China Hands

Is China the next economic superpower? Ming Zeng of Cheung Kong business school and Elizabeth Economy from the Council on Foreign Relations hash it out.

Ming Zeng

Professor of strategy at Cheung Kong Graduate School of Business in Beijing

Elizabeth C. Economy

Senior fellow for China at the Council on Foreign Relations

Resolved: China will be the next economic superpower.

Zeng: Forget yesterday's image of Chinese companies as producers of cheap, low quality imitations flooding world markets. Chinese firms are advancing very quickly into high-end products and industries and they are now competing for high-value activities like engineering, design and even R&D, not just basic manufacturing.

Few will be immune to their global impact. The sheer scale of resources Chinese firms can muster, especially fast developing human resources, the leverage afforded by China's huge home market, and the new opening of international markets for everything from capital through to technology and design (which favors latecomers) means that Chinese companies are poised to become the ultimate source of disruptive competition in the global market.

The emergence of China as an economic superpower has a solid foundation in this fast rise of Chinese companies in global competition.

Economy: Optimism is healthy, but so is realism. Of course there are some world-class Chinese firms making their way abroad or listing on the NYSE—Suntech, Lenovo and Haier come to mind—but they're not technology innovators. That is still the domain of foreign invested firms and joint ventures. Moreover, even if this handful of internationally competitive companies grows to thirty or forty, they will not be enough to power the Chinese economy and 1.3 billion people to preeminence by 2050 or before. For that to occur, China will have to take a few steps back and focus on the fundamentals.

Behind the skyrocketing GDP and trade statistics, a range of challenges are corroding future growth potential: a banking system in which non-performing loans continue to proliferate and now exceed China's foreign currency reserves; an educational system which produces over 300,000 engineers each year, yet only 10% of which can function at international standards; and devastating environmental challenges that cost the Chinese economy 8-12% of GDP annually in lost industrial output, medical costs, etc. And we haven't even touched on public health, pensions, or the corruption that produced 87,000 mass protests in 2005.

China may yet become the world's next economic superpower, but not until it gets the fundamentals right.

Zeng: Truth is always somewhere in the middle. Chinese firms are definitely making aggressive moves into innovation. Some of the recent Chinese IPOs at Nasdaq are high tech firms, such as China Medical and Vimicro, and more are coming. In fact, innovation is the buzz word in China nowadays, not only as a major mandate of government policy, but also for thousands of Chinese firms who want to make it to the next stage of their development. In addition, there are innovative firms such as Focus Media who develop unique business models that take full advantage of the opportunities offered by the fast growing Chinese markets. Even today, there are many Chinese firms who are already globally competitive, although they are less well known outside their industries. For example, Shanghai ZhenHua Port Machinery has more than 53% of global market. And this is just the beginning; hundreds and thousands of more will come in the next few decades.

Now, to the fundamentals. I agree with all the challenges you listed. They are the hurdles China has to overcome before she can enjoy high quality fast growth. However, there are more powerful fundamentals working as well: 600 million rural people who are eager to grab any job they can get; 3.5 million college graduates each year which is a big plus for Chinese firms moving to innovation, even if only a small portion is globally competitive as you would argue (if every one of them is up to international standards, you can imagine how fast high tech jobs will migrate to China!); a peaceful development period China hasn't enjoyed for over a century despite all the social problems (at least this is what my 89 years old grandma told me).

These are the powerful fundamentals that will keep China going despite all the big problems on the way.

Economy: The enthusiasm of the Chinese people and the now popular slogan of "peaceful development" have probably taken China as far as they can. Addressing the fundamentals, I am afraid, needs fundamental reform—the kind Deng Xiaoping unleashed back in the early 1980s.

Only this time, it's the political system that needs to be opened for business. If China's leaders are going to make a dent in the challenges I ticked off earlier—bad loans, pollution, corruption, poor education, and let's add the lack of intellectual property rights for good measure—transparency, accountability and the rule of law need to be more than buzzwords, they need to be put to work. That means loosening the grip of the Party, widening the scope of the media and civil society to tell the truth, and offering political opportunities for the talented not simply the party faithful.

Simply put, no amount of Marxist-Leninist teachings, anti-corruption campaigns, Internet police and rhetoric about a harmonious society can substitute for real political reform. I know there are some in China who know what needs to be done; I'm just not sure that the current set of leaders is bold enough to do it—particularly if the future of China's economy rests on the end of single party rule.

Zeng: Now we are heading to a different topic. No doubt China needs political reform, although some would argue it only needs government reform to improve bureaucratic efficiency. While there is still ongoing debate about whether modernization means Westernization, a debate that has been going on for almost two centuries, a majority would agree that China needs rule of law, transparency, democracy, freedom etc. The difference is more on how to achieve such political reform. And this is a very difficult issue to tackle. It is easy to complain, and even point to the right direction, but it is a completely different matter to come up with a constructive solution that will lead to that long-term goal.

As a strategy professor, this is the most common complaint I receive from my students. It is easy for me to say what the right strategy and directions are, but it is awfully difficult to for them to implement that.

Give China some time. What it needs is not revolution, but evolution. As long as it is progressing on the right track, even a certain period of stagnation should be tolerated. Why should we insist on the current leadership team to make bold moves; why not just wait for another decade? Think about what has changed over the last 10 or even 5 years. China has a long history, and we are patient.

Economy: I don't think we have shifted topics—just dug deeper down into what China will really need to do to continue to grow its economy and truly emerge as a global economic leader. In this regard, political reform is not a luxury for China but a necessity.

I think you are right to argue that political change should come as an evolutionary rather than revolutionary process. The Chinese people have had enough of revolution in their history and endured horrific consequences. I would add only that as with China's economic reform, the process can be evolutionary but the end result will have to be revolutionary.

My point is simply this: for over a decade, we have heard China's leaders recite the same litany of economic, social, and political problems, offer the same tired policy responses, and watched as now, the scale of some of these problems has grown to crisis proportions. What you describe as a desire by some for simply enhanced bureaucratic efficiency represents a mistaken view that 1) China can be the next Singapore and 2) such an approach could even begin to address the range of challenges we have been discussing. No amount of tinkering around the edges will be enough to grow China sustainably. Real reform has to begin with a few bold steps; the only question now is who—and it doesn't look like it will be Hu—will step up to the plate to get China on track for the coming century.

Zeng is co-author, with Peter Williamson, of Dragons at your Door: How the Emergence of Chinese Firms will Disrupt Global Competition (Harvard Business School Press, spring, 2007). Economy wrote The River Runs Black: The Environmental Challenge to China's Future (Cornell University Press, 2004).

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