ISSUE 9 - Winter 2007    The Virtual Strategist

China:  2020

Anita Tang

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Trade liberalization introduced by the late Chairman Deng Xiaoping in 1978 brought about extraordinary economic growth in China.  Since then, the average nine percent annual growth rate in the Chinese Mainland has helped the country’s per capita income grow from 1978’s RMB 379 (US $168) to 2004’s RMB 10,500 (US $1,276), a whopping 2670% increase.  Recognizing that productivity is the determining factor in the economic development of societies, China seeks, by 2020, through productivity development, to build a society of largely middle-class families with a per capita income of RMB 25,000 (>US $3,000) for its 1.6 billion population. 

     Why 2020?  Although China expects the high growth rate to last for at least 40 years, it also recognizes that the country needs to maintain stability for several decades to achieve such an elevated rate —  clearly, a challenging and daunting task.  What factors will influence the course of this development?  While myriad factors will undoubtedly play a role, the  following analysis is based on impressions I gleaned in the course of my participation at the International Forum on Productivity Development in China, held in Beijing on November 17- 18, 2005. At the conference, 32 government officials, academicians, and representatives of non-governmental organizations, among them two Americans and one Briton active in the World Academy of Productivity Science, reported the results of research designed to help China cope with the problem of ensuring continued but stable growth and development.

Moving Up the Value Chain
The traditional manufacturing industries consume extensive amounts of  natural resources and energy.  In response to this, China is determined to use technology — “self-developed technology” — to optimize its productivity.  But manufacturing activities have not produced high income for China, a fact that has made it increasingly urgent for China to develop its service industry.  According to the  former Vice President of the China Academy of Machinery Science and Technology, Qu Xianming, China must learn from such companies as GE and IBM.  Both companies sell products and services, but both derive greater revenues from sales of their services than from sales of their products. 

        Currently, the primary industry sector in the Chinese Mainland accounts for less than 40% of China’s overall economy while the secondary industry sector has grown fivefold  since the liberalization, accounting for about 30% percent of the economy. In 2004, the service industry sector accounted for 31.9% of China’s GDP. Developing China’s tertiary industry sector in high-tech and services will help alleviate the conflict between supply and demand of capital and resources as well as provide more employment opportunities for the population; it is an important component of any development plan.

Toward Achieving the 2020 Plan
By the end of 2005, China’s rural population accounted for 57% of its total population.  To build a society of largely middle-class families by 2020 through productivity development, China is increasingly turning toward urbanization, which is currently at 45%, a 50% increase since 1978.  Urbanization — building infrastructure, expanding transportation structure, improving industrial production, and encouraging consumer spending — makes China a bigger and more concentrated consumer market. But urbanization can exert negative impacts, too. These include human resource shortages, low productivity, resource depletion, environmental costs, and reduced consumption power among the rural population.

     One  positive though clearly partial response to these critical issues resides in so-called green productivity — that is, change wrought through top-down and bottom-up cooperation between the government and enterprises.  Indeed, the Chinese government  is working to effect change in many areas.  To effect total change and to realize its 2020 goals, China must obtain the support and cooperation of its population as well as of the rest of the world.

Sectoring China into Developmental Regions
One focal point of Forum participants is on the importance of developing China’s various regions, especially, developing connectivity within the regions, which would  link them together, aiding them in building and expanding infrastructure and transportation structure.  Following the successes of the Pearl River Delta and the Yangtze River Delta regions, the Bohai Bay region has emerged as the center of the next phase of development. Other regions targeted for priority development include China’s West and Northeast regions.  As these projects illustrate,  China can make use of its geography in developing bi-lateral and regional trading and cooperation blocs.  Indeed, three provinces in the Northeast — Jilin, Liaoning and Heilongjiang — serve as links to Russia, Korea and Japan; while Yunnan is a connecting point to Southeast Asia and South Asia; and, Guangxi, a part of the Pan-Pearl River Delta (PAN-PRD) region, is a corridor to ASEAN countries, particularly to Vietnam, Malaysia, and Thailand.

     Highlighting the importance of the development of China’s provincial economies, Forum participants sought, first, to identify the latter’s strengths and weaknesses and, then, to develop plans for channeling China’s provincial development into regional trade and cooperation. Participants also maintained that transforming  the regions from rural  to urban would minimize migration as well as other social and cultural concerns.  Moreover, by creating super-cities, China can take advantage of  economies of scale:  return on investment will be higher and, among other things, it will be easier to implement environmental protections.

Ensuring Energy and Natural Resource Security
Forum discussion stressed two main points regarding energy:  first, China has long depended on domestic sources for its energy supply. Second, energy security is an issue directly related to  national security.  Petroleum, in contrast to other fuels, is a critical strategic material for military and national defense, and, therefore, its security is the most significant energy-related  security issue confronting a country.

     From 1997 to 2002, China’s energy self-sufficiency rate was high. However, since 2002, due to rapid economic development, the demand for energy has risen sharply. Besides giving priority to coal usage and supporting a policy of self-reliance, Forum participants asserted that the country’s net petroleum import rate should never be higher than 20%, and, for petroleum security, China should limit its net import rate to below 30%. Though China has an extensive supply of resources, ranking third in the world, its per capita resources are low. Its exploration for, and exploitation of, resources is inefficient and poorly managed. Because the discrepancy between resource supply and demand over the next 30 years is predicted to be significant, it is important to protect the supply, i.e., control exploitation and also promote renewable energy use.

