China's Year

When corporate managers first learned that the Chinese word for “change” combines two characters meaning “danger” and “opportunity”, their enthusiasm for this new thought was endless. Not since the old Army concept of “zero defects” had an aphorism so captured the limited imagination of the business world. As if from an assembly line, the observation that the Chinese word for change combines characters meaning both danger and opportunity reproduced itself at conferences, pep talks, meetings, training sessions and even in corporations’ annual reports. I remember hearing it several times. There is a complementary Chinese curse, almost equally well known: “May you live in interesting times”. Those times are upon us again and China seems well situated to make something of the opportunities they present.

This has so far been an exceptional year for China’s image and reputation. They “won” their own Beijing Games, depending on whether gold or total medals are counted. But however you count them, who knew that China was so competitive in so many sports? Gymnastics, judo and ping pong for sure but how about gold medals in sailing, weightlifting and kayaking? And Chinese women took the silver and bronze medals in beach volleyball. If they have television wherever Mao is now he must have been stunned at that one.

Last week, on September 27th, a Chinese astronaut took the country’s first “space walk”, in a Chinese-made space suit, five years after China put its first man in orbit. Interestingly, though the Chinese space program might seem recent the base from which they launched in the Gobi desert began construction in 1958, fifty years ago and only 8 years after the Peoples Liberation Army first took power. China was at the time an impoverished, third world, rural economy with a fifty-year history of civil war, invasion and famine. So they evidently think long-term here.

The debt-ridden economies of the West are now contracting and would probably be collapsing but for unprecedented government interventions in North America and Europe. You can sense the panic building as formerly blue chips like AIG dwindle to penny stock status. Will it be a recession (two consecutive quarters of negative growth) or a severe recession (ten point reduction in GDP) or a depression (30 point reduction in GDP)? The choice at the moment seems to be between the last two. All that’s certain is that Western governments are going to incur tremendous debt as they attempt to stall the momentum toward panic. The US national debt – from which the excesses of the past and the emergency of the present are funded – is now $10.1 trillion, heading toward $11.3 trillion, about 70% of GDP. Twenty-five percent of that amount is owed to foreign countries and of those foreign debtors China is the second largest, owning $519 billion of US treasury bonds.

China also has a current surplus of $1.8 trillion, no sub prime problem in its banking system, and no credit problem in its economy. As far as I can tell, there is no credit. This is a cash economy. I haven’t used a credit card since I arrived in China because I can’t find anywhere that takes one. I am told that there are domestic credit cards but I haven’t seen anyone using them. So, if there are really no hidden problems in the Chinese economy and banking system – apart from the fact that the country’s biggest customers are now basket cases - how might they emerge from this global turmoil?

China’s Premier, Wen Binjiao, was quoted yesterday as saying that “what China can do for the world is keep growing”. China’s economy has grown at an average rate of 10% in each of the last 30 years and this year and next the rate is projected at between 8% and 9%. That projection may be wishful thinking since it comes from the CEO of Rio Tinto, a very large mining and metals conglomerate, who admits that his own company’s prospects depend on that growth rate. The panelists at the discussion where this prediction was cited, however, agreed that the role of China in the world economy is about to become substantially more prominent.