They say that if you spend a week in China you can write a book; spend a year – an article; spend five years – nothing.
The game
The game is simple but unprecedented. Whereas Britain put 30 to 40 million people through an industrial revolution in the mid-to-late 19th Century and had the colonies to draw its raw materials from; whereas America put 150 million people through an industrial revolution at the turn of the 20th Century and had its own raw materials; China is putting 1300 million people through an industrial revolution with neither colonies nor substantial indigenous resources besides coal. The only way it can do this is by establishing long-term supply contracts with resource-rich countries, the most recent example being the deal with Australia over uranium supplies.
The game is fraught with risk because it relies on an harmonious world where many of the factors (including America's behaviour) are beyond China's control. Basically, China wants to regain its status as top-dog nation - a position it held for 1000 years from 400 AD to 1400 AD - by 2040. If it succeeds our grandchildren and their issue will live in a world very different to our own where the West has been the dominant player. They will have to get to know a culture and language which is very different to their own. They may even have to learn Mandarin. Equally, Americans will have to go through the same sort of psychological adjustment that the British did at the beginning of the last century.
Of course, even when China has the largest economy in the world, its per capita income will still be well below the Western average given the ratio of its population to that of any Western country. Yet, the enormity of the task the Chinese have set themselves can be illustrated by the following statistics. They intend doubling current coal production of 2 billion tons a year (employing 23 million people) to 4 billion tons a year by 2015 and they are currently adding 70 gigawatts a year to their power grid (equivalent to two South African or one British power grid a year). They have 32 nuclear power plants in the pipeline.
China's game is very open compared to Japan at the same stage of development in the 1960s. They export 38% of their GDP and now have $800 billion in foreign reserves. Moreover, the sizzling growth of foreign direct investment in China has meant that 58% of their exports are sourced from foreign-owned companies operating in China. It was noticeable that at the Central Party School, the élite Communist Party Academy where one of us gave a scenario lecture, all the slogans in the buildings were quotes of Deng Xiaoping, who was the architect of China's modern open-door policy. He began the game in its modern form in 1978, only 28 years ago. Ironically, to the masses, he is still way behind Chairman Mao as a national hero.
The players
China's game involves a whole variety of players each with its role to play:
i. The West provides brands and advanced technologies which China does not yet possess. There is not one single global Chinese brand of note at present so they rely on famous Western brands setting up shop in China. Equally it will take a long time before China rivals the West in the quality control measures necessary to sell ultra advanced products (like passenger aircraft). The West is also a player as the principal market for China's exports. For example, 60% of the goods sold through Wal-Mart in the US are made in China.
ii. East Asia including Japan supplies China with semi-processed manufactures, parts and accessories. In fact, China runs a big trade deficit with East Asia. China's relationship with Japan remains difficult while the Japanese prime minister continues to pay an annual visit to a shrine in Japan that commemorates, among other war dead, 14 class A war criminals who committed atrocities in China during the Second World War. However, painful memories of Japan's occupation of China during the war are offset by the realisation that the success of the East Asian bloc rests on an harmonious relationship between the two biggest players in the region.
iii. The Developing World is the provider of raw materials as well as something of a market to Chinese goods. It is interesting that the two top suppliers of oil to China are now Angola and Nigeria. China in no way wants to colonise countries important to its interests but it wants to establish long-term relationships that will favour both sides and therefore be self-sustaining. Africa, because of its mineral wealth and the disinterest shown in it by the West, is a prime target for China's deal-making strategies.
iv. The Chinese Communist Party (or at least the Politburo) can be likened to the Board of the biggest multinational company in the world - China Inc. The strategic objectives of the company are set out in each five-year plan. Currently, in the 11th Plan starting in 2006, the emphasis has shifted from pure economic growth to seeking a balance between the economy and the environment, closing the gap between rural poverty and urban wealth and helping to create an harmonious world beyond China's borders. Nevertheless, they want the economy to continue to grow at 9% per annum and if possible achieve a saving of 20% in energy consumption per unit of GDP by 2011. The Communist Party is still the most important player in China. Nothing gets done without its approval.
v. The Chinese People are the hardest working, most dedicated bunch you will ever come across. You only have to translate the immense entrepreneurial energy of Hong Kong and Taiwan across to the inhabitants of the Chinese mainland to realise the potential the country has to dominate world markets. Currently, they are the cheapest and most gigantic factory on the globe but one day they are going to get back to being smarter than anyone else as well. In Xian, the famous site of the terracotta warriors, the best exhibits in fact are two chariots that were constructed in 210 BC complete with tilting (and removable) parasols for the charioteers. It is hard to believe that the technical complexity of these chariots predates Roman times. A famous Chinese saying about entrepreneurship is: "It is better to be the beak of a chicken than the back end of an ox." Smaller towns like Guilin, Yangshuo and Chifeng are thriving entrepreneurial hives attesting to this principle (no Tescos, no Pick'nPays).
