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Joe Borich - Emerging China and what it means for Washington business
Why is China emerging now? What accounts for this economic and developmental boom virtually unrivaled in human history? From China’s perspective, much of what we are witnessing is simply playing “catch-up.” For much of the past 2000 years of so, China was arguably – in some instances, inarguably – the most advanced nation in the world. In science and technology, commerce, social organization, governance, legal structure (including a relatively clear definition of rights and responsibilities) and education, few if any other societies could match up consistently with China over the past two millennia. Until about 1800, that is. By the end of the Ming Dynasty, or 150 years before 1800, China had begun to turn inward, spurning its earlier progress in S&T and the advanced institutions it had created, and essentially froze in time. The “tiger” had gone to sleep. The balance shifted suddenly and dramatically to the West. By the early 1800s, the West had not only surpassed China by virtually any conceivable yardstick, it had begun to wrestle control of China’s most valuable real estate away from the Qing rulers and establish foreign-run colonies on China’s soil. Over the following 150 years or so, China was beset by an almost unbroken record of disasters, natural, foreign-induced and self-inflicted. Touching on only a few of the highlights – or, perhaps, lowlights – during that period and in reverse order, we see that Chinese have had to contend with the Cultural Revolution, the famine of the early 1960s, the Great Leap Forward, the 100 Flowers Campaign, the Anti-rightist Movement, China’s civil war, the Japanese invasion, the warlord period, the Republican Revolution, the Boxer Rebellion, the Taiping Rebellion, partial colonization by western powers and the Japanese, and the Opium Wars. All of this left China bankrupt and dispirited by the late 1970s, with a sort of collective inferiority complex and with a growing grudge against both its own leadership and its former foreign oppressors. No wonder Chinese were ready for a new approach in 1978 when then-leader Deng Xiaoping announced the new policy of reform and opening! 25 years later, self-confidence has returned to China. Reflecting perhaps on the country’s former glory as much as its bright future prospects, Chinese are now saying “It’s been a rough couple of centuries, but w-e-r-e b-a-c-k!” Starting from the late 1970s, the nation-wide policy called reform and opening has created profound structural changes in China’s economy, and opened the way for a market forces in China. It is fair to say that China’s leadership did not institute the overarching policy of opening and reform for altruistic reasons, nor did its leaders experience a St. Paul-like epiphany in which they suddenly realized Marx was wrong and Adam Smith was right. The principal motivation for this change was the realization that past excesses, in particular, the Cultural Revolution, had left the legitimacy of the Chinese Communist Party’s rule very much in question. They gauged correctly that nothing less than sweeping reform of China’s economy, and much more openness to the outside world would promote stability and restore the party’s legitimacy. In the past twenty five years of reform and opening as China has restructured increasingly along market economy lines, its gross domestic product has quintupled. Foreign trade has burgeoned and there has been an explosion of infrastructure development with new construction or improvements of expressways, rail lines, ports and airports, telecommunications and buildings. In 1990, there were zero miles of expressways in China; by 2010 there will be over 20,000 miles and only the U.S. will have more. Nor is China going to let up on its torrid pace of development any time soon. The 2008 Beijing Olympiad, the 2010 Shanghai World Expo, the program to open up and modernize China’s western region and the revitalization of Northeast China’s industrial base will continue to play out over the balance of this decade at least, and require hundreds of billions of dollars in additional investment. Unleashed entrepreneurship and economic development have created unprecedented prosperity for most Chinese, assuring virtually all access to the most basic human requirements of food, shelter and clothing. According to the UNDP, 200 million people were lifted above the poverty line in China between 1980 and 2000, a feat unprecedented in human history. Rising prosperity has been accompanied by social and political change, too. The control over almost every aspect of daily life that was the hallmark of the old work unit and commune systems has been dramatically loosened. Today, Chinese have more personal freedom than ever before to decide where they will live, when and where they will travel, what they will buy, and which jobs they will compete for. They also have unprecedented access to the world of ideas inside and outside China’s borders. Today, 200,000 Chinese students are pursuing their education outside of China, many of them in the U.S. Countless more travel internationally or view the rest of the world through satellite television and the Internet. The change China has undergone in the past two decades has not only enhanced China’s stature in the community of nations and raised living standards to an all-time high, it has also engendered the longest period of unbroken social and political stability there in the last 200 years. China’s soft revolution – so-called “Socialism with Chinese characteristics” – has been a great success thus far. Where does that leave China today? Although China is still a long way from fulfilling its enormous economic potential, it is already an economic superpower in most respects. At some point fairly soon, China will become the world’s largest economy in terms of aggregate GDP. China already possesses one of the world’s largest economies, is among the top ten nations in terms of international trade, and in 2002 surpassed the U.S. to become the world leader in attracting new foreign direct investment. At the same time, the Chinese government is pushing ahead with an ambitious program to restructure its state owned enterprises, China’s banking system and its government bureaucracy in order to make its economy more efficient and productive. And while China’s economy is becoming more streamlined, its 1.3 billion consumers are becoming wealthier and more discriminating. Further growth of China’s economy will depend increasingly on domestic consumption, rather than exports and foreign investment. Retail turnover of consumer goods grew