China: The Next Big Market Opportunity or the Next Big Bubble?
Is China post WTO a land of great entrepreneurial opportunity, or a house of cards threatening to collapse on foreign investors?
Those with firsthand experience suggest, in response to this month's column, that few CEOs with a reason to be there can forego investment in China. However, there is a reason why involvement today is most likely to be as a customer of China's global factory. Dramatic market opportunities and substantial returns on investment of the kind suggested by some are years, perhaps even decades, away. It will require not only caution but also a great deal of patience as barriers to economic development are lowered. The risk is not so much that of potential economic meltdown as it is overestimating the speed and magnitude of possible investment returns.
First, what's the amount of risk at the macroeconomic level? Wenbin Guo suggests that it is lower than most people think, primarily because of the vast, diverse nature of the economy. As he puts it, "Whether the [a market opportunity or bubble] will happen at the national level at once is a big question mark." Warren Ching comments, "The Chinese government wants nothing but [to save] face. They will not allow this kind of economic meltdown." Others argue that, given the gradual transition of the Chinese economy, Russia is not a good analogy. The risk of a sudden disruption in China is much lower. Patrik Akerman articulated the argument in this way: "The European Communists opened up their economies because of a collapse (on a multitude of fronts), whereas China gradually opened up on its own terms."
On the other hand, those without patience should beware as well. As Herb Smith, who lives and teaches in China, puts it, "... invaders will do well to be forewarned to bring their lunch and plan to stay awhile." The most-often mentioned barrier to growth was the complete absence or ineffective enforcement of intellectual property laws that may stifle China's transition from a manufacturing to a higher-value-added knowledge-based economy. Greg Durst cites both "Western gullibility" in overestimating the ease with which access can be gained to China's vast markets and "massive issues around the respect of intellectual property rights" in arguing, "It's high time to call into question portions of the Chinese miracle."
Perhaps Jack Zhang captured the sense of many respondents best when he said, "I think both versions [large market opportunity and possible bubble] have their own merits." But, like others who suggest that anyone developing a market in China needs to do it with an open mind and open eyes, he believes that those who do it will find that "The growth is real, the changes are real, and being there is fun, exciting, and rewarding."
Several respondents emphasized that the most essential ingredients for success in developing markets in China are trusted partners with management talent who understand and operate comfortably and effectively in the Chinese market. Indeed, this may be the scarce resource. This view raises questions of whether there will be an adequate supply of such talent. Will impatient Western managers eager to develop Chinese business opportunities delay initiatives until the right people can be found? How high is the cost of delay versus the cost of premature entry? What do you think?
It was recently announced in somewhat wondrous tones that new car sales in China this past year exceeded one million. Reports in BusinessWeek and Forbes trumpet the growth of China and the size and promise of Chinese markets. Several economists have suggested that Chinese gross domestic product will once again surpass that of the U.S. by the year 2020, two hundred years after Chinese GDP was nearly one-third of the world's total. Those optimistic about China's economic future have poured the equivalent of billions of dollars in foreign investment into the country.
On the other hand, Joshua Kurlantzick, writing from Shanghai in The New Republic three weeks ago, paints another picture. His is of a China with a failed banking system with 50 percent of non-performing loans made to state-owned enterprises to satisfy political pressure; rampant corruption; false reporting of growth, beginning at the provincial level to conform with announced national goals; an economy that is propped up by foreign investment; and a country that is actually using less and less energy—energy use being a reasonably reliable indicator of real growth. In short, he describes China as a house of cards that is being held up largely by a Communist regime and foreign investors who are for the most part silent about the results of their Chinese investments.
Where does the truth lie—at the extremes or somewhere in between these wildly different views? For those of us who believe in free market economies, what's the best that we can hope for? A Russian-style transformation to more social and economic freedom? A collapse and rebirth of the Chinese economy would dwarf what happened in Russia. For example, it is estimated that more than half a trillion dollars would be required just to put the Chinese banking system on reasonably firm footing. Less optimistic views envision everything from a more violent transition to a pull-back to a more dogmatic form of Communism by a threatened leadership. Is it possible that the very investments flowing into China today could eventually trigger a Chinese economic meltdown?
What kind of risk-reward profile does this represent for foreign investors? What priority would you give to investment in China in you were the CEO of a large multinational? Could you afford to stay out? Could you afford to invest heavily in fixed assets if you went in? Will this be the next great growth market for investors? Or will it implode with a force greater than that of the U.S. high-tech bust of the past few years? What do you think?