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The emerging economies of Brazil, Russia, India and China, or BRIC bloc of countries, represent 40 percent of the world’s population and together, a growing economic force. Throughout the next six weeks, Chris Devonshire-Ellis will travel to the four BRIC nations to observe the impact these countries are having on one another, and the impact they are having on the world. In this first article he focuses on the biggest economy of the four, China.

By Chris Devonshire-Ellis

BEIJING, Sept. 30 – China’s rise to dominance as a global manufacturing powerhouse has been as spectacular as it has impressive. Twenty years ago, as I stood on the Bund in Shanghai, a small sense of a city about to reawaken was in the air. The clock on the old HSBC bank building chimed the hour, and with the mid-1800s colonial buildings lining the waterfront, the city reminded me rather of Liverpool in England – somewhat genteel, a faded traded history and a sense of mildewed decay however permeated the air. Near the Peace Hotel, elderly couples paid 1 jiao to dance the tango from a selection of old 78s a vendor possessed. Some restaurants wouldn’t let me in as a “capitalist,” and it was forbidden for a foreigner to possess RMB. The massive department stores on Nanjing Xi Lu sold piles of Soviet-made rubber boots, and an evening meal could be a roast sparrow on a stick from the night market located just where Armani’s store at 3 on the Bund is now.

It’s not necessary for me to recount the oft told amazing story of China’s renaissance and deliverance into the global business and diplomatic community. It’s been told many times before, and book after book promise to advise executives how to do business in China and get rich. Yet, 20 years later, the China I see still has many of those same, original, unchanged characteristics. To me, it’s often a case of the emperor’s new clothes. China has changed, but as I travel through the BRIC countries (Brazil, Russia, India and China) in this new series and reminisce about the one country I know better than the others, I realize with a sense of partial surprise I have actually witnessed nothing at all, and in many key areas, China has remained the same. This then, while global journalists wax lyrical about the new China having discovered it since last summer’s Olympics, is how it really feels like to be here from the perspective of a 20 year plus China veteran.

Change for China
The key to China’s success is the massive improvement in living standards and the creation of new wealth that the Chinese of today have achieved. Long gone is the communist lady who refused to serve me in her restaurant, gone too are the “friendship” stores and their bottles of imported “luxury” whisky bottles (Johnnie Walker Red Label) and Marlboro cigarettes. All sales outlets, from department stores to hotels are now friendship stores, and staff are eager to serve, and the more expensive the consumption the better. Bars now have a selection of imported malts, Krug can be ordered and quaffed down with the finest Chinese cuisine. Michelin stars are awarded to Chinese restaurants, and the world’s finest chefs indulge in Beijing, Shanghai and Hong Kong tours and open their restaurants where before I was barred entry as “undesirable.” China is now open for business to the international community, but to what extent?

Acceptance of foreigners
China has been the largest recipient of foreign investment, ever. Over the past 20 years, a staggering US$997.9 billion has poured into the country. In most countries, this would trigger a boom on the stock exchange, and locals would clamor to get into the demand for growth and make their millions on buying low, selling high as investment poured in. While China has indeed established stock exchanges, it is wise to ponder a curious fact; despite the massive volumes of foreign investment into China, foreign companies and subsidiaries of foreign companies remain banned from raising money on China’s stock exchanges, or indeed from sharing their assets with the people of China. Out of all that foreign direct investment, not one investor has made it past the ‘regulator’ and been able to list in mainland China.

Stock markets as a government controlled tool
Consider this as well, of all the Chinese stocks that are listed in China, 90 percent of them are owned directly or indirectly by the government. China is happy to allow foreign businesses speculate and invest in China, and to take all the risk. But when it comes to allowing foreign companies to access the very markets they have invested in, often helped create, and certainly develop, they remain left out in the cold. It’s hardly a great way to treat the global business community, and this needs to change. There are signs that this may alter, but it will be a slow process, and only for those selected by the Chinese government, such as the expected HSBC listing. That’s selective capitalism, right there. Quite simply, despite all the media attention, China’s current stock markets are not a market indicator and remain far from being a barometer of domestic sentiment. No other exchanges operate under such restraints, yet the “new” China stocks are quoted globally. Why?

