China Revisted

My first visit to China was in 1980u00e2u20ac”81 when I was heading an effort to build a modern hotel in Canton (now Guangzhou), at the request of the U.S. Department of State. They needed one for sure. Our group stayed in the u00e2u20acu0153bestu00e2u20ac hotel in South China. The entertainment included two large rats fighting for the peanuts I left on my dresser, and a one-stop-fits-all bathroom with holes in the floor for all activities.

Iu00e2u20acu2122ve been back to China many times since that first visit. In fact, Iu00e2u20acu2122ve just returned from an educational visit sponsored by Corporate Board Member magazine, Bank Directoru00e2u20acu2122s sister publication, through its affiliate, Global Navigation (www.globalnav.com). It was a great trip and even though I thought I knew China, I learned a lot.

We started out in Beijingu00e2u20ac”my last visit was three years ago and at that time I labeled it the worldu00e2u20acu2122s ugliest major city. To my surprise, it has been totally beautifiedu00e2u20ac”signs down, storefronts rebuilt, hundreds of new buildings, thousands of new trees and plants, and miles of green grasses.

Here are some of the things that were new to me:

• 43% (more than 500,000,000 Chinese) are now part of the new middle classu00e2u20ac”there are still about 900 million peasants on the farms, but they are moving into the working middle class at the rate of 10 to 12 million a year.
• The economy is growing at 10% to 11% with a GDP of $2.4 billion, about equal to the GDP of California and Florida and less than 25% of the U.S. GDP of $12.5 trillion. They are creating more than 10 million new jobs each year.
• China is interested in developing internal consumption as its principal driver of the economy as opposed to exports and investments.
• Chinese R&D is growing at a 17% rate (compared to 4% to 5% in the United States).
• Inflation, a real threat in China, is now at an 11-year high of 8.7%. (Its price controls make it worse.)
• China is projected to be the third-largest economy by 2025.
• If China consumed oil at the rate of the United States, by 2030 it would use 99 million barrels a dayu00e2u20ac”20 million more than the whole world uses today. Of course this canu00e2u20acu2122t happen, but something has to give.
• China is modernizing its economic structure with a labor law (just went into effect) that is very restrictive in terms of firing employees, required facilities, etc. and a Sarbanes Oxley-type of independent corporate directorship with director responsibilities much like ours.

Three things were clear, but unspoken, as we listened to industrialists, managers, and government officials tell us of the new China.

First, nothing important can be done without the approval of the government, and particularly the Communist Party. Even the corporate governance charge is equally accountable to the Communist Party and management.

Second, the government is determined to keep control to prevent the kind of corrupt and disastrous freedom displayed by the Russian economy after the fall of the Soviet Union. Thus free enterprise is promoted while potential freedom stops at the point that any citizen tries to organize for a political purposeu00e2u20ac”and the Chinese are clearly very pleased with this system. Unlike my earlier visitsu00e2u20ac”the young appear to have little interest in change of the type that caused Tiananmen Square.

Third, the Chinese government has two high priorities. One of these is to achieve access to raw materials, in particular oil, to meet growing demands. This could mean some very aggressive actions in the future. Also, the wealth gap has grown at rates much higher than ours, and the threat of a rebellion is a very real factor for the government. From President Hu on down, the objective of the new economy is to do more for the pooru00e2u20ac”or suffer the consequences of nearly a billion peasants.

The Doing Business in China trip was informative, exhausting, enjoyable, and educational. The group of directors who made the journey included those from such behemoths as Microsoft and Morgan Stanley to little LML Payment Systems (mine), and as usual, we learned a lot from our fellow directors (especially those that have sizable Chinese operations). My compliments to Global Navigation CEO Joan Susie for putting this trip together in a very professional manner. Everything happening in China has important implications for U.S. businessesu00e2u20ac”including your banks, and more particularly, your customers.