China Economic Miracle Or Myth Bill Hicks April, 2010

China: Economic Miracle or Myth?

C

China’s national flag was adopted in 1949. It has five golden yellow stars in the upper
left hand corner. The star on the left is larger than the other four and the red color symbolizes
revolution. The large star symbolizes the Communist Party and the smaller stars represent the
people of China.

Bill Hicks
Emory Goizueta Business School
International Colloquium:
Hong Kong and Shanghai 4/17-25/10


China- A Riddle Wrapped in a Paradox
The China economy is forecasted to grow at 10% in 2010 compared to the World economies at 4.2% or the
U.S. at 3.1%.i Everywhere you go in China there are construction projects; new office buildings, residential
apartment buildings, commercial and public infrastructure building. The old is being transformed into the
new. Hong Kong and Shanghai visits and in depth presentations and field trips to a variety of company and
infrastructure locations gave a great insight into China’s economic renaissance. (Hong Kong and Shanghai are
built around river deltas; Hong Kong on the Pearl River and Shanghai on the Yangtze. The populations of Hong
Kong and Shanghai are approximately 7 and 14 million respectively. Shanghai is currently estimated to have
the largest city population in the world) ii. The 24- 7 boat, ship and barge traffic on both rivers is indicative of
and offers a metaphor for the Chinese economy- constantly moving and incredibly diverse. Traffic on both
rivers provides a glimpse into China’s amazing growth story and offers a visual indicator that China is a country
of the future. The current joke is that the national bird is the crane- the building crane that is. Clearly there is
a massive economic boom happening in China where entire new cities are planned and populated in five
years. There is an entrepreneurial energy in China being driven by the government’s desire to position itself on
the world stage and become known for innovation and global productivity. The most populous country in the
world is rapidly transforming itself into a market economy. Perhaps it should be considered an”authoritarian
market” planned by the Peoples Republic of China government, but it is clearly an economy on the move with
a national purpose. HOK Architects predicted that over the next five years that China commercial real estate
projects square footage built would equal that of the entire United States current square footage! My God,
how will the U.S. compete with this juggernaught!?iii

The country is exploding and according to David Gossetiv over 500 million Chinese have been lifted out of
poverty over the last decade. By 2020, “xiaokang” or “moderate prosperity” will characterize a more
harmonious Chinese society, which is a national PRC goal to become more integrated with the modern world.
In other words, China will be transformed over the next decade into a more mainstream consumer economy
driven by the worlds’ largest middle class population and will move from a primarily industrial export driven
economy to a more balanced GDP. The Chinese middle class entry into the 21st century consumer market will
not only help China’s GDP to maintain potential double digit growth in the future but will also help many of
the industrialized world economies grow as well.

As of 2008 there are currently 1.3 billion people in China which is the most populated country in the world. 1.3
billion Chinese people are emerging as the dynamic that is driving the Chinese economy and yet China’s per
capita income is only $3700 versus the U. S. at $46,400, still a very large gap.v 1.3 billion Chinese people are
becoming consumers as they move from a largely agrarian driven economy to an industrial and service
economy. The direct result is that the Chinese economy is forecasted to outpace the developed world
economies in 2010 by 140% as measured by GDP with a current unemployment rate of 4.3%.vi

And yet China is a communist country where one political party and central planning commands the economy
and rules the country. This is the paradox of China. How can a centrally planned economy run by one party

Emory Goizueta Business School International Colloquium- Hong Kong and Shanghai- April/17-25/2010 Page 2


and a massive bureaucracy actually be productive and act like a capitalist system? How can a country with 22
provinces, five autonomous regions, four municipalities and two special administrative regions (Hong Kong
and Macau) be considered a major world economic engine?

