What’s driving China’s economic transformation?

China is on track to become the world’s largest economy, taking a position held by the United States since at least the early 20th century and most likely since several decades earlier.

Whether it happens in two years or 10 years is a matter of debate, but Dr. Xiang Bing, the founder of China’s Cheung Kong Graduate School of Business (CKGSB), is among the many who say it is inevitable.

Speaking recently at NUS Business School as part of the Asian Business Series, Xiang laid out the historical and economic factors that he believes point to China’s inexorable rise to the top of the global economy.

First, he says, China is already globalised.

Critical spark

He cited statistics showing China’s progressively increasing contributions to the world’s GDP, beginning in 1978 in the initial stages of the reform process when it accounted for less than two per cent of global GDP,

chinastreet280It increased slowly for the next couple of decades, but the critical spark came in 2001 when China joined the World Trade Organization, rapidly pushing China’s contribution up to its current level of around 12 per cent.

Indeed China’s position is now so central to the global economy, Xiang argues, that without its contribution the fallout from the recent global financial crisis would have been much worse.

Also working in China’s favor, according to Xiang, is the democratisation of information via the internet, and a population dividend, whereby a pool of cheap and plentiful labor has helped to fuel China’s economic growth.

Some economists argue that the one-child policy and an aging population mean the dividend is getting smaller.

Furthermore, China has history on its side. Xiang argues that China did best during times when it was open, a point he made concisely by collapsing 5,000 years of Chinese history into about two minutes.

And he says China in the 21st century is more open than many economies around the world. He points to American firms as diverse as semiconductor maker Qualcomm and fast food chain KFC, both of whom see more than 50 per cent of their global revenue coming from China.

Likewise Korea’s Samsung, Switzerland’s Nestle and France’s Carrefour all do robust business in China.

“Being so open is essential to China’s economic progress,” he said.

Environmental cost

His enthusiasm though is tempered with an acknowledgement of the hurdles that could trip China up.

“I think the number one concern for China is the environmental front. You see the pollution of air, water. We have not incorporated the cost of the environment into China’s products.”

pollution280Elaborating further he said it was obvious that China has done a terrible job on environmental issues but that one should also not ignore that globally somebody inevitably has to do the dirty work.

“You have to be sympathetic to the countries that perform all this dirty, low value-added work. But we might have been to the point where the whole model might not be sustainable.”

Another major challenge Xiang highlights is China’s growing wealth inequality.

The latest figures from China’s National Bureau of Statistics puts China’s Gini coefficient – a measure of income distribution – at 0.473 for 2013, barely changed from .0474 in 2012. (A 0.0 score means perfect equality, while a 1.0 means one person holds all the wealth.)

Compounding the problem, says Xiang, is the fact that the Chinese tend to want to keep the wealth within the family.

Family-owned businesses have trouble passing the leadership to anyone who is not a member of the family, making it difficult for these companies to be globally competitive.

Xiang says that’s like having all the sons and daughters from a family forming a football team and expecting to be able to take on the likes of Manchester United – and win.

‘Collective myopia’

China’s growth could also be held back by what Xiang calls the “collective myopia of humanity,” that is, not taking a view any longer than the 4-10 year time frame that defines most political leaders’ time in office.

ThinkAloud4This myopia extends to Western democracies as well, he says. “When we talk about 10 years, we say ‘long-term planning,’ but in civilization 10 years is nothing.”

Other challenges for China include maintaining political stability and countering the so-called “China threat.”

Xiang says it’s in China’s best interest to keep the lid on simmering tensions over its claims to disputed islands.

“China has very incentive to preserve peace and stability,” he said. “China is most dependent on global trade so it has every incentive to make sure sea and land are safe.”

China gets a bad rap for lack of innovation, and on the surface it seems that could be lumped together with all the other challenges. But Xiang says that is not necessarily something China has to worry about.

“You don’t need to be innovative to become a billionaire. You have a Google, we have a Baidu. You have Expedia, we have C-Trip. So you just import a technology, a business model from the West to China, you become a billionaire.”

The suggestion here, he says, is “why innovate? Innovation carry risks.”

He also believes that the sheer size of China’s market means companies will be able to attract innovators from beyond its borders.

“The ability to innovate will be imported globally,” he said, pointing to the example of California’s Silicon Valley which draw entrepreneurs and innovators from around the world, not only America.

“The Chinese people, the Indian people, the Israeli people, Italian people, Russian people go to Silicon Valley to become innovative. So China will become a hotbed for that because they have largest market.”

Chinese companies already have shown how innovative they can be when it comes to working around the constrictions of state capitalism.

He says the private sector “outmaneuvered and outsmarted many kinds of discrimination imposed on them,” from lack of access to capital markets to barriers to securing bank credit.

That, in itself he says, shows the entrepreneurial spirit is alive and thriving in China.

China, he says, succeeded “not because of state capitalism. China succeeded in spite of state capitalism.”

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