through most of the 1990s at an average annual rate of nearly 20 percent. Previously unheard of luxuries like televisions, washing machines and air conditioners are becoming commonplace. So too are private phones and home computers. Another new phenomenon that is radically changing lifestyles in China and creating a new source of wealth is the privatization of housing. More than 80 percent of Shanghai’s housing stock is now privately owned, for example, as compared to less than 10 percent a decade ago. The past seven years have seen the birth of mortgage lending, an explosive growth in the real estate market, and a dramatic increase in demand for household furniture and furnishings along with home improvement products and services. Chinese personal savings accounts now total more than the equivalent of one trillion dollars, or, about $1000 per person; how many of you have $1000 in personal savings? I know I don’t! With growing personal wealth and more freedom than ever to travel, Chinese are beginning to eye the automobile as their next major purchase. Both production and sales of cars in China are rising rapidly and China this year will move into fourth place among the world’s leaders in auto manufacturing. In addition to growing consumerism, China’s economy is increasingly driven by the private sector. To encourage greater development of the private sector (for both domestically owned and foreign-invested businesses), China’s parliament has passed legislation to extend to private property and investments the same protections that have always applied to the public sector. The re-emergence of the private sector as the principal engine of economic growth is vital to China’s long-term goals, and is now firmly enshrined as a guiding principle of China’s ruling party. The shift toward market economics and away from state control of the economy has already come a long way, especially since the early 1990s. By now, more than 70 percent of China’s GDP is accounted for by the private and cooperative sectors. China is also becoming a major manufacturing base. Some pundits, in fact, have taken to calling China “the world’s factory.” While this claim is somewhat overstated, China has undeniably made use of both domestic and foreign capital and the quality and low cost of its labor force to rise rapidly among the ranks of the world’s manufacturing powerhouses. It is now in sixth place and will certainly go higher. Growth of manufacturing in China has been matched by trade displacement within Asia – i.e., Japan, South Korea, Taiwan, and others have shifted production, including production for exports, to China. Much of what China exports are labor intensive products such as toys, footwear and textiles. As China’s share of the U.S. market for such products has grown to over 60 percent in the last decade, so has Taiwan’s, South Korea’s and Hong Kong’s combined share declined by roughly the same amount. Thus, while our trade deficit with China is mushrooming into uncharted territory, our overall trade deficit with Asia is actually declining as a percentage of our global trade deficit. Higher-end products for export such as computers are for the most part assembled rather than manufactured in China. The sophisticated guts of these products are largely manufactured outside of China, then put together, encased and (somewhat misleadingly) labeled "Made in China" by low-cost Chinese workers. In fact, over half the value of China's imports and exports is accounted for by this kind of export processing. We may anticipate, however, that China will move toward manufacturing and exporting its own higher-end, higher value products. We should also expect more original technologies and designs coming out of Chinese enterprises and laboratories. In fact this is already beginning to happen in cutting-edge areas like information technology and bio-technology. With China now graduating as many engineers per year as the U.S., this trend will certainly accelerate. But, foreign investment, technologies and management will continue to play a significant role in China’s development for quite some time to come. Foreign invested enterprises have accounted for much of China’s capital expansion, attracted unprecedented levels of both domestic and foreign investment, and helped create millions of new jobs. As we have seen, much of the growth in China’s exports and manufacturing over the past decade has been accounted for by foreign invested enterprises. In fact, nearly fifty percent of what China exports globally is actually produced by foreign invested enterprises. Nevertheless, to reach its full economic potential China will have to do more to develop international markets for its own brands and products, as Japan, Taiwan and South Korea have already done successfully. This it seems to me would be the next logical step in China’s rise as an economic superpower. Lest we think that China’s march to modernity and economic superpowerdom is without its speedbumps, we’d best think again. What are some of the issues facing China today? Number one is the sheer size of its population. With a land mass roughly the same as the U.S.’ China contains nearly one-fifth of the world’s population. Imagine for a moment the U.S., but with China’s population: a California with 160 million people, or a Washington with 30 million, or a greater Seattle with about 15 million. Those are the kinds of numbers we’d be talking about, if the U.S. had the same population as China’s. And you think traffic is bad here now! Moreover, although China’s birthrate is declining, the population will still likely reach about 1.6 billion by mid-century when growth is expected to level off. What this means is that China will still grow by the equivalent of Japan’s population in about a decade, and by the equivalent of the U.S.’ within a generation. Despite remarkable growth and development, China’s economy remains fragile in many respects with great disparities between various regions and sectors. China’s economy will strain to meet the rising demands of its population. Just to soak up first time applicants entering the job market, China has to create about 10 million new jobs each year. Like the U.S., China must also struggle with the effects of economic restructuring that has resulted in the loss of tens of millions of urban jobs over the past decade. In industry, too much of China’s capital and labor remains locked up in the state owned enterprise system. Although restructuring has helped many of these enterprises become more efficient and even profitable, they are by and large still protected from competition, and continue to enjoy ready access to operating capital through unrecoverable loans from