This is the question Andy Xie is asking. His answer: yes and no. Yes it is unstoppable, barring an anti-globalisation back draft, or an own goal. My own view is that the former is extremely unlikely given the force of this wave of globalisation, the fact that China is a customer as well as a supplier, that the negative network effects of shutting the doors are enormous, and finally, that putting China out of the picture really would leave a global economy running on half an engine (the post-bubble US). The own goal scenario is far more preoccupying. The recent SARS epidemic shows the difficulties a non-democratic China has in handling information, and these difficulties don't seem set to go away any time soon.
China does not appear to have any credible competitors in terms of global production location. Its labor quality and low-wage and high-savings rate make it an ideal production base. Its export price level is driven by internal rather than external competition. That China is a factory for the world is already a fact. Investing in China is increasingly a competitive necessity for multinational corporations. Global prices for manufacturing goods are being defined by Chinese costs. For survival, multinational companies are virtually undertaking most of their capex in China to stay in the game. China appears to be an unstoppable machine of competitiveness. Multinational corporations are rearranging the global economy around China’s competitive advantages. In my view, there are only two extreme scenarios that may stop China’s march towards becoming the biggest industrial powerhouse in the world. First, the world may rebel against globalization. Second, an internal event may decrease China’s competitiveness.Most pundits give significant odds to the first scenario. I disagree. China defies ‘us-versus-them’ analysis. Its model of development is to latch onto the global economy at every possible docking point. No other big economy developed in such a fashion. The Japanese model, for example, attempted to generate all indigenous capabilities necessary for a modern economy. These abilities then manifested through local companies that became globally competitive.
In contrast, China imports whatever capability it does not have. Any Chinese semiconductor company will speak volumes for China’s open-door approach. Its equity participants may include global technology companies, international private equity funds, and local government interests. Its management comprises mostly overseas Chinese engineers who worked with global technology companies for many years. This is why China was able to get its technology sector started so quickly. This is not the end of the story. If it were, China would be turned into a high-cost economy. Such technology companies hire large numbers of local workers who lack experience and, hence, receive low pay. However, over several years, they are likely to take over such businesses. By that time, expatriate talent will probably have to accept local pay or move on. However, equity awards for joining such companies should offset this risk. China, essentially, is totally capitalistic and color-blind in how it creates its competitiveness. A backlash against globalization is mostly about the demand side. No matter how competitive China is, it will grow much more slowly if cut off from wealthy customers in developed economies. That risk is quite low, in my view. The demand side that links China to its customers spreads its benefits to layers of interests in multiple countries. China-made products are mostly sold under existing western labels. A large number of companies in the world have built their franchises on passing the benefits of China’s low costs to wealthy customers in their home markets. Cutting off China would be like cutting a limb from one’s own body. As long as China remains passive in the global economy, I believe its industrialization and globalization will continue to move forward hand in hand.
In my view, only China can trip itself up. No economic force outside China is powerful enough to do so. This is why Chinese leaders are extremely careful about maintaining internal stability. The motto of the late Deng Xiaoping, ‘Cross the river by touching stones’, represents the best summary, in my view, of how Chinese philosophy handles issues that arise from its industrialization. China’s cautious approach works well most of the time...........
As China’s globalization deepens and its populace becomes more exposed to modern lifestyles, the cautious approach also brings its own risks. The SARS epidemic is such a case. Bureaucratic caution conflicted with the need for a quick policy response to the spreading of a new contagious disease. The good news is that China’s senior leaders now consider SARS a top issue. Chinese bureaucrats usually solve problems efficiently when they receive their marching orders. The SARS crisis will not be an exception, in my view. How China’s bureaucracy dealt with this issue in the absence of senior leaders’ attention speaks volumes about its relationship with the people and its critical weaknesses. Chinese bureaucrats believe that they know best what is good for the people and are inclined to make decisions on their behalf whenever possible. Tension is now being generated between the central role of the bureaucracy in Chinese society and the needs of China’s globalization.
The Chinese bureaucracy has one critical weakness, in my view. Its relationship with people is modeled on that between parents and children. This is why the bureaucracy (1) always tries to tell people what to do or think and (2) never manages to get corruption fully under control. Chinese bureaucrats believe in their superiority and have no compunction about making decisions on behalf of the people. The other side of this coin is that people feel inferior to bureaucrats and dare not think of changing official behavior, which can make official corruption a huge problem. How the SARS issue was first handled reflected the traditional thinking of Chinese bureaucrats. It wasn’t judged as a serious development. In a Chinese context, it did not look so. Industrial accidents kill far more than such a contagious disease. Panic would have caused economic chaos. The bureaucrats involved were essentially making such tradeoffs for the people when deciding how much information to release. What was lost was the people’s right to know and to modify their behavior for self-protection. The value of the individual versus society is the issue here. China’s bureaucracy has difficulty grasping this notion...........
China’s future depends on its bureaucracy. Its power derives from its economies of scale and its information advantage. No other organizations in China can compete. Advances in IT technology may erode its information advantage. How it responds to the spread of information will determine what kind of country China will become, in my view.Not everyone looks upon the rise of China favorably. Export-oriented manufacturing economies in Asia are being priced out of the global economy by China. They are being gradually forced into retirement and to live off their savings. Even though they trumpet access to China’s growth to project an optimistic outlook, their view could quickly change if they were to see an opportunity to slow China’s advances. The SARS incident has become a rallying point for some to make China look bad. It could become a real problem for the economy if multinational corporations were to change their view towards China, but I do not expect this to happen at this point.
Source: Morgan Stanley Global Economic Forum
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