Global: The World’s Only Growth Story
Stephen Roach (New York)
morganstanley.com
China is continuing to have extraordinary success in separating itself from the rest of the pack. That’s true of its economic performance when compared with the rest of Asia. It’s also true when compared with the rest of the world. Ironically, the Chinese, themselves, don’t see it that way. To them, China is still a poor country in the midst of a most daunting transformation.
This contrast between how China sees itself and how the world perceives China was the overriding theme of a one-week tour I have just completed of Beijing, Shanghai, Suzhou, and Shenzhen. Accompanying me were a diverse group of senior investors and industrial leaders from Europe, Russia, South Africa, and the United States. Some were seasoned China hands. Others were not. But all of them walked away truly staggered at what they saw.
In the macro business, it’s easy to get caught up in your own point of view. Since I go to China so often, I welcomed a fresh perspective. I last led a similar mission some 18 months ago. The contrast between these two trips is a great way to benchmark shifting perceptions about China’s journey. A lot has changed in the world since the spring of 2001, especially the context of a much weaker global economy. But as I look back at my notes from both of these trips, it’s the transformation of China that jumps off the page. What seemed so tentative to many a year and a half ago, no longer does. China has come of age in shaping its own destiny and in impacting the broader global arena. One the of the savviest and most seasoned investors on the trip, summed it up succinctly, "China is simply mind blowing."
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. It’s an increasingly challenging combination for the rest of the world to face. As one of more seasoned industrial leaders on our trip said, "I don’t know of anyone in the electronics business that isn’t contemplating a major investment in China to the tune of $1-2 billion per plant. Any company that doesn’t," he concluded, "will find its performance punished." Nor is there a problem with product quality. I heard this earlier on my Asian tour from the senior management of Sony in Japan. They stressed that there was absolutely no difference whatsoever in the product quality coming from Japan or from their five manufacturing plants in China.
We also saw the quality story first hand at Huawei, the giant Chinese counterpart of Cisco. With its vast array of telecom network solutions conforming to the international quality standards and protocols, Huawei’s cost efficiency loomed all the more formidable. As one of the investors said, "It’s easy to lose money in technology these days, but Huawei may have the best cost structure in the world to produce increasingly commoditized technology products. The high-cost industrial world isn’t even close." Nor is Huawei just about cheap, high-quality production. It is nearing completion on a new R&D complex in its Shezhen campus, a high-rise facility that can house up to 10,000 of Huawei’s engineers and scientists. China has long been criticized for its lack of IT innovation. Huawei’s massive R&D efforts promise to challenge that perception.
Which brings me to scale -- the third dimension of the Chinese economic miracle. China has never been small. However, while it contains fully one-fourth of the world’s population, it currently accounts for only about 4% of world GDP. China’s leaders continue to stress this latter statistic in minimizing China’s impact on the world at large. But it’s change at the margin that matters most in shaping global trends. On that count, there can be no mistaking the impact of China’s rapidly increasing scale. While China now makes up about 4.5% of global trade, Andy Xie estimates that the nation currently accounts for approximately one fifth of the growth in global trade.
Scale has always been China’s siren call. The generic refrain we have all heard for years, goes something like this: "If each of China’s 1.3 billion citizens were to buy only one paper clip a year…" That really misses the point. The past 20 years of economic development have raised the base for industrial output, exports, and even domestic demand. Huawei, itself, speaks volumes about the scale of China’s growing industrial clout. And it is only just the beginning. In Japan, I also met with Nissan’s management. They were astonished that their vehicle sales in domestic Chinese markets were surging by 80% from year-earlier levels; moreover, they stressed that the comparisons were not off a small base. Say what you want about the stereotypical Chinese worker making a dollar a day. There’s a critical mass forming in China that now puts the scale of its accomplishments in a very different light.
Which brings me to the bottom line of my latest sojourn to China: China is now beginning to come to grips with the global context of many of its macro problems. The senior officials we met with in Beijing were quite frank in expressing their concerns about global deflation. They were also convinced that an overvalued US dollar was ripe for a fall. Moreover, official Beijing now concedes that both of these developments have important consequences for China. This is a subtle but important shift. I detected greater concern on both counts than I did in several visits earlier this year. To me, that’s real progress. The difference comes in the sticky area of blame. China argues that it is an innocent bystander -- and a source of resilience -- in an otherwise shaky global economy. The rest of the world sees it differently -- that China’s emerging economic prowess is now part of the problem.
It’s tempting to find a scapegoat in tough economic times. It would be one thing if the world were booming -- there would be plenty of prosperity to share. But with today’s global economy in lousy shape, it’s more of a zero-sum game -- one country’s gains can often come at the expense of another’s. Such are the pressures and finger-pointing that China must now face. One of the investors on the trip summed it up best, "Just as the world must now cope with China, China must also cope with the world." 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. |
