mr. Karabell sees genuine friendship. Where others see the Chinese Communist Party as something resembling a mafia, looking after its own and a network of elite supporters while plundering resources and destroying rivals or not even allowing them to exist, Mr. Karabell sees an Athenian style `democracy.'

He tells us all the good bits about U.S. business in China, but none of the messy bits (for that the serious student will read Joe Studwell's "China Dream" and Ethan Gutmann's "Losing the New China"). Without knowing the real determinants for the success or failure of foreign businesses in China--and Mr. Karabell does not explain them in his recounting of three low-hanging anecdotes--it is indeed difficult to predict future success. But Mr. Karabell does not let such details impact the grand narrative, so the story steams ahead.

In this analysis, the deep differences and contradictory interests between the U.S. and China take a back seat. But in the real world it is only a question of how long one can luxuriate in a rose bed before getting pricked.

On Jan. 13 the head of the Joint Chiefs of Staff Michael Mullen commented that "China is investing in very high-end, high-tech capabilities... Many of these capabilities seem to be focused very specifically on the United States."

China develops anti-satellite and anti-ship weaponry not for fun, but to use them. Mr. Karabell's fusion could be cleaved in twain in as much time as it takes to say "Taiwanese independence!"

Saving the reader from another polemic on US China relations, Zachary Karabell presents a well written, insightful, even handed analysis of the China US mutual dependency.
Starting with KFC, Avon and Federal Express, the intricacies and nuances of American companies gaining a foothold in the Chinese marketplace are examined. His conclusion: the United States and China are intrinsically bound together. The timeliness of this book, tho penned in 2009, is indicated in his examination of the Huawei Technologies as a company and its most recent failed attempt to enter the US technology market with Sprint which hit the news stands this week. One of the best books on this essential relationship as this world heads in to the 21st century.

Superfusion: How "Chimerica" Will Shape This Century
By Ravi Nagarajan
Published on February 2, 2010 at 10:38 am

Few topics generate as much controversy in the United States as the question of whether free trade has been beneficial for our society. In the early 1990s, the main focus was on trade with Mexico and the impact of the North American Free Trade Agreement (NAFTA). Protectionist sentiment still occasionally results in trade disputes with Mexico such as the restrictions on Mexican trucking that resulted in higher tariffs last year. However, the main target of trade skeptics today is China. The widespread failure to grasp the nature of the complex relationship between the United States and China has led to periodic trade disputes and could seriously harm both countries in the years to come.

Zachary Karabell has made an important contribution to the debate in Superfusion: How China and America Become One Economy and Why the World's Prosperity Depends on It. Mr. Karabell attempts to trace the history of China's remarkable rise over the past twenty years by presenting a wide ranging "thirty thousand foot" view of political and economic forces as well as individual case studies of American companies that penetrated the Chinese consumer market. The underlying thesis is that China and America have "fused" into a single economy of "Chimerica".

Expanding American Brands into China

While Mr. Karabell's big picture observations receive more space in the book, from a business and investing standpoint the individual case studies are equally interesting. The question of how a business can establish, maintain, and grow a brand over time is difficult enough to answer when one is dealing with a single culture and society. Even within a country like the United States, there are many brands such as See's Candies that have not gained traction outside one region. What steps must be taken to expand brand loyalty into a very different culture?

The case studies of Kentucky Fried Chicken and Avon were both revealing in terms of the missteps that American firms are prone to making when expanding into different cultures as well as the eventual placement and branding of the products. Some amusing anecdotes are discussed such as KFC's mistake in translating the "Finger Licking Good" slogan into a Chinese phrase meaning "So Good, You Suck Your Fingers." But the most interesting aspect of both KFC and Avon's entry into China is that they transformed middle market brands in the United States into high end "aspirational" brands in China.

This is actually not very surprising because countries that are experiencing rapid growth in personal incomes often want to emulate richer countries and by consuming American brands, these consumers were demonstrating their economic success in small ways. Of course, the American brands had to be adapted for local tastes and the book provides useful details on how this can be done. KFC has been so successful due to its "early mover" advantage in China that it is now the largest fast food operator in the country with over 2,300 outlets including more than 200 in Beijing alone.

Taking a Broader Perspective

While the individual case studies are of great interest, Mr. Karabell's major focus is clearly on the broader macroeconomic forces that are driving America and China into a single unified economy that he calls "Chimerica". The use of that term is perhaps unfortunate because it is likely to serve as fodder for political sound bites promoting protectionist policies. The book clearly shows that not only are these economic ties mutually beneficial in many ways but that they have reached the stage where China and America are integrated to the point where attempts to reverse course would lead to disaster.

Proponents of isolation often gloss over important questions with sound bites such as "buy American", but what does this really mean when American companies have manufacturing facilities in foreign countries while foreign companies have facilities in the United States? When one buys a Toyota Camry manufactured in Kentucky, is that choice more or less "American" than purchasing a Ford Mustang manufactured in Flat Rock, Michigan simply because Toyota is a Japanese company? The same example applies to American companies that outsource manufacturing to foreign countries and then import these goods into America for final sale. Should the litmus test be the question of where the company's stock is listed? Or the question of what percentage of revenue is generated from various countries? Or the ownership of the company's shares based on the citizenship of the shareholder?

All of these questions may be of interest from a public policy perspective but the bottom line is that in a global economy companies are increasingly focusing on leveraging the comparative advantage of different countries in an attempt to operate in the most efficient manner possible. One can object to this by correctly claiming that American manufacturing jobs have been lost over the past several decades. However, it is disingenuous to not also examine the benefits that American consumers have enjoyed in the form of more affordable consumer goods produced by overseas manufacturers or the benefits of American brands expanding into China.

Looking Ahead

Mr. Karabell concludes the book with a discussion of how the United States can avoid a fate similar to Great Britain's after World War II. After the war, economic, political, and military dominance of the West clearly shifted from Britain to the United States and has resulted in six decades of undisputed dominance for America. With China's economy growing at a much faster rate than America's, is it inevitable for the United States to follow the path of Britain in the coming decades?

This is a sobering question particularly in light of the massive government deficits facing the United States that neither political party shows any sign of addressing. The fact that China is playing a major role in funding these deficits will eventually force the United States to come to grips with the problem. The question is whether this will be done on America's terms or in a way decided by the Chinese.

Recent events in Washington are troubling to say the least. Politicians are calling for a commission to address tax and spending questions that our elected Representatives have decided to punt on. This reveals an abdication of duty of the highest order and does not inspire confidence that the matter will be decided on America's terms.

It would cost less than $14,000 (at the full retail price) to send each Member of Congress and the President's cabinet a copy of Mr. Karabell's book. It would be money well spent if they actually bother to read the book.

Such clear detail, chronological, historical, provides very clear background on China and how we got to where we are today, and gives a reader food for thought regarding some of the more probable future directions.

I've been to China and am a CPA of 40 years of business experience, facts presented coincided with my experience and observations there, and I felt this material to be presented in as objective fashion as possible.

Karabell writes this so well that it is a fascinating, easy read, did not want to put the book down, and I thoroughly enjoyed his vast vocabulary and many new words presented. Did have my dictionary close by for each of them and am very happy to have learned at least 30 new words. Fun.

Some reviewers are obviously not thrilled with US vs. China, and I understand that feeling, however, it is inappropriate, and a complete waste of time and energy, to cast one's personal opinion of US & Chinese politicians upon this book. That can only derail one's possibilities of gleaning the wealth of solid and vital information offered in the book.

If you are thinking of doing business in China, or other parts of Asia, this is a must read, in my opinion, and I also believe you will be surprised how much you appreciate obtaining the information.