As Chinese leader Xi Jinping makes his first state visit to the U.S. as president, interest in all things China will be at a near-term peak over the next few days, just as surely as the Shanghai Composite reached a top on May 1, 2015, which happened to be the Labor Day holiday in China. The concern in the West about China's growing economic and geopolitical influence is not unjustified, although "concern" is probably not the correct word to apply to the situation. Learning to co-exist with a large and formidable competitor is never comfortable, but the integration of China into the ROW ("rest of world" in business-speak) is an unadulterated positive for both China and the West. We already experienced the alternative with the Communist block during the Cold War, with less than optimal results.
A state visit like this offers pundits unlimited opportunities to deliver opinions on how China could make our lives better, and being a part-time pundit myself, I will do likewise. But my views are influenced by a unique -- and somewhat surreal -- experience that I will share with you. My home state, hometown, and family occupy an unexpected position in the history of U.S.-China relations.
Some Real Money readers (and I'll wager nearly all our Chinese readers) may recall that Xi Jinping visited Iowa in 1985, when he led a small delegation from Hebei Province on a two-week visit to learn about U.S. agriculture. At the time, Xi was a mid-level county functionary in his early thirties, the son of a prominent (and politically exiled) father, but otherwise an unknown "regular guy." The highlight of that 1985 trip was three days spent in my hometown of Muscatine, Iowa, during which time the delegates stayed with local families. For Xi, this first trip out of China, first trip to America and first time staying with an American family made an indelible impression. It shaped his image of the American people; at a reunion with old friends in Muscatine 28 years later, when he visited the U.S. as China's vice president, he told us, "To me, you are America!"
A variety of photos taken during the visit of the Xi delegation to Iowa: The two-week visit was organized by the Iowa Sister States, occurred a few months after then-and-current Iowa Governor Terry Branstad visited Hebei province and met Xi, in which he invited Xi to come to Iowa.
My parents hosted Xi and his translator, Wenyi Xia, during their stay in Muscatine. Xi slept in my bedroom while my brother and I were away at university, which is why my mother had the empty rooms, and she was happy to offer her hospitality to these visitors from a far-off land. My sister was still in the house and met Xi long before his rise to the top. The conversations were not easy -- having to go through a translator -- but both parties learned a lot about each other, both personally and about their cultures and countries. The visit was a catalyst for my parents and sister to visit China the following year, their first sojourn to Asia.
An exclusive photo of Xi and Xia in front of the Dvorchak family home in Muscatine, Iowa, in 1985. From left to right: Xia, Eleanor Dvorchak, Thomas Dvorchak, Paula Dvorchak and Xi Jinping.
Life went on and the Muscatine folks involved with the visit lost touch, which is not surprising in a pre-Internet era with significant language barriers. Xi continued his rise to the pinnacle of Chinese politics, and in 2008 emerged as vice president and designated successor to lead the nation. As he planned his 2012 visit to the U.S., which introduced him to the world as the heir apparent to lead China, he directed his staff to track down those people he met in Muscatine all those years ago. The staff succeeded, of course, and his visit to Iowa and the reunion with old friends was an international highlight of that trip.
Eleanor and Tom Dvorchak meet President Xi 28 years later. The reunion included the exchange of fond memories of the 1985 trip.
Less well known is that Vice President Xi invited the Muscatine group to China for a weeklong visit hosted by the Chinese government. The group spent 10 days touring China in May 2012, a few months after the original reunion. The visit included a lunch with the Xi at the Diaoyutai State Guesthouse, the official compound in which visiting dignitaries are entertained. My sister Paula accompanied the group, and described the whole experience as "overwhelming."
The Iowa "old friends" visit Vice President Xi in China in May 2012. My sister Paula is in the floral-print dress. To her left is Luca Barrone, who drove the delegation around Iowa for the full two-week visit in 1985. To his left is Iowa Governor Terry Branstad (in his second stint leading the state). Governor Branstad's invitation to Xi in 1985 unknowingly set in motion a chain of events that has greatly benefitted both Muscatine and the state of Iowa.
The implications of that 1985 visit reverberate to this day, both for my family, for Muscatine and for Iowa. Since 2013, I have been spending over half my time in China, building business relationships and gaining a better understanding the country. Not surprisingly, given our family's relationship with the president, both my brother and I are forming a long-term commitment to China. My wife and two daughters have been visiting as well; the experience and exposure to China that my daughters are getting will be incredibly valuable in navigating the China-dominated world we will inhabit in the decades ahead. Muscatine is seeking to capitalize on the ties with China, and hope to develop closer cooperation with Chinese businesses, government officials and cultural organizations. Just last week, I spoke at a ceremony dedicating my old house as a museum symbolizing U.S.-China friendship.
When my parents visited China in April, their first and only trip since the 1986 visit with my sister, the Chinese government rolled out the red carpet, hosting 10 days of touring, meetings and banquets. President Xi warmly welcomed my parents. The highlight of the trip being a private, two-hour dinner with the president and his wife. By setting aside two hours of some of the most valuable time in the world to my parents (as well as me, my family and my brother) demonstrates the depth of warm feelings President Xi has for that brief time in Iowa so long ago. Because the dinner was a private event between "old friends," the government has asked us not to share details, so I can't really offer more. But the fact that this dinner was not covered by the media and thus not staged for political purposes deepens my conviction that the Muscatine visit 30 years ago made a deep, personal and lasting positive impression on Xi. He really does consider the Muscatine hosts his "old friends."
Not surprisingly, this experience has informed my view of events unfolding around the world, especially in the relationship between the U.S. and China. Here are a few key points regarding China I believe do not get sufficient attention in the financial media, or come up enough in my conversations with people in general:
- Analysts seem to be confusing the direction of causation in the interaction of the Chinese economy and the ROW. When the world catches a cold, China sneezes, not the other way around. The Chinese economy is built on manufacturing and exporting products to the world. If the economy is slowing, that means their end-markets are slowing. A slowdown in China is your "tell" that the world economy is entering a sluggish period, if not outright recession. There is little China can do to rescue the world. They can rescue themselves, however, by directing production toward internal consumption.
- One word. As Mr. McGuire advises Benjamin Braddock in The Graduate with one word, "plastics," I am giving you one number to memorize: 1.4 billion. That is the population of China, and it is the reason the country is destined to be a world leader, both economically and politically. You simply cannot imagine how many people there are until you spend time in the country. China is full of secondary cities you have never heard of that are larger than New York City. Its upper middle class will be as large as the whole U.S. The busloads of Chinese tourists you see in N.Y. and Washington, D.C.? Just the tip of the iceberg. The wave of Chinese buying houses in swanky Los Angeles suburbs? Only the beginning. The deluge of applications and acceptances of Chinese students to U.S. universities? For every one you see now, 10 more are coming in the years ahead. Brace yourselves; we are only in the first inning of China's integration into the world economy.
- There are solid fundamental reasons to be long-term bullish on China, despite any near-term fluctuations in growth rates. Start with "the number," 1.4 billion people. Consider that most are still poor, with an average income of $6,000 a year. All of those people are striving to enter the middle class, or more accurately, are working hard to ensure their children and grandchildren live far better lives. This culture values education and hard work, and like us, the Chinese want to get rich. Any large population with the right values and a reasonably stable political and cultural environment is destined for success. One of my most high-conviction bets is that over the next two decades, China will continue to grow, its upcoming generations will enter the middle class with better-paying professional jobs, and it will become a fully integrated member of the world community. Bet against that at your own risk!