Rules of the game
Some of the more important rules are as follows:
i. Chinese baseball. One Chinese businessman described the difference between doing business in America and China as the difference between American and Chinese baseball. In American baseball the rules do not change whereas in Chinese baseball the rules change during the game (think how elastic Chinese Communism is). It is the reason why Western businessmen find it so frustrating to do business in China - they want a contract signed and sealed and then adhered to according to the laid-down rules. No such luck! The Chinese are the ultimate 'foxes' living in a world of dynamic change, adapting to new circumstances as they arise. Foreigners have to go with the flow or, as one observer put it, "learn to cross the river by feeling the stones under the water". And you don't even know if you are going to get to the other side. It is possible that as the Chinese economy matures the rules will become more fixed. Britain and America went through 'cowboy capitalism' before settling down.
ii. One child. Walking along the river in Shanghai on a Sunday afternoon, one is amazed by all the couples with a single child - usually a boy. 'Little emperors' they are called. There are exceptions to the rule: you are allowed more than one child if you are a farmer in a rural area or belong to a minority group. You can pay $10 000 or if you and your spouse are both single children, you can have two children yourselves. This form of population control is understandable if you bear in mind that China has roughly the same surface area as America with a billion more people. Nevertheless, down the line it may lead to all sorts of demographic problems ranging from an imbalance of the sexes to a greying nation reliant on a shrinking workforce. For the time being, however, there are plenty of 20 to 30-year-olds to keep the nation going.
iii. Guanxi/li/face. 'Guanxi' is connections or your network, 'li' is respect combined with a set of mutual obligations and 'face' is what you should never allow your neighbour to lose. Along with Confucianism, Taoism and a touch of Buddhism, these are the cultural rules of Chinese society. It is deeply hierarchical and totally unlike Western society where the tall poppies are pulled down at will. Satirising the rulers is unheard of in China. There are places in the Chinese mind that Westerners will never be able to go. Having said that, a refreshing humility, willingness to learn new ideas and accessibility to people of power still exist in China. And they do not break engagements. Corruption is around but capital punishment discourages it. Street crime is virtually non-existent. Driving however in Chinese traffic is interesting. Somewhere in the driving code is an unwritten rule: put your nose in first.
Key uncertainties
Below are some of the uncertainties that could derail China's bid to be the biggest economic player in the world by 2040:
i. International wars/terror. The last thing China needs in proceeding smoothly through its industrial revolution is a world riven by wars and terror, where its security of supply of raw materials is threatened. For this reason alone, it is not surprising that on issues like Iran, China takes a dove-ish, diplomatic line. However, China does have the problem of North Korea and its nuclear potential on its doorstep.
ii. Protectionism. The European Union has already had a go at China with restrictions on imports of bras and now shoes made in China. On the other side of the Atlantic, the US has blocked the Chinese acquisition of an American energy company on the grounds of national security. A lurch back to protected markets could be very negative for China.
iii. America. The future behaviour of America as the current lone superpower is terribly important to China not only because America can disrupt China's vision of an harmonising world by doing its own thing in the Middle East and elsewhere, but also because a recession in the American economy (caused by debt, deficits etc) would immediately have a knock-on effect on the Chinese economy. As one experienced Chinese academic dryly put it: "Our relations with Americans could not be better or worse". China fears that America still has not come to terms with the fact that we live in an interdependent world where no nation has the power anymore to act in a unilateral fashion.
iv. Commodity prices. China's growth in demand could be creating a permanent scarcity in some key commodities, thereby driving up prices to a level which will cause them a massive headache. Actually, given the need of many Western countries to renew their ageing infrastructure, it will cause everyone a headache. One Chinese analyst drew attention to the position China currently occupies on the 'metals intensity' curve that all countries go through as they industrialise. He said that China is only 15% of its way up the curve given its present per capita GDP and therefore is still in the mode of increasing its commodity consumption per unit of GDP. If, besides China, India now joins the fray, expect some commodities to move from a 'stronger for longer' scenario to a 'stronger for ever' scenario. Obviously, substitution and human ingenuity may kick in to limit the rise, but maybe the Club of Rome were just 50 years too premature in publishing their work 'Limits to Growth'. For specific reasons (like a war in Iran), oil could go through $100 which could stop the world (and the Chinese) economy in its tracks.
