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 quickly into high-end products and industries and are competing for high-value activities such as engineering, design, and even R&D. The sheer scale of resources they can muster—especially a fast-developing labor force and the leverage afforded by its huge home market—will allow them to become the ultimate source of disruptive competition in the global market.

Economy: Some world-class Chinese firms are making their way abroad or listing on the NYSE—but they're not technology innovators. And even if this handful of internationally competitive companies grows to 30 or 40, they will not be enough to power the Chinese economy to preeminence by 2050. For that to occur, China will have to 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 nonperforming loans now exceed foreign currency reserves; an educational system that produces more than 300,000 engineers each year but only 30,000 who can function at international standards; and devastating environmental challenges that cost the economy 8% to 12% of GDP in lost industrial output, medical costs, etc.

Zeng: Truth is always somewhere in the middle. Chinese firms are definitely making aggressive moves into innovation. Some recent IPOs on Nasdaq are Chinese high-tech firms, such as China Medical and Vimicro, and more are coming. As to the fundamentals, all the challenges you point to are real. However, there are powerful positive forces, as well: 600 million rural people eager to grab any job they can; 3.5 million college graduates each year; and a period of peaceful development the likes of which China hasn't enjoyed for over a century (at least this is what my grandma tells me).

Economy: The enthusiasm of the Chinese people and the slogan of "peaceful development" have probably taken China as far as they can. Addressing the fundamentals requires fundamental reform. Transparency, accountability, and the rule of law need to be more than buzzwords. That means loosening the grip of the Party, widening the scope of the media and civil society, and offering political opportunities for the talented—not just the party faithful. No amount of Marxist-Leninist teachings, anticorruption campaigns, Internet police, and rhetoric about a harmonious society can substitute for real reform.

Zeng: No doubt, China needs political reform, although some would argue it needs only to improve bureaucratic efficiency. Give China 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 another decade? Think about what has changed over the past 10 years. China has a long history, and we are patient.

Economy: You're right to argue that political change should be evolutionary; the Chinese have had enough of revolution in their history and endured horrific consequences. But the result will have to be revolutionary. For more than a decade, we have heard China's leaders recite the same litany of economic, social, and political problems, and offer the same tired policy responses. 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.

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