If it takes an insider to really get the scoop on China's dairy potential, David Mahon is perfectly suited for the job. Mahon has lived in Beijing for 32 years building Mahon China Investment Management, a foreign investment and advisory firm specializing in the Chinese agriculture, food and beverage sectors.

Mahon spoke at the USDEC Board of Directors and Annual Membership Meeting in October, before the U.S. presidential election, offering an upbeat take on the health of the Chinese economic and political systems, as well as dairy demand. The following are edited excerpts from his presentation.

On reports of Chinese economic troubles:

If you read newspapers or watch television in the United States or Europe, you see a country where economic growth is slowing too fast.

What we see is not an economy that is slowing too quickly. This is not an economy full of consumers that don't have confidence. This is one of the most dynamic and confident economies we have seen. Real middle-class demand for quality products has never been stronger.

Don't believe that the world is about to be kicked in the guts by China. It will not happen.

The one potential problem in the Chinese economy is that the Chinese government, partly for social and political reasons, is authorizing the main banks to continue to pump money into unnecessary state projects. They are extending airports that don't need to be extended, widening the streets of third-tier cities that don't need to be widened. If China continues on this path, the banks will begin to run into a problem in the next two to three years of not having enough cash.

On reports of strong-armed political tactics:

Another myth is that China is run by this extreme character, Xi Jinping-a president so conservative that he is trying to drag China back to its Communist past. Xi Jinping is a very conservative man. He's a tough guy, but he's accomplished something that has probably saved the underlying stability of Chinese society and the economy. He's run a relentless anti-corruption campaign since the first year of his tenure.

Nothing has been more popular in modern Chinese history. We know that not because officials tell us, but our friends that are middle-class and working-class people suddenly don't have to bribe the officials for ordinary processes like getting their kids into a school. Those running factories are not getting visits by officials seeking fees paid and all the other commercial distortions that have made running businesses in China so difficult.

This anti-corruption campaign will continue for the remaining years that Xi Jinping is in power. But he has not eroded civil liberties gained since China opened up in the mid-80s. China is freer, more outspoken and a much more liberal place than it has ever been in its history.

You can talk about anything in China. You can talk about the government and you can talk against the government. You may not be able to go out into the press and take an official position on those things. China is a one-party state, but it is not a police state. It is not a state that governed by fear in a sense that somehow the political system, will in the end, cut off any substantial economic development.

On the relationship between the United States and China:

There is a premise that China and America have been in conflict since Nixon and Kissinger did the deal with Mao that America would eventually recognize China and China would then accept a formal relationship with America. But many of the things that held them apart in the Cold War were left in place by both countries, unnecessarily, to quite a degree. A sort of military jousting is constant, but trade interdependence is huge.

China and America are very good at sorting stuff out. There is a mechanism for maintaining this kind of uneasy status quo.

A lot of what China becomes is how it is treated. Some of the things need to be ignored as the kind of gestures of a country that is not quite sure where it stands in its region. Because of the global financial crisis, China was launched 10 years ahead of where it was ready to be from a diplomatic and political position regionally, and it is still stumbling around. It is knocking itself out over East China Sea islands that hold no strategic value and belong to Japan anyway.

I think Xi Jinping is a very good leader. I don't think he's that good at the regional diplomacy, but it won't come to much because in the end both countries need each other.

On the lingering impact of the 2008 melamine contamination incident:

It is left in the minds of dairy farmers and manufacturers. It is left in the minds of those that analyze and invest in the dairy industry in China. And certainly in the minds of consumers, it has left a terrible uncertainty.

To this day there remains in the subconscious of all those parents and often grandparents (because they were the ones that were buying the infant formula) this terrible sense of uncertainty of "what am I giving my child?"

The one thing that the Chinese consumer will not adjust to in this generation is that Chinese infant formula can be relied upon. When a child is getting nothing but milk powder, you have to get it 100% right, and that still remains a huge opportunity. I see real growth in the future because whatever improvements the Chinese government and dairy industry make, it will not be enough for consumers to trust them.

On reports that Chinese consumers now prefer domestic to international products:

It's rubbish basically. The government would like that to be the case.

On competition among the world's dairy suppliers:

Australian, New Zealand and European propaganda is strong. New Zealand is saying "Our milk is the best. We are the best dairy farmers on the planet. America has the wrong cows and they feed them funny stuff." The Europeans are saying, "We are the Old World and we know more about this than anyone."

It is all rubbish. The Chinese don't care. If they get a box of imported UHT milk, all they want to see is a little sticker in Chinese that says it is imported. Whether it is from Poland, or Australia, or New Zealand or America, to most consumer it does not matter-except to some extent for infant formula.