     A number of participants, including Wang Mengkui, President of the Development Research Center of the State Council, asserted that China's rapid growth had exacted a very high price: the excessive use of its resources. The Chinese must recognize that energy saving is not only a task for the government but needs the support of everyone as it is going to affect the entire Chinese population and its livelihood.

Practicing Environmental Protection
China is experiencing the loss of land as a result of environmental issues, a situation that clearly harms the economy.   Specifically, the country needs to improve the quality of its drinking water; upgrade its drainage system; restrict  townships to limit soil erosion and avoid water and lake pollution; provide for treatment of land deterioration, preserve grassland, and reclaim arable land.  Over the next 15 years, more than 600 cities in China will need to improve their environments. Indeed, within the next few years, China is expected to start a pilot program designed to deal with environmental issues in the 113 cities the government has termed “atmospheric pollution control cities.”

     Based on the recommendations of the China Environmental Protection Foundation, China should incorporate three major principles in its environmental control policies: (1) Those who have caused pollution should be responsible for cleaning it up (2) environmental protection and management procedures must be improved and (3) the rule of law in the area of environmental protection should be strengthened .  Obviously, China's future well-being depends on the adoption of these key principles.

Promoting Education and Independence
If education is the key to improving China’s productivity, then training is the means to upgrade its labor force.  And where does technology fit into all this?  Clearly, technology is related to national security.  While China’s technological capabilities are abundant, it is lacking in organization and innovation skills.  It needs management talent to lead its companies — on the Mainland as well as abroad – but demand for that talent far exceeds supply.  Between 1995 and 2005, China’s export structure experienced drastic changes: while labor-intensive exports declined from their number one position, high-tech exports became increasingly important.  However, as of 2004, 57.1% of China’s exports were goods from foreign-invested companies; and the technology was largely foreign-owned.

     Indeed, there is not enough R&D activity in China. Though big companies generally make larger R&D expenditures, this is not true for the entire economy. In the past 15 years, large- and medium-sized Chinese enterprises maintained an R&D budget of around 0.75%.  It is only in recent years that China has begun to develop its own intellectual property and to apply for patents.  To achieve national independence in technological innovation, China must organize and develop its own technology, cooperate with foreign partners, and make technology acquisitions. Moreover, it must maintain its determination to develop its legal structure, especially an aggressive pursuit of intellectual property rights protection.  This should facilitate trade and business and enable China to honor both its World Trade Organization obligations and its intellectual property development needs.

Improving the Social and Financial Structure
Beyond promoting economic development and productivity, China must ensure that social security remains in place in order to safeguard societal stability. In its quest to build a society of middle-class families, it must address three major issues: uneven income distribution, unemployment, and an aging population. Besides providing basic insurance to the population, China needs to improve medical policy as well as to introduce commercial insurance.

     On the financial front, a basic financial framework has been established in China.  However, there are some aspects of the system that are inconsistent with free market development, including the unfulfilled transformation of fiscal function, an imperfect tax-sharing system, and an incomplete taxation system. To build a strong foundation for productivity development and maintain financial security, China must establish a public financial system, comprehensive risk management, and financial control procedures and structures.

     On the food supply front, China has adopted a so-called policy of food safety:  that is, to assure China is fed, it supports a position in which supply and demand are basically balanced. Gao Tiesheng, a former Director of the State Bureau of Grain Reserve, asserted that issues concerning grain and food have a vital bearing on the lifeline of the national economy and state security. To ensure food security, Gao recommends making the best use of both international and domestic grain markets — the physical market  as well as the futures market.   

Expanding the Chinese Economy by Going Abroad
To expand the Chinese economy, the Central Government is encouraging Chinese enterprises to build two economies:  one in China and the other abroad to connect with the world and to optimize productivity and utilization of world resources.

      Since China lacks the types of multinational organizations found in a number of other countries and has no experience in mergers and acquisitions (M&A), its companies require substantial assistance if they are to establish a presence abroad.  To swiftly secure a position in the world market and to improve its trade position., which is China's goal, Chinese companies will have to actively engage in investment and M&A activities overseas as well as to establish its own multinationals.  

Cooperation with the Rest of the World
Globalization brings the world together, making members of the global community more dependent on one another, for better or for worse. China’s optimization of productivity affects the rest of the world as well as China. 

     Indeed, Forum participants were keenly aware of the dangers non-cooperation presents.  As emphasized by George Smith, Forum participant and President of the World Academy of Productivity Science,  “War anywhere in the world will interrupt the supply chain; so no one can tolerate a war, or terrorism.”  This sentiment was echoed by many other Forum participants.

Final Thoughts
China is reaching out to its neighbors and partners guided by the central government’s diplomatic policy of mutual cooperation.  Heard frequently among Forum participants are the two basic tenets of this policy: Treat your neighbors well and as partners; and make your neighbors harmonious, wealthy, and safe.

     Foreign investment helped China in its economic development over the last 25 years. Now the Middle Kingdom is going abroad to build its second economy.  This will benefit China as well as the rest of the world though it remains unclear which countries or regions will benefit most from the development taking shape in China. 

     I believe it will spur a major global competition among a number of countries in the world. Don't you?

Anita Tang is managing director of Royal Roots Global Inc., a management and investment consultancy she founded in 1994.  Headquartered in Chicago, the firm has a liaison office in Washington D.C. and associates in Hong Kong, Shanghai and Beijing.  Anita has eight years of experience working in Treasury in four major European banks.  In 1989, she started a trading and investment firm in Singapore, after which she established Royal Roots in Chicago.  A frequent speaker in Illinois’s and China’s business and academic communities, she holds an MBA from the Kellogg School of Management, Northwestern University.