OECD Observer: Just how important is China to the global economy?
Joerg Wuttke: China is a continent in itself, vast by any measure. As large as western Europe, yet with 1.3 billion people, it is a challenge to the imagination. The Middle Kingdom has re-emerged in the last 20 years. Will it become the second largest economy in the next 15 years, or will it succumb to the weight of history and unattainable expectations?
Expatriates often make the mistake of misjudging China, by underestimating the country’s ability to transform itself and change. As a businessman, my estimations focus primarily on the economy, because this determines my market. I see the Chinese economy probably continuing to grow by above 7% annually for the next 10 years.
The Chinese are said to be overwhelmingly in favour of free markets. Is that your impression?
It depends. China remains an autocratic country, with a communist political structure, but with a very open economy. The country has a large private sector, but with many prices artificially low or fixed. This causes problems in the supply chain, as with oil and gas, and encourages wastage, in water and energy, for instance. Also, remember that while China increasingly understands the benefits of an open market, it has to safeguard its many poor: about 100m people live on a dollar a day. Many foreigners forget this when they stay at the Shangri-La in Shanghai. China will never fully embrace Hayek’s philosophy on ultra-liberalism, but the leadership is set to encourage more efficiency by raising prices, and at the same time putting mechanisms in place to protect the poor.
How hard is it for a business to get established in China?
Generally, the Chinese authorities are pro-business, and they see benefits in permitting foreign firms to establish there. The setting up procedure in China demands far fewer steps than in some other countries, such as Brazil for instance, and is comparable with India or Japan. The real difference shows in the time required to get through those procedures: in China it takes about 41 days to establish a firm, in India about 89, and 152 in Brazil. The Chinese delay is even shorter than in my own country, Germany, which is a world leader in terms of receiving foreign direct investment but where establishment nevertheless takes 45 days.
What about location?
Shanghai is the business capital, particularly for services, though it appears to be declining in importance for manufacturing due to an explosion in costs. Industries have started to move into the surrounding provinces of Jiangsu and Zhejiang, and even further, thanks to improving infrastructure. Central provinces like Anhui and Jiangxi are developing fast. However, Beijing remains the city if you are seeking approvals for major projects, or considering investment with large state-owned companies, for instance, PetroChina, Sinopec, etc., but also so-called provincial champions, like Anshan Steel and Shide, both from Liaoning Province, which are heavyweights in the Asian region.
How do you find business skills in China?
These have improved. Take the quality of engineering–many multinational companies have moved some engineering tasks to China, where some 350,000 science and technology students graduate each year. That’s equivalent to the entire engineering pool of ASEAN countries, quite a talent pool to draw on. Their basic design engineering is fine, though detailed engineering is not easy and requires a lot of supervision. Also, there is the ever-present question of intellectual property rights (IPR) to watch out for. Protecting the intellectual capital we bring from abroad is key. Violations are a major impediment.
What about the general workforce, in services for instance?
The Chinese are very efficient, and always eager to learn. Skills are easy to cultivate, which we do by exposing graduates to the “real world”. They enjoy getting their hands dirty primarily by job rotation. This is important in large firms, though it is not easy in China, as people do not like to move beyond their city. Loyalty in the junior ranks can also be a problem, but this is mostly not the case among staff over 30 years old, as the more career-minded managers and engineers see value in staying on in the same company.
Surprisingly, the people are not always good team players, probably because competition is high, and individuals have to safeguard their turf. This might explain their lack of a communications culture.
Interestingly, I find that women have a far better attitude when it comes to services than men, especially in northern China, where a rather Mandarin attitude reigns amongst men. Chinese women make excellent sales people.
One recent change I have noticed is the age of company leadership. When I arrived for my present stint in China in 1993, all company bosses were 30 years older than me. Now, though I too have aged of course, many senior business people are in their late 30s or early 40s. They are still mostly Chinese-speaking, though particularly in long-established industries they tend to surround themselves with internationally trained staff. And in the new Internet industries, the chiefs of all the major players speak English.
What are the most important challenges going forward?
There are internal and external challenges. A starting question is whether growth is sustainable. A scenario of a GDP collapse or a sharp decline in growth is unlikely with the present government’s administrative control and the Chinese pattern of high saving, urbanisation and demographics, particularly the demographic “sweet spot” just ahead of fewer children and not too many pensioners. In China, an ageing problem is going to kick in after 2020.
There are other worries. Provincial growth varies, with coastal regions growing fastest, and inequality and social disparity in areas like education and health could eventually slow down growth and even lead to unrest. The government is introducing new policies to avoid this, like development in its western region, second-tier city growth and social welfare improvements.
Also, China is a fragmented local market, and GDP can be improved tremendously by reducing intra-provincial trade barriers. The government is introducing this in a targeted way, for instance allowing national rather than just provincial procurement, instituting bankruptcy laws that permit claims beyond provincial borders, and so on.
Beyond these domestic issues, the most important task today is to integrate China into the world economy, something that is not always easy to achieve, as history shows. Just look at Germany’s rise in the late 19th century! It needs a lot of wise people at the top to communicate to their constituencies that China is not a threat, but an opportunity. Many people have jobs thanks to the emergence of China, while others will lose theirs. Sadly, the focus has tended to be on the losers. Politicians and business leaders, but also workers and others that know or deal with China, have to make sure that their home countries hear about the mutual benefits. Multilateral organisations like the OECD must also do their bit, to build understanding and make sure that prejudices are not being kidnapped and misused for domestic policy purposes. In business, China must accept that it has to play by the rules. That means IPR protection is a must. Sales of company products, for example, should not be made conditional on technology transfers.
What about cultural acceptance?
Cultural acceptance of foreign staff varies. The Chinese tend to like Americans and Europeans but, for historic reasons, still feel antagonistic towards the Japanese. This is a little unfortunate, since Japan’s companies are not only large investors and employers, but display good corporate governance, which is important for China. On an individual level, while the Chinese have embraced a western lifestyle, sipping a latte from Starbucks does not turn them into Americans. Rather, they feel more nationally proud than ever, and understandably so. A great nation is on the way back.
©OECD Observer No 255, May 2006