state owned banks. This artificial skewing of capital allocation means that the private sector, which is the only economic engine in China currently generating new jobs, often goes begging for investment capital. China has another problem that the U.S. put behind it a century ago: the rationalization of agriculture. China still has about 400-500 million people engaged in farming – mostly subsistence farming. This accounts for over a third of its population. Despite the fact that about 100 million peasants abandoned farming and moved to the cities in the 1990s there are still far too many farmers eking out a living on plots of land averaging less than an acre. Urban planners in China are predicting another 200 million farmers or more will migrate to the cities this decade, possibly overwhelming urban economies and services. Why is all of this important to us? Earlier in my talk I stated that China is already an economic superpower. Clearly, though, it is one with still-enormous unfulfilled potential. That is the reality of China today, a country that economically has made the right moves so far and is well into the process of self-transformation into a mighty economy with all the market and private enterprise bells and whistles so loved by westerners. That said, however, we must acknowledge that the transformation is no where near complete, and more work still lies ahead. What then does all of this mean for doing business with China? Just looking at basic data, it is easy to understand why the U.S. Department of Commerce attaches such overriding importance to this, the very largest and most promising of the world’s big emerging markets. It is a nominal market of 1.3 billion people. Even discounting the portion of the population engaged in subsistence agriculture that still leaves hundreds of millions living in or near metropolitan areas, and with growing disposable incomes. Over one-third of these urbanites would qualify as middle class or higher based on purchasing power parity calculations. On top of that, China’s economic growth rate, though slightly slower than during the 1990s, is still likely to be among the world’s highest in this decade. There are opportunities for foreign firms in virtually every sector of the economy, from providing expertise and capital equipment to meet China’s infrastructure needs, through supplying industrial equipment and materials to China’s booming industries, to retailing consumer goods and services for China's burgeoning middle class. I would single out environmental protection as a particularly promising sector. Nearly a quarter of the US$ 26 billion China will invest in the 2008 Beijing Olympics is earmarked for environmental protection and cleanup, for example. On top of that, China can provide a wide range of quality products at competitive prices to foreign buyers. It is still, and will remain, a major supplier of textiles, apparel, footwear, foodstuffs, machinery, metals and metal products, chemicals, raw materials, electronics, toys, games, sporting goods and handicrafts. Increasingly it is also a source for high-end products and equipment as well. In Washington State, the leading export to China by far, of course, is transportation equipment, especially aircraft. However, China offers a major and growing market for many of this state’s products, including agricultural products and food, information technology equipment and services, forestry products, and environmental technology. Washington businesses looking to enter the China market must balance the tremendous potential of that market against the daunting barriers to success. As numerous businesses have already demonstrated, firms can succeed in the China market, but success is often slow in coming and usually not easy to achieve. The China market is not El Dorado, and it is not for the risk averse. Despite all of the reform and opening, China still sees itself as a socialist state ruled by a communist party. While this philosophy of governance is changing over time, it is important to remember that China is not yet a capitalist society, or an entirely free-market economy, and should not be thought of as one by those seeking to do business there. Other problems that may hamper foreign business include a weak banking system and generally underdeveloped financial institutions; a still-confusing and sometimes opaque system of regulations and laws governing business, often administered inconsistently; and transportation bottlenecks, to name but some. My purpose in enumerating these difficulties is not to discourage prospective trade and investment with China, but to draw attention to the challenges one must face and surmount in order to succeed. Given these challenges, a commitment to doing business in China must be firm and long-term. There, I hope I’ve provided a bit more perspective on the subject of today’s conference. But, I can’t resist the temptation in closing to offer some hopefully useful, based on my own experiences and the wisdom I’ve gleaned from others over the years.
Much of the above may sound like common sense, but it’s amazing how often common sense is forgotten or ignored by foreign companies in their eagerness to get their business going in China. Finally, let me wrap this up with a few words about the Washington State China Relations Council. The Council a 25-year old private non-profit organization whose mission is to serve our member companies and, in general, promote commercial, cultural and educational ties between this state and China. Our 150 member corporations and organizations represent every sector of the economy, as well as cultural and academic interests. What all of our members share is a strong interest in China. Although we are not government-funded, we work closely with the Washington State Government, the U.S. government, and local governments throughout China to promote our members’ interests in China. We offer business consulting services, including contact building and assistance with resolving business disputes. We will soon be able to offer a full menu of professional consulting services with the assistance of several of our member firms. We also organize a variety of programs every year to help build better understanding of China and how to do business there. Among our planned major events this year are:
If you are doing business with China, or planning to do business with China, you might wish to consider joining the exclusive community of WSCRC-member companies. For more information please visit our website at www.wscrc.org. Thank you! Joe Borich
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Keynote address at Saint
Martin's College - China Business Conference - April 9, 2004