China experts generally fall into two polarized camps: starry-eyed optimists and self-righteous pessimists. The former are convinced that China will become a peaceful superpower and a pillar of the global economy. The latter survey the PRC's unproductive industry and morally ambiguous commercial terrain with premonition of disaster. Oligarchic dictatorships and capitalism don't mix. The country's economic institutions are primitive and, worse yet, schizophrenic. It's a Communistic bazaar, a clanging oxymoron destined for either implosion or explosion. China both enrages and inspires. So, where are we?
The Pitfalls
Robotic Programming. The Doubting Thomas's aren't crazy. Anyone with a yen for bursting bubbles need only spend an hour at Pudong International Airport, Shanghai's municipal disgrace. From afar, the French structure is magnificent, broad shouldered, thrusting skyward. Inside, everything is designed and produced locally, on the cheap, a disastrous embarrassment to a city with cosmopolitan pretension. It's inhuman and ultrafunctional, albeit inefficiently so. The moving sidewalks are absurdly narrow; a poky, passive-aggressive traveler can slow everyone behind him to a crawl. (Now that's power!) Putrid bathrooms are underground and, in the entire building, there's only one elevator. Escalators only go down but never up. Second-rate signage marring third-rate stores scar the entire shopping arcade. Prada sits adjacent to the "International Shop," a bin of stuffed pandas and faux cloisonné. Departures are unreliable and, worse, delays are unannounced and unexplained. Gum wrappers set off alarms, prompting agents to tug, pat, and grope every body part. Customs feels like a refugee camp. Lines are interminable. All planes are scheduled to arrive and depart at the same time, clogging the single runway. Immigration officials are beyond surly; they're robotic, preprogrammed to remain dead faced or scowling. "Customer service" is an alien concept to the automatons who oversee baggage scanning. Tumbling suitcases pile out of x-ray machines and there's no one to help organize anything; it's not part of anyone's job description. The attendant "only handles baskets." The compartmentalized, sclerotic bureaucracy isn't flexible enough to deal with unforeseen complications (e.g., rain). It simply can't respond; instead, it freezes, foreshadowing collapse.
A Parallel Economic Universe? On a broader scale, China's economy is fraught with danger and head-scratching contrasts. Ostentatious wealth coexists with crushing poverty - on the same city block. The country's private enterprises are dynamic while the majority of state-owned enterprises are dinosaurs -- bloated, profitless corpses straight out of nightmares. Capital allocation is inefficient. The banks lend to curry political favor, usually on behalf of coddled state-owned enterprises (SOEs), rather than to optimize wealth. Most private companies can't get a loan from the Big Four banks. Despite overcapacity in key sectors (autos, steel, cement, real estate), interest rates are frozen and so is the renminbi, China's currency that is, for all practical purposes, still pegged to the dollar. Hot money is flooding the market, potentially destabilizing the entire financial infrastructure. Rampant corruption impedes efficient investment or horizontal integration. Managers are more focused on currying political favor than maximizing long-term return. At most local companies, the two-hour lunch cum nap is an institution. Books with scary titles -- The Coming Collapse of China -- have hit the bookshelves. Is the wave crashing?
The Potential
Faith in Pragmatic Incrementalism. No one knows. Truth be told, confidence in China's future is an article of faith. But even religious conviction can be underpinned by reason. In the PRC, straight-line projections are hazardous. The Chinese believe that destiny is cyclical, constantly changing, shifting from yin to yang and good times to bad. As a result, both the central government and the Chinese people anticipate and prepare for crisis. More often than not, they skirt it. SARS was nipped in the bud with draconian tactics. The country's "soft landing" may yet be realized. (Knock wood.) Fortune can't be fundamentally altered but it can be managed. It is no coincidence that China is the only country on earth run entirely by engineers, masters of micro-analysis. The PRC is a technocrat's ultimate fantasy. The West regards China's enigmatic contradictions as fixed variables, insurmountable obstacles on a treacherous road to modernity. But the Chinese are brilliant at weaving around barriers; across millennia of history, they have adopted a splendidly detailed, realistic worldview. The power structure's embrace of Wal-mart is but one example of pragmatism. Equipped with radar that anticipates threats, the Chinese have disarmed skeptics over and over again. They will continue to do so. While a rosy outcome is never assured, we can push fear and occasional anger aside to embrace hopeful admiration. The Chinese dragon will, ultimately, evolve into a productive and affluent member of the world community.
Economies of Scale. Warning: the following opinions will be expressed without the consent of McKinsey & Co. China's economy, while not fully hatched, is amazingly diverse given its low per-capita income and emerging market status. As mentioned earlier, the PRC has an endless supply of cheap labor. (Or does it? A few rural disturbances and pockets of migrant-worker shortages in Guangdong are said to signal the end of the low-cost gravy train, but few buy this. Sixty percent of citizens still live down on the farm. Although the pace of urbanization is amazingly rapid, China will have under employed workers available thirty years from now. ) And the Middle Kingdom is more than a cut-rate flea market. From silicon chips to industrial molds, its prowess in value-added sectors makes managers from Germany to Thailand break out the Pepto Bismol. Business Week hyperventilated that "The China Price" were perhaps the spookiest words since "prosperity is around the corner." To boot, different regions now specialize in different sectors (e.g., auto components in the South, telecommunications and information technology in the North), facilitating the formation of supplier-and-producer clusters that slash transaction costs. What's more, the emergence of China's new middle class completes a virtuous investment-production-consumption circle, the same one that allowed America to become an industrial powerhouse in the twentieth century. Currently, there are approximately 100 million middle income individuals with enough disposable income to purchase nonessential goods; by 2010, there will be 200 million.
