China’s glass ceiling

October 16, 2007 Posted by China Briefing Reading Time: 5 minutes

SHANGHAI, Oct. 16 – The more I travel to that other billion plus populated Asian country, India, the more I become convinced China has hit a glass ceiling in its development. It’s tempting after 20 years in China to become a little blasé perhaps about the country, even a little cynical, yet I feel uneasy about certain Chinese characteristics that just don’t seem to be progressing at all. Bear with me please while I try and explain what I mean by a glass ceiling by comparing China with the behemoth of India – after all it’s the only comparison we’ve got.

China Myth # 1
It’s normal for the world to buy from China
It isn’t you know, and it’s changing. Cheap manufacturing has only been on the global agenda for the past 20 years, and only in the past 10-15 in any truly large quantities from China. Prior to this, China was closed – the dream of accessing the China market – now much considered to be a dream – has given way to the supply of cheap goods. But China has no inalienable right to this status. Other markets are emerging, with the U.S. preferring the logistical nearness of Brazil and with other Asian tigers on the rise, China is facing pressures to adapt. Where we buy from in the next 15 years will not be demonstrated by a simple “Made in China” label.

China Myth # 2
Chinese companies are making lots of money from the economic boom in the country
I also do not believe this. Global competition has meant many suppliers have wafer-thin margins to supply in admittedly huge quantities to global buyers. But the margins are being made by the middle men; those who buy from China on the cheap then get the product into the U.S. and European distribution channels. It’s global businesses who are making a killing on buying cheap Chinese product, not the Chinese manufacturers.

China Myth # 3
China’s inland regions are getting wealthier
Really? I see a lot of government handouts, but really very little in the way of sustainable business in China’s interior. With transport and logistics being effective monopolies, the cost of freight out of the central and western regions is just too high to make them competitive. These regions largely trade amongst themselves and are not creating any real value. I recall the sight of a famous luxury handbag manufacturer with a store in Shenyang. When the local mayor was arrested for corruption, the store closed within a month. Guess whose wife had been the primary customer? Just because a high value store has opened does not necessarily mean that the entire city has become wealthier, just that a select few have access to that sort of disposable income. I question the sustainability of it.

China myth # 4
Chinese businesses are going global
State endorsed strategic purchases of energy and mineral resources are one thing. But only Lenovo’s acquisition of IBM’s PC business represents the private sectors play in global M&As. A relatively paltry US$1 billion deal. Er…that’s it. Compare with just one of India’s deals – Mittal’s acquisition of Arcelor (US$36 billion). Yet everyone talks up China. The Chinese private sector is just not there.

China Myth # 5
Chinese stock markets are booming
And so they are. And trading regularly at over 50 times annual earnings. With the State controlling 90 percent of all plays on the Shanghai index, and with the State in control of the regulatory regime, isn’t something a little wrong here? Like no free market enterprise? How sustainable is this? Not even the Chinese government can be immune to the laws of basic economics. Markets go down as well as up, and when they do, Chinese stocks are headed for a big drop when the government can no longer hold onto the dragons tail of unwarranted 50 times earnings plus.

China Myth # 6
Chinese businessmen are globally savvy
I don’t buy it. A lack of English skills, a lack of education, and most importantly, a lack of any independent regulatory regime means that Chinese businessmen are not being given the opportunity to progress under the current state controlled environment. When the China Securities Regulatory Commission (CSRC) cannot punish errant businessmen without state approval – and the government is involved with 90 percent of all China traded stocks – how can they learn how to succeed in globally recognized structures such as rule of law, transparency, and ethics? In India, a businessman defrauds his investors or shareholders and he can go to jail. That’s what an independent judiciary means. You can sue the government, and win. It’s not an option in China, and it holds the entire nation back.

There is the glass ceiling, and I believe China has hit it. Growth from here on in is going to become more difficult until China can learn to divide state from commerce. Indian businessmen, better educated and more internationally astute, are buying globally.

But China is stuck with the world only buying from it. It’s lopsided, and unsustainable.

China Myth # 7
China’s development has been an economic miracle
It depends upon how you quantify “development.” Here’s a tale of two airports: Beijing Capital Airport vs. Delhi International Airport.

Sir Norman Foster has just about completed work on Beijing Capital Airport, and it looks, as one would expect, and in common with a lot of development in China, totally brilliant. But is that all of the picture? I asked Kamal Nath, the Indian Minister of Commerce, about the appalling state of India’s international airports, which are derelict by comparison. “Well, India is a democracy, and as elected MP’s, we have a responsibility to our constituents, 70 percent of which (a similar figure to China’s population) are in rural areas. These people are not interested in a new airport in Delhi or Mumbai. They want to see improvements made in healthcare, clean water supply, education, and roads being maintained. We have too look after them first, or we will lose our seats. So for the airport, we want private investors to assist with this rather than government money. China, as a one party state, can do as they like with their money. But we cannot. We have an electorate to consider.”

So – with Beijing spending so much on brand spanking new infrastructure, and a pile of money on the Olympics, how are China’s rural population – 70 percent of the total – faring? Are they getting new roads, new schools, hospitals, and water? It seems perhaps not. Pollutants are increasing and riots are being commonplace nationally with unhappy peasant farmers seeing their lot get worse. The widening gap between rich and poor in China is now the widest globally. How sustainable is this before something starts to break down?

India’s airports may be a mess (although they are, indeed, as Mr. Nath suggested, now being upgraded via private, not government investment) but at least the majority of the population is getting ahead.

The comparison between China and India may not be the knee-jerk reaction to the sights of Pudong, or new airports. It may well be who is providing for their massive populations the better. A new hospital and school in a rural village may not be so grand, but multiplied by 100,000 and the effect may well be more sustainable for the people living in the country than spending billions on holding the Olympics.

In short, China’s sparkling new buildings may betray a more catastrophic picture inland. That’s not an economic miracle, it’s window-dressing.

The “race” between China and India, if you will, is long and complicated. But increasingly, when I gaze into the Chinese crystal ball I see a glass ceiling, whereas in India I tend to see opportunity.

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