With each passing year, China's hyper-growth story continues to inspire a mixture of awe and fear among commentators and business executives in the West. And I expect a forecast released on May 22 by the global accountants PricewaterhouseCoopers will ratchet up anxiety levels even more. In a crystal ball macro-economic modeling exercise, Pricewaterhouse sees China overtaking the U.S. as the world's biggest economy by 2050 if you adjust currency exchange rates to match forecasted living standards mid-century or so.
Now, I have nothing against this kind of forecasting (even if this particular example surely won't hurt PricewaterhouseCoopers' own business prospects on the Mainland). Such efforts are interesting exercises, and the company is clear about its methodology and forecast assumptions.
The report, entitled "The World in 2050," also puts forward thought-provoking predictions about other emerging economies, such as Brazil, India, and Russia. It makes reassuring noises that the rise of these societies will offer up huge trade opportunities for the U.S., Japan, Germany, and other nations that are going to fall down in the pecking order of big economies. (You can download the report for free by filling out a quick registration form at pwcglobal.com.)
QUESTION OF RELIANCE. Yet the real issue -- whether you're thinking in terms of now, mid-century, or in the year 2100 -- isn't really which economy is the biggest. Rather, it's which economy is home to a preponderance of world-class companies? By world class, I mean those that enjoy leadership in technologies that matter and are hard to duplicate, and those that kick tail in economic productivity. These metrics, much more than aggregate gross domestic product, really determine the quality of economic growth and living standards.
The question isn't whether China's economy will continue to grow by leaps and bounds. It most assuredly will. But what if several decades out, China is still heavily reliant on foreign technology and investment from the industrialized West and Japan? Right now, the Chinese seem to be asking themselves that very question.
Decades ago, China made a strategic decision to modernize and then opened itself to foreign capital and knowhow to get there. Ever since Chinese leader Deng Xiaoping abandoned the insular policies of Maoist economic self-reliance in the late '70s, the Chinese have been anything but doormats. Entry by Western and Japanese companies has always come with strings attached regarding technology transfers, and some sectors were cordoned off entirely.
TRADE TRENDS. Still, China has absorbed more than $600 billion in cumulative foreign investment since opening up. It's the No. 3 global trading nation in volume terms. And its economy is far more open than Japan's in terms of the ratio of imports and foreign direct investment to total economic output. Millions of Chinese have been lifted out of poverty along the way. Any way you look at it, this is a remarkable achievement by post-Deng Chinese leaders.
But there are some disquieting trends. Take China's global trade surplus, which more than tripled, to $102 billion in 2005 over the previous year. (Its surplus with the U.S. clocked in at about $202 billion.) Approximately half the exports coming out of China are actually from big foreign multinationals, or joint ventures they back, that use the Mainland as a production base. They sell most of that stuff in China but also re-export to other markets.
In the Chinese high-tech sector, the percentage is actually closer to 90% penetration by foreigners. Motorola (MOT) and Nokia (NOK) are among the biggest Mainland exporters. Meanwhile, virtually all of China's booming domestic auto industry has been economically colonized by foreign brands (see BW Online, 5/17/06, "What Drives China's Car Buyers").
Global auto companies such as Volkswagen, General Motors (GM), Toyota (TM), Nissan (NSANY), and Honda (HMC) dominate market share on the Mainland. At the same time, global banks such as HSBC (HBC), Bank of America (BAC), Goldman Sachs (GS ), and Citibank (C) are making serious inroads into China's rapidly growing banking and financial services markets (see BW Online, 2/6/06, "Banking on China's Reforms").
HOMEGROWN AUTOS. American companies such as Caterpillar (CAT), Coca-Cola (KO), and Eastman Kodak (EK) are doing extremely well on the Mainland. Indeed, as of last year, nearly 50,000 U.S. companies operated on the Mainland, and they have invested $51 billion in China since the early 1980s, according to China's National Development & Reform Commission. About 81% are profitable. For some companies like GM and Ford (F), China has been an earnings lift that has helped offset big troubles at home.
There are signs the Chinese are starting to worry about the competitiveness of key Mainland companies. In autos, Beijing has urged such companies as Chery, Geely, and Shanghai Automotive to work harder to develop more of their own brands and exports for foreign markets. That's definitely going to happen, but whether China can field globally competitive auto brands is still an open question. Unlike the Japanese back in the late '70s or so, Chinese carmakers don't have the huge edge in manufacturing efficiency Toyota or Honda enjoyed back then against U.S. and European rivals.
MIND THE GAP. That's not to say China doesn't have companies that have tremendous promise for the years ahead. Lenovo, Shanda Interactive, Haier, Huawei Technologies, and Baidu.com, for instance, could all emerge as first-class players. And the American, Japanese, and Western European economies have major challenges of their own -- budget deficits and aging workforces to name two -- that if left unresolved could easily relegate them to second-class status several decades out.
Right now at least, China is still heavily reliant on foreign capital and technologies -- and the gap with advanced industrialized economies is still considerable. Changing that is still a huge developmental challenge for China. The Mainland will emerge as a giant economy of the 21st century, no question. But it's far too early to say whether it will be among the most competitive ones.
Brian Bremner is BusinessWeek's Asia Regional Editor based in Hong Kong
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