Respect for Institutions. Second, the hope that China can evolve into a rule-based society is more than a hazy pipe dream. True, China's courts are partial to local interests, and civil rights essentially don't exist. The business world is still dominated by a web of impenetrable guanxi-obsessed wheeler-dealers (in Chinese business, guanxi is a network of cozy relationships based on a "you scratch my back and I'll scratch yours" mentality), not risk-sensitive banks. And the Communist party, while not opposed to carrots and sticks, ruthlessly protects its hold on power. But we shouldn't underestimate the impact of the WTO. For the first time in China's history, the PRC is poised to benefit from structured relationships with other countries and international institutions. China's most impressive characteristic has always been, and continues to be, a holistic worldview. It has always had wisdom to recognize the strengths of other cultures and leverage them in a Chinese context. (When a Starbucks opened in the Forbidden City several years ago, it was considered an integration of East and West rather than a betrayal of tradition. It was only recently forced to close down due to an fire storm whipped up by an internet agitator.) And, unlike in dynastic times, today's give-and-take will be optimized by the rule of law. During the Han, Tang, and Ming dynasties, the Middle Kingdom had extensive dealings with other governments and embraced many foreign ideas (e.g., Buddhism). But the relationships were never institutionalized; they existed at the discretion of an emperor. This isn't the case today. Multilateralism is conventional wisdom, in both "hegemonic" America and "dictatorial" China. Another factor that shouldn't be ignored is former President George H. W. Bush's much-maligned New World Order. Despite his problem with the vision thing, he had a point. Terrorism and neo-McCarthyism notwithstanding, China's outside links are being established during relatively stable domestic and international circumstances.
China, post-accession to the World Trade Organization, is slowly but surely integrating itself into the fabric of the global trading system and, this time, no side has a clear upper hand. Import duties are falling. Services, including banking and investment, will open to foreign competition, an utterly unthinkable proposition just a few years ago. Even the advertising industry, now burdened with exorbitant taxes and restrictive joint ventures, will open up. (That said, as long as the Communists remain in power, media ownership/content will always be strictly controlled. Any liberalization will be cosmetic, designed for propaganda purposes. ) Intellectual property rights, while still largely ignored (92 percent of all software is licensed illegally), are a hot topic. In short, China will be forced to play by the rules - laws designed to promote efficiency and spur growth - or it will be bounced from the party. China simply can't afford for that to happen, lest the grand Job Creation and Urbanization Paradigm crumble to pieces, an outcome that would be nothing short of disastrous, not just for China but for the world.
Mass Ambition. Third, and most fundamentally, the Chinese are, in the end, an amazing, even inspiring, people. Each of the above arguments is coldly rational; they can be debated, dissected, picked to pieces. However, anyone who has spent any length of time in China will be impressed by the dynamism and intelligence of its citizens, at least the ones not crushed by industry or bureaucratic implosion. Westerners think the outside world is, more or less, safe. Chinese believe it's dangerous; life is precarious and can't be taken for granted. To survive, let alone advance, adaptive traits are required and the Chinese have them in spades. They are cleverly resourceful. They boast a broad (albeit ethnocentric) worldview and are fascinated with anything new. Anti-individualism fuels a patriotic fervor that unifies the nation behind a common goal of national advancement. A profound respect for intelligence, the ultimate weapon in a dog-eat-dog world, has created a country that reveres the scholar. Their mindset emphasizes knowledge over might, defense over offense, skill over brute force, concentration over impulse. Smart kids are actually cool. Parents would sell their souls to get their children into Harvard. As a result, Chinese are analytically and tactically brilliant. While creativity is not China's forte, dazzling application is. The Chinese are, simply put, the most striving, ambitious people on the planet and that counts for a lot. They are pragmatic yet human, wary yet hopeful, patient yet quick to respond.
Some commentators suggest we are living at the start of the Chinese century. This is a bit much. As Morton Abramowitz concluded years ago in a critique of Asian triumphalism, economic strength is not enough. "In an interdependent world," he wrote, "those that aspire to lend their name to centuries must also have political strengths and value systems that enable them to project influence persuasively." On a diplomatic plane, the PRC is increasingly proud but still insubstantial. It will remain so until the Communist Party cedes its monopoly on power. Furthermore, enduring leadership - both economic and political - is lubricated by "responsive innovation," a quality nurtured only in democracies and societies rooted in individualism.
But the China market is real. The China opportunity is real. And we had best accept this new reality.