CHAPTER SEVENTEEN
China’s Growth Markets
COASTAL CHINA, HOME TO 400 million people of mercantile and urban culture, has been the world’s fastest growing economy over the past decade. But now it, and the rest of the country, face formidable problems.
To prevent runaway inflation, thousands of unproductive and unprofitable state enterprises that employ millions of workers and are a key power base for the Communist Party must be dismantled. Social tensions are mounting as peasants stream into overcrowded cities where there is no housing, no health care, and far too few jobs. And a nationwide power struggle has begun in anticipation of the octogenarian leadership’s passing. Their successors may not be democrats.
Yet where the internal effects of China’s growth are unsettling, the external effects are potentially destabilizing. It is hardly a harbinger of peace that the Chinese military—with no foreign enemy in sight—eagerly snaps up whatever high-tech weapons a cash-hungry Russia offers for sale. And the world is confounded by a Chinese trade dragon that exports like a capitalist but imports like a communist. The world must find new ways to meet the challenge of this emerging power.
Trade is a good example. U.S. trade policy toward China should be based on the assumption that by the early years of the next century, coastal China might become one of the largest economic powers in terms of total gross national product, industrial output, and industrial exports.
Yet a conventional approach to bilateral trade problems may fail to target the fundamentally different kind of commercial relationship a modern China will need to have with the world. This is because China is likely to be the first country where the balance of payments rather than the balance of trade is the key to economic relations. Indeed, China may be the first country to be integrated into the world economy through services rather than through trade in goods.
To be sure, the Chinese market has to open to foreign goods. In many ways it is far more tightly locked than Japan has ever been. But even if China’s doors are fully opened, it is doubtful whether the country would become a major market for foreign-made goods. Despite the enormousness of its marketplace—more than a billion people with rapidly rising incomes—and an insatiable appetite for foreign brands, China will not import Coca-Cola and Levis. Instead, such products will be manufactured in China—by joint ventures, by franchises such as soft-drink bottlers, by licenses and by alliances of all kinds. (In 1993, Coca-Cola signed an agreement with the government in Beijing to invest $150 million in ten bottling plants in China over the next five years.)
The reason for this is compelling social necessity: manufacturing will be the primary vehicle to accommodate the Chinese peasant’s transition from the feudal countryside to the modern era. Within the next ten years, as much as half of China’s population might be employed in factories. Whatever can be made in China will be made there—and that means most manufactured products.
Bringing down barriers to the importation of goods into China has to be worked on, and hard. But far more important is creating a legal and administrative framework to enable a foreigner to do business in China as a partner. Laws today are often unenforced, sometimes even unpublished. There is nearly no protection for a licensor or minority partner and often little respect for intellectual property rights. A trade policy with China must establish and safeguard access to partnership.
All that said, the biggest market opportunities for foreigners in a fast-growing China are not in manufacturing but in services.
Consider, for instance, education. Despite a literacy rate of 73 percent, China’s university system is one of the world’s most backward and is unable to support sustained economic growth. There are barely 1.5 million college students in China, a proportion to population smaller than America’s a hundred years ago. Even India, with a literacy rate about half that of China, has proportionately nearly four times as many university students. Worse still, most Chinese university educations prepare students for bureaucratic careers that prove more useful for preventing others from doing than for getting things done.
Unless this changes, and changes fast, China’s growth will be aborted by a shortage of engineers and chemists, statisticians and accountants, physicians and nurses, managers and teachers. In a similar fix forty years ago, South Korea sent thousands of its young people to U.S. colleges for training; they then created the “Korean miracle,” which transformed a war-ravaged, rural country of profound poverty into one of the Four Tigers in less than thirty years.
But China’s education problem will not be alleviated by dispatching forty thousand students abroad every year, as it does now. What is needed is a massive and immediate overhaul of the country’s educational system—a job that can be done only by large-scale outside service contractors who design, plan, and set up the needed educational institutions. Qualified suppliers of such services do exist—the English polytechnics, for instance, are well trained in such endeavors, as are many American universities and colleges that generally provide educational contract services as a charitable activity.
Such generosity, however, ignores a potential market. If such ventures are organized and professionally run, there is money to be made. A number of American colleges already have branches in Japan, and it is not inconceivable that higher education will one day become America’s biggest “export” to China and the source of major export earnings.
Health care offers similar opportunities. Mao’s awed vision of a China cared for by “barefoot doctors” is as much a travesty today as it was thirty years ago. What is needed are experienced (and that means foreign) contractors who plan, design, build, and manage health-care facilities and train medical staff. The needed hospitals could be built quite fast; the American military’s field hospitals, developed over the past thirty years and tested in the Iraq war, provide a prototype.
Financial services, the circulatory system of a modern society, provide yet another major market opportunity. Chinese financial services are in worse shape than either higher education or health care. Simply put, China has a very high savings rate but no way to put the money to productive use. It lacks the legal structures for a financial industry; its financial institutions are primitive and its personnel poorly trained. An infusion of foreign commercial and investment banks, thrifts, insurance companies, mutual funds, and the reliable economic and business data they provide would help develop a system that the Chinese could not possibly develop by themselves, at least not to the extent they need to in the time they have.
What else does China need? It needs telecommunications and information services on a massive scale. The need is so great and China is so far behind that it will have to bypass a century of Western technology and leap directly into the more modern wireless forms of telecommunications—shortwave telephone transmission beamed directly into urban homes, microwave and satellite transmission to span the enormous distances in the countryside.
The same applies to China’s last major development need: transportation. China is blessed with excellent natural harbors. But few are developed well enough to handle much traffic or cargo. And the few that are lack roads and railways to move goods to the interior. Almost seven decades have passed since new railway lines were built, and many of those are narrow-gauge and single-track, have obsolete switching yards, and still run on steam.
The measure of success in trade relations with China is thus selling services rather than selling goods. This is surely not “free” trade. But no matter how desirable it might be, free trade is not a possible policy for China—at least not until the enormous surplus population from the farms has been absorbed into urban society and urban jobs.
A service-focused trade policy with China will be criticized, especially by trade unionists, for “not creating jobs.” But this is yesterday’s argument. In all developed countries the majority of jobs, especially of well-paid jobs, are precisely in those industries that would benefit the most from a successful service-focused trade policy: engineering, design, health care, education, management, training, and so on. What really matters is that these service areas are the ones where the emergence of China as a major economic power creates opportunities. They are where the markets are.
1993