Government in business
With 90 percent of all traded stocks being in essence government owned – usually through state-owned enterprises or their subsidiaries – the Chinese government has a massive involvement in business. It’s not a case of deregulation; it’s almost a case of a complete lack of transparency. The same government runs the regulatory body, the courts and the banks. Doing business in China twenty years ago often meant spending time with local government officials, drinking baijiu and doing a deal. It’s the same today, with one exception; the process is now completely institutionalized. The government owns much of China’s business and so doing business in China means doing business with the government. That is a problem, if there is a problem on your side, and the state controls and interprets the law. China’s state control over commerce, both domestic and foreign invested, has gotten more entrenched and has not rescinded.

Lesser, not greater transparency
I also believe that as China has developed, the government has developed far more roots into all aspects of daily life and business than was previously the case. Institutionalized control permeates every aspect of Chinese society. Here, executives would do well to recognize the principal aim of the government is not actually to promote trade. That is a secondary concern, and even one that can be set aside for a time if need be, with the set aside enacted via law. As a one party state, the government’s overwhelming objective is to remain in power. Anything else comes after. The implications of this entrenched policy are as huge as they are uncertain, and this remains, paradoxically, both China’s greatest strength, and its weakness. Historically, China has always fallen prey to change through revolution, a situation the current government knows only too well; the Communist Party itself came to power only after a brutal civil war. Yet change for China in this manner would be a disaster. Revolution in overthrowing the government would now lead, at least temporarily, yet significantly, to world chaos. Plus China’s growth and development over the years has been precisely because of the one party system. No opposition; and the removal of protesters is simple. It is why China has been able to develop at a pace that will far outstrip another BRIC, India. The governments grip on power has only increased, and inevitably, no quarter has been given on providing transparency. It simply isn’t there. However, the flip side is that removal of opposing voices also destroys a sense of reason, an alternative view. In denying itself this, and sticking only to communist-style principles, China is systematically removing an alternative voice of reason from its own judgmental process. But does it matter?

Stability through growth
While China has been able to maintain GDP growth at a 9 percent clip over the past few years, things have been fine. The Chinese have generally become wealthier, yet problems still remain, and some old problems are starting to reappear. The disparity between the wealthy and less wealthy has grown. Resentment between disadvantaged minorities and the Han Chinese have begun to flare up. The lack of transparency has lead to increasing numbers of scandals through a lack of monitoring. Chinese children drink deliberately contaminated milk, made so through profiteering ahead of safety, and are stunted from lead and other toxic pollutants as government officials cut through environmental red tape. Yet parents of affected children are unable to pursue litigation against the responsible state-owned enterprise’s executives. The state alone deals with the issues, provides compensation, and punishes errant officials itself. But does it? With the State arguably culpable, prosecution of government officials is warned off. Yet this leads to the same errors being repeated, over and over again. China’s recent growth has come at a price that is only now starting to manifest itself in human costs.

China’s own economic model too, has seen signs of stress. An economy 40 percent dependent upon exports, exposed to an American slowdown has seen hardships arise, layoffs, and government bailouts. China’s challenges are multiple; to reposition the economy to a broader model of production and consumption, to put right previous industrial wrongs, to spread wealth evenly about the country, and to maintain a 9 percent growth rate. China’s challenge is that if any of these component parts fail, China will endure a series of domestic social problems. The potential for conflict between the Government and its people remains high. In pursuing growth so aggressively, China has developed fault lines that have the potential to make it less stable than it was during the Utopian days of a closed, communist society.

Insecurity
China also, in my belief, continues to feel insecure. Whether that is a legacy of the one party state is possibly a cause, however the government’s continuing involvement in politicizing the arts is a cause for concern. In accepting an honor to be the featured nation at this year’s Frankfurt Book Fair – the world’s largest literary event – it had an opportunity to show off more than 2,000 poets, artists and writers more ancient and contemporary. Yet its threat to pull out of the event due to a China dissident being given a platform to speak smacked of a meddling in individuals’ opinions. In contrast, another BRIC nation’s premier theater, the Mariinsky in St. Petersburg, Russia has recently officially reverted to its pre-communist name (it had until recently been known as the Kirov, after a Soviet-era general) and has removed the hammer and sickle badge that hung above the stage. It is hard to imagine China following suit and removing Mao’s portrait from Tiananmen. Russia had a hard time of it in the 1990s but its art is now free and the nation has a new confidence beyond communist symbolism. China still lags behind.