The riddle of China is enigmatic and seems to be something mysterious; an unknown factor or hidden key to
China’s rapid growth in the 21st century. What is it? It would seem that the combination of the Chinese
government taking a very aggressive and active role in central economic planning and execution combined
with pent up demand by Chinese consumers, a largely export driven economy, low interest rates and an
undervalued renminbi has helped China boom as the rest of the world slowly recovers from the current
recession. Currently China holds approximately 1.2 trillion dollars of U.S. debtvii and has effectively become the
lender of last resort as the United States continues to issue new debt and tries to inflate the economy with
stimulus. The Chinese economy is booming with major infrastructure projects and U.S. taxpayers are
contributing significantly to China’s phenomenal growth. It seems that China is about 30 years behind the U.S.
in infrastructure development but the magnitude due to the population is driving significant opportunities for
the world’s dynamic companies that have the desire, long term time horizon and capital to invest in the
Chinese market.

China Themes

Risk versus Reward-there are many risks when doing business in China, but rewards and return on investment
are potentially high if companies are willing to commit to a long term strategy, build the necessary
infrastructure, make significant investments and stay the course. Some of the risks that companies face in
China are uncertainty due to arbitrary rules and regulation, a fixed and high renminbi currency valuation,
higher costs, accounting, tax and legal requirements, regulations that can be added or changed, government
bureaucracy, talent acquisition, lax management practices and human resource challenges.

Speed of Change- China is changing and growing so rapidly that it is hard to predict accurate outcomes and
forecast growth. This can put substantial stress on companies when planning budgets and forecasting capital
allocation. Corporate executives will need to be nimble, flexible and have the ability to make decisions in the
absence of complete information and analysis.

Relationships- doing business in China is very dependent on building trusted relationships with government
officials and business partners over time. To be successful corporate executives need to be very careful about
who is responsible for business development in China. This is a critical role and will have a substantial impact
on whether a company is successful or not. Although relationship building is critical, particularly in China
where most foreign multinational companies are required to have a Joint Venture Chinese counterpart,
partner, vendor, distributor and customer relationships are critical to any successful company anywhere in the
world. This skill set is particularly important to companies setting up shop in China.



Role of Government- the PRC is responsible for “managing the economy” and plans in detail which sectors it
wants to invest in, which ones are protected from outside competition and which are not. Dealing with
government officials is a fact of life in China. Successful government relationships can make or break a
company and provide substantial advantage in the marketplace. Entire industries can be affected by the
governments’ decisions positively effecting future investment or negatively by onerous regulations or new
laws. While we were in China, the government had substantially increased regulations on the residential
mortgage industry in an effort to cool down home sales and property valuations. GOMES, China’s largest
electronic retailer was undergoing significant uncertainty and stress due to the recent arrest and prosecution
of the company’s CEO and founder under allegations of stock manipulation and fraud. Also, we learned that
the Minka light factory that we visited in Shenzhen was mandated to move the entire factory at their expense,
to a new location due to the local government’s decision to create a retail zone at their current location. The
government can have a very heavy hand that poses significant risks to operating in China.

Patience- this one is hard for most major corporations that are used to managing their business based on a
quarterly earnings basis. However, if companies want to be successful in China, they will need to commit to a
long term strategy and substantial resource allocation. If a company is just beginning to invest in China they
need to treat the strategy like a start up that needs to be nurtured and committed to for the long term.
Kentucky Fried Chicken’s success in China has been primarily driven by getting their strategy right, determining
the best product to offer for the Chinese palate and strong human capital. This was accomplished over the
first ten years in operation which is now driving significant profits for KFC’s parent company, YUM Brands and
is the largest and fastest growing restaurant operator in China.

China Facts, Figures, Notes and Anecdotes
In 2009 China’s became the world’s largest auto producer, out producing the U.S. for the first time. For
every 1000 people in China, 30 own a car compared to 700-800 per thousand in the U.S. In 2009 Geely
Automotive, a Chinese auto company purchased Volvo from Ford and plans to invest $1b in operating
capital and build a 300,000 unit assembly plant in Bejing.

China’s retail sales in 2008 were $1.6 trillion.

