Can China Maintain Its Economic Power?

 
 
Professor F. Warren McFarlan made his first visit to China in 1979 and has been returning ever since. He discusses the country's market-based reforms and its challenges to further growth.
 
 
by Deborah Blagg
A group of Chinese tourists visiting the promenade in front
of Pudong's skyline. Source: Richmatts

When F. Warren McFarlan and a small group of HBS colleagues arrived in Beijing in July 1979, they stepped off the plane into a country struggling for a toehold in the twentieth century. “They brought ladders up to unload our bags,” recalls McFarlan, the School’s Albert H. Gordon Professor of Business Administration, Emeritus, and a tactful bridge builder who has played a key role in launching and guiding several collaborative HBS-China initiatives. “There was a two-lane road between the airport and downtown Beijing, and during the trip we saw maybe one other car every five minutes or so.”

Fast-forward 37 years, and that same roadway is 10-lanes wide and jammed with traffic from 7:00 in the morning until 9:00 at night. During more than 70 visits to China, McFarlan has watched the leaders of a nation still shadowed by Mao Zedong’s controversial legacy institute market-based reforms that have made the country the world’s second-largest economic power. He has helped document that journey as the author of scores of cases, articles, and papers on Chinese business, as well as his recent book, Can China Lead? Reaching the Limits of Power and Growth, coauthored with HBS professor William Kirby and Regina Abrami of the Wharton School.

In addition to teaching in several HBS Executive Education programs, McFarlan has been a guest professor at Tsinghua University’s School of Economics and Management in Beijing. The Harvard Business School Alumni Bulletin recently caught up with McFarlan and asked him to reflect on his experiences in China, and his thoughts about the future of a country he describes as “a fascinating place with great promise, but uncertain prospects for continued economic growth.”

Blagg: What were your first impressions of China in the late 1970s?

McFarlan: We were seeing a country that had missed the industrial revolution that happened in many other countries in the nineteenth century, and then had suffered terribly under Mao since 1949. The so-called Great Leap Forward in 1958 triggered a famine that killed 40 million people, and in 1966, Mao’s Cultural Revolution shut down all the universities in the country for 10 years. In terms of education, it was a lost generation.

Q: Did you get a sense of people’s outlook toward the future?

A: Under the new leadership of Deng Xiaoping, there was an energy that you could feel—the possibility of stability and maybe a different face toward the outside world. But there was also the reality that it was a country that had only begun to emerge from a time of massive pain.

Q: When you look back broadly at the last few decades, what were some of the key factors in China’s economic rise?

A: In the 1980s, Deng Xiaoping’s establishment of the free trade zones began the transformation of China’s state-run economy. In the 1990s, you saw a significant easing of restrictions on startups—first in the restaurant industry and gradually spreading elsewhere. Small, state-owned enterprises were slimmed down under Premier Zhu Rongji--basically cut loose and left to go bankrupt and be restructured--while the government focused on larger enterprises.

The transition to an export-driven, low labor-cost country was well under way by the turn of the century, as millions of workers moved from the interior to new factories on the coast, leaving behind their families for 48 weeks a year. At the same time, they were building the massive transportation infrastructure that eventually allowed factories to relocate to the center of the country and to move goods from the factory to customer. The prosperity that began on the coast spread inland in the first decade of the new century.

Q: What were the first red flags that indicated to you that China’s economy was beginning to slow down?

"The red flags were discernible in social structure, in economic strategy, and in government"

A: You could see the social fabric wearing thin in a number of places over the past several years. The fact that so many factory workers had to leave their families for extended periods was untenable in the long run. There were the terrible Foxconn suicides. The one-child-per-family policy was beginning to create a population shortage that meant cheap labor was running out. The old low-cost manufacturing-for-export strategy had run out of steam. They were developing a new economic formula based on stimulating consumer consumption. More recently, there was an anticorruption campaign that created huge turmoil in the government, and also a large buildup of balance-of-payments surpluses. So the red flags were discernible in social structure, in economic strategy, and in government.

Q: What strikes you most about China’s economic development over the last few decades?

A: If you had told me in 1979 that 350 million Chinese would be able to lift themselves out of poverty into something that resembles a middle-class existence, I would have sent you for counseling. It’s amazing what they were able to do with market-based economic experiments and progress on infrastructure and food security once they put the Cultural Revolution behind them.

Postwar Japan had begun to rise in the 1960s. The four Asian tigers [Hong Kong, Singapore, South Korea, Taiwan] got going in the early 1970s. China, however, had to wait to get out from under Mao’s control before it could make the moves that ultimately enabled it to catch up. Under Deng Xiaoping and then Jiang Zemin, government support for economic expansion really took off.

Q: What are your thoughts on China’s transition to a consumer-based economy?

A: China is a land of engineers—they love to build things, and they are very good at it. Their progress on infrastructure projects in the last couple of decades is remarkable, but in keeping with their natural strength and the will of a one-party government.

Meeting the growing demands of increasingly sophisticated Chinese consumers is a more complicated challenge. One approach Chinese manufacturers are using is to acquire companies around the world in order to get fast access to the technologies they need to modernize their product lines. ChemChina is a good illustration. The company started out in 1984 making teapot polish in western China, and through a succession of acquisitions, it is now the 234th-largest company in the world. ChemChina recently spent $43 billion to acquire the Swiss seed giant Syngenta, which would have been unthinkable a few years ago. That is the new Chinese economy.