Desecration of history
China, also uniquely among the BRICs, and possibly elsewhere, has demonstrated an almost cynical relationship to its past. While Russia has gone through its own upheavals and recent changes into a partial democracy, along with it has come a resurgence of what it means to be Russian. The previous, banned icons of church and the monarchy are now re-evaluated, and newly remembered and revered. The Hermitage and Armory recall days of Czars in all their splendor, Russians regard them as historic, yet part of history, and of their culture. India too retains its many temples, buildings, and artifacts back to the days of Imperial Britain and beyond. Yet China subdues its past. Embarrassed by the splendor of the Last Emperor, or even the attempts by the Republic to introduce democracy, the Forbidden City is kept quaintly shabby, while churches remain closed, and the state appoints bishops and lamas. China continues to desecrate its past, in order to project the gleaming spires of the new. The one party state can endure no competitors, and the quite frankly appalling retro taste of many Chinese towards an imagined past bears little resemblance to the actual glories the nation was once capable of. Russia and India remember and revere their past, China, politically, has elected to erase it.

Pragmatism
The Chinese are often referred to as pragmatic. Often, that’s a disguised way of saying they can get things done, which reflects back to the one party state model, not to a nation’s psyche. Yet I feel China today is far less pragmatic. It is becoming a nation of dangerous dreams, of claiming more than it deserves. With a one child policy in place for much of the past thirty years amongst educated Chinese – the policy applies in the main to those residing in cities, and is not, as is commonly believed, nationwide – China has grown now two generations of so-called little emperors. Pragmatic these children – some now approaching mid-thirties – are not. Spoiled, lacking social intercourse skills, or the natural competitive nature of siblings, they are amongst the least pragmatic people on earth; expectant, demanding and arrogant, China’s future social problems lie in these individuals. India, which currently has the world’s fastest birth rate, closely followed by Brazil, remains pragmatic. Children growing up and learning to share and enjoy the rough and tumble of an early life breeds a healthy generation gap. Russia’s population has been declining but shows signs of picking up, and increasingly the Russian government is also incentivizing its nationals to have children. Multisibling generations grow up to be pragmatic, tolerant and largely worldly-wise. The new Chinese generations are to develop into a problem that will be felt globally, and not for the common good.

Conclusion
That China has been the developing star of the past twenty years is beyond doubt. Yet more than ever before, the nation’s problems, and its ability to move ahead, seem to be greater than before. It’s leaders, while educated, well meaning people, will have to start to wean themselves off the one party state model if the country is to continue to succeed. It needs democracy at the very least as a safety valve against dissent, and its needs alternative political opinions to help solve its many problems. Investment into China is also changing by way of evolution. The country needs to re-balance its economy, and that means less cheap export driven manufacturing and more focus on the development of the local economy. China may never be a nation of 1.2 billion consumers, but the China of the last 20 years is now more on the path to providing this opportunity than ever before. However, obstacles are in the way. Investors now have to contribute increasing amounts of capital and pre-tax profits to China rather than themselves. China’s mandatory eight day holiday for the national day celebrations are a case in point – factories employing staff over the holiday have to pay double, and in some cases triple time. China’s opportunities lie now in selling and providing goods to its domestic market. But for companies intent on doing so, the China price of business is likely to be rather higher than imagined. Looking further, China’s problems – particularly its social issues – are going to start to slow it down. Those will rear their heads in ten years from now. This next decade will prove to be the last for China’s rapid and dependable growth unless major political and social reforms are put in place to deal with them.

Author’s gut feeling
GDP growth rate 2010-2012 to average 6 percent

One U.S. dollar to equal RMB7.6 by end 2012 (U.S. dollar strengthens on global recovery; China’s economy slows in parallel yet opposite directions)

Related:

• The Russia BRIC: Low Taxes Key To Investment Diversity
• The India BRIC: Mumbai Has The Global Buzz

Comments are welcome

Next week: Russia

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He is now based in Mumbai.