By 2020 China’s urban population is expected to grow from 600 to 800 million people.

Coke has invested more than $1.3b since coming to China, mostly in bottler infrastructure (Joint
Venture companies and 36 bottling plants, including an $80m headquarters building, R&D Center and
Coke University in Shanghai). Between 2009-2012 Coke is expected to invest an additional $2b in
China.



Shanghai will see between 450,000 and 500,000 square feet of new retail space added to the market
every year until 2012.

In 2009, China produced 560 million tons of steel, 40 % of the world’s total.

Tesco, based in the UK and the worlds’ third largest retailer is planning to develop more retail and
leisure space in China over the next five years than it currently operates in the UK. The retailer is
planning to open 80 new shopping malls amounting to 40m square feet of space by 2016 and will
invest £2b.

City Populations
Shanghai- 14m
Shenzhen- 10m
Hong Kong- 7m

Chinese outbound investment
2004- $5b
2007- $27b
2008- $58b
Foreign Direct Investment in China

1998- $46b
2008- $93b

Exports from foreign companies in China

1998- $81b
2008- $791b

Highway miles
Start of 1990’s- 400
Start of 2000’s- 40,000

Kentucky Fried Chicken Restaurants

2900 in 450 cities



Conclusion and Wrap-Up

The opportunity to spend time in two of the three largest economic zones in China, Hong Kong and Shanghai,
listen to multiple and varied speakers deliver informative and enlightening presentations on their perspectives
and experience in China was an invaluable learning experience. Of course, when you get back from a trip like
this everyone wants to hear about your experiences. I have been talking about China nonstop since our arrival
back in Atlanta. As well, the country’s economy has a constant presence in the media and I now read with
great interest and new perspective China’s daily news. One question that I was asked by a friend was, “Do you
think that China will become a “superpower”? Wikipedia’s definition of a country with superpower status is “a
state with a leading position in the international community which has the ability to influence events and its
own interests and project power on a worldwide scale to protect those interests.” By that definition, which
may be a little outdated, I now view China as very much a “superpower”. Its economic engine, currency
strength and government determination to become a formidable global competitor in multiple industries with
growing influence around the world, particularly in the U.S., has significant impact on our policies and
economy. The question cannot be answered definitively and many will continue to ask whether China is a
threat or whether it will help save the world economically.

China currently has the third largest economy in the world behind the U.S. and Japan and will very soon
surpass Japan. Already known as the “factory of the world” with over 100,000 manufacturing plants,
predictions are indicating that by 2020 China will become the world’s largest economy and will out produce
the United States. Only time will tell but the one thing that I am certain of is that the next ten years will be an
exciting time to be engaged in business and watch economic events unfold in China and around the world.

Peter Drucker, the prolific management consultant from Austria said, “One cannot manage change, one can
only be ahead of it.” This quote would seem to be a perfect metaphor for the rate of change and velocity of
economic growth in China. Edward Tse, in his new book, The China Strategyviii aptly points out that there is no
other country like China and that no other country has so many opportunities and challenges. He also
concludes that there is no better time to be doing business there. Further that,” the paradoxical truth, is that a
China strategy is not a strategy for entering China. It is a strategy for creating a global business, in a way that
prepares for something that may be happening for the first time in history: the knitting together of worldwide
enterprise into a coherent whole.” China is truly a country with an amazing future; one that like Janus, the
Roman God with two faces, looks back to its ancient history and at the same time gazes forward into the
future. It will be fascinating to watch!



China Picture Gallery

i
International Monetary Fund World Economic Report 2010
ii
Wikipedia
iii
Toby Bath- Managing Director-HOK Architects- April 20, 2010
iv
David Gosset- Professor China Europe International Business School- April 22, 2010
v
IMF 2009
vi
IMF World economic Report 2010
vii
International Monetary Fund 2009
viii
The China Strategy- Edward Tse- Published by Basic Books 2010


China Economic Miracle Or Myth Bill Hicks April, 2010

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