Just recently, the Wall Street Journal published an article stating the incredible growth in automotive component manufacturing in China, as well as other industries. Many people are mystified by the details of how to do business in China. In particular, many people ask me about the chances for reform, and what it means as growth continues to occur. Is China a democracy? What is the impact of communism? What do I need to know if I do business in China?
One of the important elements that any visiting executive should think about before going to China is an understanding of the political history that has led to the position of China today. One of my recently graduated MBA students, Hao Xie, educated me with a brief history lesson that I will share with you. Hao is now dutifully employed at Chevron, working on procurement best practices with the company’s CPO.
Before 1911, China was still characterized as a feudalistic economy run by the Qing authorities. Even by 1949, China was primarily an agricultural economy. However, colonial capitalism did have a long and significant impact in some coastal cities, Shanghai and Guangzhou in particular.
The general economic condition of the nation was terribly bad because of the World War II and continuous civil wars. A crucial reason why Jiang Jieshi did not defeat Mao Zedong was that the capitalist economy was just forming and the industrial power was still very weak in most parts of China.
From 1949 – 1978, China, for the first time, systematically built its industrial base and transformed itself from an agricultural economy to an industrial one. The period between 1949 and 1956 was recognized as the golden period of Chinese industrialization, as the country established its primary industries including steel, automobile, textile, chemical, and defense. The GDP grew at the rate of over 20% per year.
Because of over-optimism, Mao made his first huge mistake by summoning his nation to speed up the industrialization. This was the “Great Leap”, which resulted in the significant economic recession in 1958 and 1959 and also the disaster in early 1960s.
The economy recovered, however, under the leadership of Liu Shaoqi in the early 1960s. As Liu accumulated much power in the communist party, Mao felt a threat from him and made his second huge mistake by starting the famous “Cultural Revolution” to suppress Liu and his followers, including Deng Xiaoping.
Nevertheless, it was during this period when China as a nation, rather than in a few cities, started its industrialization, though a lot of ups and downs. China created its college system and built hundreds of national labs throughout the country, and developed its most advanced technology under Mao’s dictation, such as nuclear weapons, satellites and rocket science, and super computers. Under his dictation, the most talented Chinese students chose science and engineering majors instead of law or economics, which Mao saw as trouble-making majors. This, maybe unintentionally, prepared today’s China with many talented scientists and engineers, many of whom became the technocrats in the government.
If Mao was the person who led the Chinese to the entrance of the industrial highway, Deng was the one who led the Chinese to drive on the highway. During this period, China has grown at a rate of over 10% per year. It is a common mistake that many Americans believe the rapid growth in China only happened in recent years. Jiang basically continued Deng’s philosophy, and harvested the fruits of the economic reform started by his predecessors.
During this period, China started to migrate from the economy of import-substituting to export-led. Jiang, originally from the Shanghai area, also did a lot of favors to his home city, and helped it overshadow the rapid development of Guangdong Province, where Deng first tested his pro-capitalism economic policy and has been open to the West since 1979.
Like Japan and the US, the power of China was not built overnight, but was a cumulative growth over the past 50 years. Though China has experienced rapid economic growth for over 25 years, most western countries paid attention to it only after its entry into WTO and the hosting of the 2008 Olympics.
Further, the CIA World Fact Book confirms the impact of these changes on the economy and its growth. Specifically, they note that:
The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis, China in 2005 stood as the second-largest economy in the world after the US, although in per capita terms the country is still lower middle-income and 150 million Chinese fall below international poverty lines.
Economic development has generally been more rapid in coastal provinces than in the interior, and there are large disparities in per capita income between regions. The government has struggled to: (a) sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; (b) reduce corruption and other economic crimes; and© contain environmental damage and social strife related to the economy’s rapid transformation.
From 100 to 150 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time, low-paying jobs. One demographic consequence of the “one child” policy is that China is now one of the most rapidly aging countries in the world.
Another long-term threat to growth is the deterioration in the environment – notably air pollution, soil erosion, and the steady fall of the water table, especially in the north. China continues to lose arable land because of erosion and economic development. China has benefited from a huge expansion in computer Internet use, with more than 100 million users at the end of 2005. Foreign investment remains a strong element in China’s remarkable expansion in world trade and has been an important factor in the growth of urban jobs.
In July 2005, China revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies. Reports of shortages of electric power in the summer of 2005 in southern China receded by September-October and did not have a substantial impact on China’s economy. More power generating capacity is scheduled to come on line in 2006 as large scale investments are completed. Thirteen years in construction at a cost of $24 billion, the immense Three Gorges Dam across the Yangtze River will be essentially completed in 2006 and will revolutionize electrification and flood control in the area.
The Central Committee of the Chinese Communist Party in October 2005 approved the draft 11th Five-Year Plan and the National People’s Congress is expected to give final approval in March 2006. The plan calls for a 20% reduction in energy consumption per unit of GDP by 2010 and an estimated 45% increase in GDP by 2010. The plan states that conserving resources and protecting the environment are basic goals, but it lacks details on the policies and reforms necessary to achieve these goals.
Whew! That was a very brief lesson, but enough to help you understand the diverse set of political and economic forces at work.