I think it’s safe to say that with it’s huge leaps and bounds China is always at some sort of crossroads, whether it’s dealing with organized labor, promising national health insurance, launching a soft power campaign or what have you. One of the smartest China hands, David Wolf, has an excellent piece in Ad Age China on perhaps the most important crossroads of all, the economic one, and on what it means for foreign companies doing business there.
Suddenly, just as people in China were starting to wonder if they still needed foreign capital and know-how, we went and proved to the Chinese that we were greedy, dumb, and actually needed China’s help to pull us out of our own mess…
Not only did that that gave the government the opportunity to put an end to policies that favored foreign companies in China, it was also a signal to the Chinese people that they could no longer take for granted that foreign brands were better than their local counterparts. Maybe they were just overpriced.
China, in other words, is starting to say “no” to our employers and our clients, and the above trends suggests that this is likely to get worse. Smart Chinese competitors are figuring out that they have an opportunity to take back some of their home turf, and they are refocusing their efforts on domestic operations.
This doesn’t mean, however, that China has all the answers, and is gliding through the crisis. Wolf spells out why China isn’t out of the woods, and why the current economic crossroads is so critical, and tenuous.
The global financial crisis has revealed the fundamental weakness of the nation’s export-driven economy: even in a healthy financial environment, the world cannot buy all of the goods China needs to sell to sustain 8-10% growth indefinitely. With no social safety net, Chinese consumers are focused on saving, and industrial productivity is so embarrassingly bad that nobody even talks about it.
Political stability in China is built on an unspoken social contract: the government delivers constant improvements in opportunities and lifestyle, and the people accept single-party rule, warts and all. Delivering on that promise is getting harder as China’s export engine sputters, as inflation grows, and may become impossible if the stock-market and real estate bubbles burst and the middle class demands that the government cover personal losses.
A thought of my own that popped up while I was reading it: The “Chinese financial crisis” is a phrase we don’t hear much anymore. I think we’ve been almost hypnotized into believing there is no economic crisis in China, that it was all about the US, and then Europe, with Asia remaining largely invulnerable. Indeed, a powerful meme took hold among financial writers over the past year, portraying China’s authoritarian system as superior in many ways to democracy because the party can make things happen fast without getting tied up in lawsuits and hearings and protests (usually). And this one-party system protected China from the crisis, allowing the government to launch a massive government spending program that kept the country afloat and free of the misery faced by weak democracies.
Wolf reminds, however, that the Chinese economy right now is quite tenuous, and that the shock absorbers that have seen it through so far – namely, government spending – may not be enough to hold everything together when the economy sours (and all economies sour).
“Read the whole thing.”