Q: Do the Chinese business leaders you talk with offer opinions about what should be done to reverse the current downturn?

A: There’s a lot of interest in finding ways to develop internal consumer consumption. Another big topic of concern is access to capital for midsized companies. Because capital raising is controlled by the state, it tends to go to state-owned enterprises. That is a big problem for a lot of privately owned businesses and has created the shadow banking sector.

Q: What is your view of the wide income disparity in China today?

A: Even with the country’s recent economic slowdown, China has more billionaires than the United States. Behind that fairly startling statistic are troubling related issues such as corruption among China’s elite and very wide variance in income, standard of living, and opportunity gaps between urban and rural Chinese. Just addressing that problem—finding ways that farmers in the country’s poorer provinces can achieve a standard of living equal to a high-tech worker in Hangzhou—is a daunting task. This increasing unease about economic inequality and instability is causing the wealthiest Chinese to invest outside the country and immigration rates to rise.

Q: Is the immigration trend related to the growing number of Western-educated Chinese?

A: Over 300,000 Chinese students enrolled in various US colleges and universities last year. President Xi Jinping’s own daughter graduated from Harvard a few years ago. We’re also seeing more Chinese students applying to our high schools.

These young scholars are often China’s best and brightest, and they are bringing back ideas and outlooks that present challenges to the current government, which is moving in a more traditional, conservative direction. With censorship on the rise, most young people in China today have no awareness of the Tiananmen Square massacre in 1989. The government can kick Google out of China, but all bets are off when Chinese students return from travel outside the country.

Q: And yet, the government is not opposed to so many students studying abroad?

A: Chinese universities are almost unparalleled at teaching science and engineering. But to move the country forward in a global environment, Chinese parents, and to some extent government leaders, recognize the value of an American-style liberal arts education in building leadership skills. The problem for the government, of course, is that it doesn’t really want the independent thought and social disruption that can come along with that kind of education.

Q: Where is China in terms of developing its own education resources?

A: Fifteen years ago, China had half as many students in higher education as the United States. Today, China has nearly twice the number of college students that we do. World-class institutions such as Tsinghua University, where HBS has a long relationship, Wuhan University, and Peking University, among others, are terrific success stories. China is moving toward mass education very rapidly, with plans to enroll 40 percent of young adults in colleges or universities by the year 2020.

Keep in mind, though, that there is still a big gap between education for rural and urban Chinese. In China’s elite universities, only 20 percent of students come from rural areas. And there are still many bureaucratic and political constraints imposed on scholars by the government that seem to work against intellectual progress.

Q: What does a Chinese entrepreneur need to succeed today, and is it different from what someone launching a business in the United States needs?

A: Being smart, ambitious, creative, and having a great idea that looks promising in terms of making a profit is not enough in China. There are 87 million members of the Communist Party in China. If you have more than 50 employees in your company, you have to make sure that you have a party representative on your leadership team. You have to be in sync with the government, and by that I mean national, provincial, and local. Without government support you will fail.

Q: Any words of advice for Western companies that want to do business with China?

A: There are several things to focus on. The first is that Chinese business is very much relational. In the United States, we have a more transactional focus. And we’ve had to learn that in China, they don’t care if you make money. You’re there because you’re bringing them technology, knowledge, or skills that will make their nation stronger. If you do that, then it’s OK to make money. So it starts with a different kind of orientation.

"They are intensely proud of their civilization and determined to preserve it, even as they have become leading players in a global marketplace"

Second, the Chinese have very long memories. I have no doubt that to some degree they still see a connection between a professor from Harvard who comes to their country to study management in 2016 and the Englishmen who brought opium to their country in the early 1800s, ultimately triggering the end to Imperial China. They are intensely proud of their civilization and determined to preserve it, even as they have become leading players in a global marketplace.

They also have very long outlooks. They don’t keep score in quarterly earnings. They do a lot of their thinking one or two generations into the future. That’s not our strength in the West. Foreign companies get into trouble because they assume their Chinese counterparts are operating on the same metrics, and often that just is not the case.

Q: What are one or two key forces that will shape China’s economy during the next 20 years?

A: The tension between state-owned and private enterprises is a concern, as is the need for continuous innovation, creativity, and entrepreneurship under a system of government that isn’t known for welcoming disruption. The government’s hyperfocus on intellectual property protection can also hinder collaboration with the international partners they need to serve Chinese consumers’ needs.

There’s a wave of older government leaders who are about to retire, and it’s difficult to anticipate what the impact of new leadership might be. The civil rights debate rages inside China and within the business community. There are a lot of countervailing forces and opinions. Some are following the path of avoiding controversy in order to continue to make money, but the lineal descendants of the Tiananmen Square protestors are also well represented.

Related Reading:

China’s Economic System has Difficult Road Overcoming its Political System
Book Excerpt: ‘Can China Lead?’
The Historian Who Came in from the Cold

This article first appeared in Harvard Business School's Alumni Bulletin under the title The Dragon's Tale.

About the Author

Deborah Blagg is a former editor of the HBS Alumni Bulletin and a freelance writer.

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