v. Taiwan. China firmly believes that Taiwan is part of its territory. It is non-negotiable. Hence, any move towards independence by Taiwan could upset the stability of the region and harm America's relationship with China.
vi. Political unrest. According to one seasoned observer, there were 80 000 incidents of rural unrest in 2005, up by 30% on the previous year. Most of them were caused by municipalities seizing agricultural land from farmers for the purposes of development. Nevertheless, because China is not a democracy, there is no safety valve in the event of a build-up in pressure and resentment in the countryside. Of relevance is China's history of dynasties since 2200 BC. Some dynasties hung around for hundreds of years, but virtually all of them came to a violent end. If China's economic growth falters, another sudden shift in the tectonic plates of Chinese politics could happen. One must not underestimate, though, the average Chinese citizen's capacity to tolerate hardship as illustrated in the following joke: "Question - Why is porridge better than love?
Answer - Because nothing is better than love, but porridge is better than nothing!"
vii. Bird flu. Since the population is so densely concentrated in China, any epidemic could move very quickly through it. SARS was a real scare a couple of years ago in response to which the Chinese authorities built a hospital with 7000 beds in one week and fully staffed it. The country still has a long way to go in generally providing an adequate level of health care, so in the interim the danger of disease remains of concern.
viii. Deterioration of the environment. The sunlight in the major cities in China has a silvery quality about it because of the level of pollution. A campaign has been launched in Beijing entitled 'Blue Skies by 2008' to cater for the Olympics. In the rural areas where 780 million people or 60% of the population live, the average amount of arable land per head has fallen to 0,5 hectares - considered dangerously low by international norms (income per farming household is around 3000 yuan a year or $400). Thus the environment everywhere is under extreme pressure and one wonders whether it will become the ultimate constraint on China's fortunes. The government is caught between a rock and a hard place. On the one hand, increasing the size of farms in China would lead to even greater city populations (already 15 to 20 million each) and even greater numbers of migrant workers (currently about 100 million). On the other hand, doing nothing will leave China with one of the most fragmented and inefficient agricultural sectors in the world. The challenge of the environment is recognized in the latest five-year plan but may in practice be ignored in the headlong dash for economic growth. Two other specific uncertainties are regional imbalances in water and the possible capping of carbon emissions in light of global climate change. What will the latter do to China's intended expansion in coal output?
Scenarios
From interviews with various formidable gurus on Chinese affairs and points raised during a conversation at the Central Party School, two mainframe scenarios offer themselves as China's possible paths into the future:
i. Harmonious world. This is the one China wants and has adopted as its vision in the 11th Plan. It is a world in which globalisation continues and China plays catch-up on the West, converting itself from a cheap and effective factory to a sophisticated world-class economy. China becomes a leader in innovation and technological advancement, closes the income gap between its rural and urban populations, manages to find an appropriate balance between nature and development and acts as an agent for harmonious change in global affairs. In other words, China wins but shares its successes abroad because it recognizes that no other conditions will allow it to succeed. This is very different to the American Dream which is basically about America, and that's it. The importance of this scenario lies not so much in the likelihood of its occurrence but in the fact that it pervades all the positions taken by Chinese officials in dealing with foreign companies and other organisations. Coincidentally, the philosophy behind 'Harmonious World' is very much in line with the 'Friendly Planet' scenario which featured in our letter to President Bush in 'The Mind of a Fox' in June 2001.
ii. Polarising world. This is the scenario where it all goes wrong for China not because of its own actions but because the external environment, through no fault of its own, simply disintegrates around it. Islam slugs it out with Christianity and Judaism, something the Chinese cannot understand given the limited influence religion now has in China post Marxism. World trade declines as the war on terrorism escalates and the West hunkers down in a 'gilded cage'. China's supply chains are seriously ruptured while the price of certain key commodities like oil go through the roof in the international scramble that ensues. The external nightmare unleashes massive unrest in China as its economic growth rate plummets. A new dynasty emerges which (once again) points the dragon inwards and turns the clock back.
These extreme scenarios explore the outer edges of the envelope. In actuality, the most probable scenario lies somewhere in between with China continuing to grow at a healthy economic growth rate and continuing to modernise its economy. There might be some internal unrest, but the place won't splinter (93% of Chinese are of Han descent). Notice, however, that neither scenario envisages China turning into a Western-style democracy any time in the near future. Whatever the outcome, you can safely say that for any business outside China it is better to be in a game where China is a customer, rather than a direct competitor.
This article appears on the website www.mindofafox.com which belongs to Chantell Ilbury and Clem Sunter, and was republished with permission.
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