I’ve frequently come across the view that China is on track to become like Japan but with 10 times the population. It is a form of wishful thinking that drives a great deal of investment in China in the hope that carving out a market share will bring untold riches one day.
In an example of the optimism, in 2008 the China Daily cited Commerce Ministry statistics of more than $200 billion of foreign money invested in China in 2006 alone. It was an astronomical figure considering the difficulties the likes of Google, Fosters and Sino Gold have faced in China.
Most of the predictions that China will follow the lead of their Asian neighbours seem to be based on a shallow analysis of history. Specifically, history shows that Japan used to be a mass manufacturer of low quality products for export. However, as its economy developed, it diversified into service industries and became a mass consumer in its own right.
To an extent, South Korea and Taiwan followed a similar pattern except, whereas Japan became a democracy after its constitution was written by the USA after WWII, South Korea and Taiwan became democracies when an increase in private sector power put pressure on the military to give up some power.
So will China follow the same path? In my experience speaking to people doing business in China, I got the impression that it was a good place to save money (get something manufactured cheaply) but not a place to make money (sell things) and I don’t see things changing. Basically, whenever a foreign company tried to go into competition with a Chinese company, it would be subjected to taxes not applied elsewhere, activist vilification, and in extreme cases, the company simply confiscated by the Chinese.
Reflective of Chinese business practice, the majority of the service industries seem to relate to the formation of guanxi (networking) which basically involves spending time in restaurants with party officials, the police, fire inspectors, taxation officers and other bureaucrats in order to gain favourable business conditions. Spending money on advertising, public relations, human resources and product development is somewhat redundant if poor guanxi results in excessive business costs being applied or an inability to gain access to the market. As a result, many of the service industries that have developed in first world countries are struggling to develop in China.
Obviously, for China to follow the lead of Taiwan, Japan, and South Korea, this kind of corruption would have to be brought under control, most likely by the development of a more democratic political system. With leadership constantly changing, guanxi could be broken down and in its place, businesses would compete by producing superior products and cutting edge advertising rather than spending up to 50% of work time drinking baiju in restaurants.
Perhaps the crackdown on corrupt officials like Bo Xilai could be interpreted as a sign that members of the Communist Party are aware of the transition that China needs to make for its economy to grow. This is a positive sign, but there are a couple of issues that make me question whether it would ever be enough for China to emerge into Japanese-like market conditions.
Firstly, Taiwan, Japan and South Korea had the USA pressuring them to adopt democracy and open their markets to American imports. America was able to do this because the respective Asian countries needed to export to America and were dependent upon America for a degree of military protection. China is very different as it has four times the population (with a consumption potential that dwarfs America) and no desire for military protection.
With China being able to resist American pressure to change in a way that Taiwan, South Korea and Japan could not, change would have to come from within, and in particular, from the business community and the Communist Party. Again, I have some reservations. A move to democracy would threaten all those Chinese businesses that have good guanxi and want to retain their favourable business environments. In other words, rather than business wanting change, most of the powerful Chinese businesses would oppose it.
Additionally, the power of the leadership of the Communist party is over stated. It isn’t like the case in North Korea where a dear leader is able to anoint his son as a successor and fabricate stories of scoring a hole in one on every hole in his first game of golf. In China, power is shared in various levels of one massive bureaucracy – which is why so much time is spent in restaurants building relationships with some many different people. There is no one key person that can be bribed or one person who needs to be kept on side for unfettered market access. Obviously, having a friend in president Xi Jiping would be helpful but even he needs guanxi.
Many Chinese that I have spoken to are of the belief that the upper echelons of the Communist Party are actually quite honest and they believe that these powerful people are frustrated with the corruption that prevents their projects becoming successful; however, they just don’t have control of the situation to change things. That is a belief that would be difficult to verify but it is somewhat depressing if true. Basically, it would mean that while the Bo Xilais can be put in jail, so endemic is the corruption that it would continue regardless.
Ironically, China is so large that it can resist American pressure to become like Japan, but that size also prevents it from being able to change even if it wanted to. Unlike Nth Korea, the Communist leadership just isn’t able to gain control in the way it could in a smaller country. With that in mind, I have to say, any foreign business that looks at China as the land of untold riches is, for lack of a better word, deluded. China is China and Japan is Japan. They have very different histories and very different futures.
- Why big American businesses fail in China (chinadailymail.com)
- China’s Rebalancing in Light of Earlier Asian Experiences (brookings.edu)
- China recycling cleanup jolts global industry (miamiherald.com)
- China Recycling Cleanup Jolts Global Industry (abcnews.go.com)
- Republic of China, Taiwan (samborgwardt.wordpress.com)
- US, Japan to deploy new radar, drones in next year (boston.com)
- U.S.-Japan to Expand Military Ties for First Time in 16 Years (bloomberg.com)
- PLA missile system uses Japanese-made switch: Global Times (wantchinatimes.com)
- Taiwan urged to speed up regional economic integration (wantchinatimes.com)
Categories: Trade & Investment