Lessons Learned: The Enigma of China
by Vart Adjemian
 |
Chief Operating Officer
Vart Adjemian |
More than 25 years after it began embracing free markets and opening up to foreign investment, China continues to be an enigma for most Western companies.
It also continues to grow at a blistering pace, with an economy that has been doubling in size roughly every six years. China's GDP is now about 1/8 that of the United States, and some economists believe that by 2015 China could become a major rival to the U.S.
Meanwhile, over the past 15 years, the urban landscape in big cities like Beijing, Shanghai, and Shenzhen has changed completely, with high-rise buildings and highly innovative architectural designs popping up everywhere. The government continues to spend huge amounts of money building infrastructure and getting ready for the 2008 Olympics, which will be a well-staged showcase for Chinese progress and a serious attempt by the leadership to show the world that China has joined the international community.
For all international companies, China's huge population base of 1.3 billion consumers is a major attraction. As China's middle class grows and per capita disposable income rises, China's consumers will undoubtedly become a major factor. However, at present, there are still many unanswered questions about the pace of growth and the future stability of the country.
Here are some of the realities and issues that China faces today:
1 - China has embraced a "Free Market" economy, yet the Communist leaders of the country are still trying to manage it centrally. Given China's size and the conflicting economic interests of the regions, sooner or later something will have to give. This is likely to create transitional problems and widespread unrest. The economy is simply too big to be centrally managed over the long term. The two systems – the free market and the centrally managed economy – will eventually collide.
2 - The government's leaders are changing from old guard, die-hard communists to a younger, more open-minded generation. Even though the transition appears to be smooth, this is not always the case. For example, until just this weekend, former President Jiang Zemin continued to retain control of the Chinese military, a major power behind the scenes, despite his earlier resignation as President and head of the Communist Party.
3 - The economic gap between the urban seacoast and the rural areas continues to widen. This is going to be the biggest challenge for the government. Only a 50-mile drive out from the coastal urban areas and the new freeways, the rural areas remain underdeveloped and appear to be stuck in the last century. China currently has about 650 million people living in these rural areas, which can adequately support a population of only about 300 million. This means that over the next decade, about 350 million rural Chinese will move to urban areas seeking both jobs and housing. This will be a huge undertaking for China and the Chinese government.
4 - With China's entry into the WTO, expectations were that local Chinese laws would be revamped, becoming more transparent, more strictly enforced, and more in line with international standards. This has been a slow and arduous process. Chinese law and the local court system has not yet been reformed and continues to pose major problems. The concept of "intellectual property" is largely unknown in China, and as a result, products manufactured anywhere in the world (including well-known products with brand equity) are copied in China and sold worldwide. Another real problem is that Chinese industrial production has outpaced domestic consumption, and that most of this production continues to be geared to the export market. At some point, China thus runs the risk of exceeding world demand and creating an economic backlash.
5 - China's growth has created huge demand for all commodities from aluminum, steel and oil, to soybeans and cotton. Moreover, with continued urban development, agricultural land has decreased and the supply of water has tightened. This has resulted in decreasing grain output and depletion of grain stocks over the last four years, and led to an increasing concern with food security. It has also raised commodity imports and prices significantly. For example, China's soybean imports early this year were so great that prices were driven to their highest levels in the past ten years. As prices became unreasonably high, China then defaulted on its purchase contracts, creating huge market displacements, logistical problems, and numerous arbitration cases – in short, a real mess.
To conclude: China as the waking dragon has the potential to materially impact world economics and politics. However, until it becomes more transparent, it will continue to be an unpredictable place to do business and a major challenge for international companies.
Vart
E-mail:Vart.Adjemian@conti.com