On China's regulatory environment:

The regulatory environment is going to be the most challenging [for dairy suppliers]. To navigate that, particularly for infant formula, you need real assets in China to actually know where you are going. Your Chinese partners may give you some assistance, and a domestic position to manage it would probably help, but in the end you need to be very careful that you develop your own assets as a company to work out what all the changes mean.

To my mind, many of the domestic processors don't know what it means. An in-country presence in a critical market, even to govern distribution of a product, is always a good idea.

On China's domestic dairy strategy:

China has an approach to the dairy industry that is not written about and most officials you deal with will actually deny: That is, dairy has been secretly defined as a "strategic industry" to the Chinese government.

Since 1949, China characterized all grains as being strategic to assure the country could feed itself if isolated from the rest of the world. China has since held a huge store of strategic food supply in cases of crisis. Somewhere around late 2009/10, an internal paper defined dairy as another strategic food group. That has already caused distortions in the Chinese dairy industry.

Farmers are being paid to produce milk that processors can't use. Then processors are getting [reimbursed] in some cities to take that milk and do something with it, even if that means tipping it over a cliff at the back of a factory.

China is trying to build a reliable dairy industry. While it might be distorting markets now, it won't last.

You've got at least twice, even higher, feed prices in China than you do in the United States. You don't have enough water. Very few dairy farms are actually profitable. Even the scale farms that are better run struggle to make money.

About a quarter, maybe a third, of the milk in China comes from scale farms. A scale farm in China is anything over 1,000 head. The rest is essentially a 17th-century farming system supplying a 21st-century nation.

So it is not a country that can be rationally considered for any level of independence in dairy. It is much better for China to use that land for other things than feedlot farms for dairy cows. They are better to buy in the international market. Whatever they go through, do not be dispirited, because they will in the end buy in the international market.

On where the Chinese government is focusing dairy efforts:

I think that they are genuinely trying to get a fresh strategy where the bulk of what people are consuming and the bulk strategic interest lies in fresh dairy products. Also, emotionally and out of genuine and understandable pride, feeding your own children and being able to do it responsibility is imperative at the moment. I don't think they'll achieve it because of the history, but essentially it is growing as a concept.

On Chinese dairy opportunities:

Gone are the days when drying milk and sticking it in containers and sending it to China is going to make you a steady flow of easy money. Gone are the days when you can turn up in China with a liter of [fluid] milk and say, "This is a magic product that will make your kids taller, handsomer, prettier and more intelligent, so pay four times what you might pay in the U.S."

The Chinese consumer learns faster than most. Regarding the high price of UHT, once people traveled and saw what UHT should cost, they stopped buying it until the prices started to come down The Chinese consumer knows that they must check out every product. They remember the days of melamine. You are dealing with a very discerning consumer.

The Chinese nutritional story has come down to the fact that the dairy drinks that ran the edge of volume in the sector for so long are actually rubbish. They are largely water. They are drinking water, flavoring and coloring with a tiny bit of milk powder on the bottom. So there is now a move to fresh product.

On the relaxation of China's one-child policy:

The policy change is a huge event.

If you are right in the heart of the middle-class, you might think twice [about having a second child]. How big is the middle-class? There are many ways of assessing it. Maybe 300 million people to be generous in a population of 1.4 billion.

If you are wealthier than that, you can afford to have the second child. You can afford the extra tuition costs and all the other things having a second child entails.

If you are poorer than that, which is the bulk of the population, your children are your wealth.

I ask people around me, "Are you going to have more than one child?" The neighbor in our office building is already pregnant. The woman that governs parking cars below my tenement in central Beijing is now off on maternity leave. A lot of people are going to have a second child. So I think for the dairy industry, it will have a palpable effect and it is a major factor.

On China's current dairy buying spike:

I don't think it is another speculation play. I think it was 2013 when one of the key Fonterra managers said, "Where is all this going? They keep buying more and more of our whole milk powder." They were asking the question but no one wanted to actually check out if the golden goose was actually a duck about to die.

China was a catalyst to a lot of the oversupply we are currently having to endure.

Right now, I do believe the buying motivation is genuine, but China is a very opaque market, and if there is any factor for your business particularly that you think you need to assess, don't just look at the top-end numbers. Try and walk the farms, talk to the processors and work on a grassroots level as much as you can yourself and you will get a reasonable picture.

Mark O'Keefe is vice president of editorial services at the U.S. Dairy Export Council.

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The U.S. Dairy Export Council fosters collaborative industry partnerships with processors, trading companies and others to enhance global demand for U.S. dairy products and ingredients. USDEC is primarily supported by Dairy Management Inc. through the dairy farmer checkoff. The password-protected article above is intended for USDEC member organizations only and should not be shared with anyone outside your organization.