"China is simply mind blowing."

Stephen Roach is just back from China, and he's impressed. He's seen the future, and he thinks it works. As he concludes "The global response to China looms as one of the biggest unknowns in the macro equation. It could well be the most important test of all for the world’s greatest growth story".

China is continuing to have extraordinary success in separating itself from the rest of the pack.

China’s economic progress is evident on three fronts -- breadth, depth, and scale. In terms of breadth, it’s all about China’s gathering success in moving up the value chain. That’s true of the shifting composition of its exports -- away from consumer softgoods and into increasingly sophisticated electronics and other forms of information technology. Andy Xie has calculated that high technology goods have accounted for 42% of China’s export growth in the year ending August 2002. But it’s also true in the shifting mix of its aggregate demand -- especially the emphasis on domestic demand. China’s growth dynamic is still heavily dependent on exports -- this segment of the economy accounted for 54% of total GDP growth in the first half of 2002. There is growing recognition in the Chinese leadership that such external reliance is excessive and must now change.

As such, support to domestic demand is now very much the focus of Chinese macro policy. The trick, of course, is to pull it off. Infrastructure spending continues to play an important role in this regard, but there are also budding signs of an emerging consumer culture in China, as well. That stands in sharp contrast to what was evident 18 months ago. Nowhere was that more obvious than in Shenzhen -- Hong Kong’s twin city near the mouth of the Pearl River. We had a fascinating meeting with Shenzhen’s dynamic and relatively youthful mayor, Yu Youjin. He was as impressive as any politician in the West, and was filled with energy in describing the explosive growth of this 22-year old city that now has a population in excess of 7 million. Shenzhen is loaded with some of China’s most dynamic and exciting companies; we met with two of the most impressive ones -- Huawei Technologies and Ping An Insurance. But the statistic that stuck most in my mind was Shenzhen’s youth -- a population with an average age of 29, making it perhaps the youngest major city on the world today. The streets are alive with shops, movie theaters, and car dealerships; there is even a Sam’s Club. You get a real sense that the birth of the Chinese consumer is now taking place in Shenzhen.

In terms of depth, China’s progress is also unmistakable. Infrastructure lays the groundwork. It’s not just roads -- now some of the best in the world. It’s also the wiring of the Information Age. We visited the Suzhou New District (SND), an industrial development zone about two hours west of Shanghai by car that has only been in existence since 1990. The 52-square-kilometer area comes complete with its own fiber optic telecom grid. From Motorola and Dupont to Sony and Canon, some 614 foreign multinationals have set up business in the SND. We spent some time with Solectron, a leading electronics outsourcer, and learned first hand of the appeal of China. Due to the global IT slump, Solectron has pared its worldwide headcount by 30,000 over the past couple of years; however, its staffing in China is going the other way, led by a doubling of its current facilities in Suzhou.

Yet there’s more to infrastructure than just highways and telecom cables. It’s also about human capital -- scientists, engineers, and the development of a new managerial class. The Chinese are the first to concede they have a real problem on the management front: The legacy effects of a planned economy left a glaring hole in this key segment of the labor force. To get a better understanding of how China is attempting to overcome this problem, we spent part of the afternoon at one of China’s leading new business schools -- China Europe International Business School in the Pudong area of Shanghai. The briefing from the CEIBS administration was impressive, but the students said it all. Bright, inquisitive, well-informed, articulate, and energetic, they compared favorably with any we had run across in the West. China has been lagging in its investment in human capital. A recent paper by Nobel laureate James Heckman found that China’s public expenditures on education stood at just 2.5% of its GDP in 1995, less than half the 5.4% ratio in the US but not all that far from Japan’s 3.6% share. As efforts such as those at CEIBS expand, I believe there is nothing but upside to China’s potential on the human capital front. The combination of physical infrastructure, human capital, and new technologies speaks volumes to the ultimate arbiter of China’s depth -- productivity enhancement.
Source: Morgan Stanley Global Economic Forum
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