Yeow, Here Comes China!

Tom Peters

The Economist, in a special report (Nov. 28, 1992), calls it "The world's biggest economic boom." Shops are "clogged," and factories, offices, and homes,"are being built as fast as round-the-clock construction crews can put them up."

The subject: China. By 2012, if current growth trends continue, it could be the,world's largest economy. That means, the magazine asserts, "the biggest change,since the Industrial Revolution."

The binge started in 1978 when Deng Xiaoping embraced sweeping economic reform. Since then, China's growth has averaged 9 percent a year (12 percent in 1992); not even the Japanese at their post-World War II best can match that. By 2002 the Chinese economy should be eight times bigger than in 1978.

Deng began by freeing China's 800 million farmers from most central controls, including price controls. Their real income, flat from 1950 (the year after the Communists came to power) to 1978, rose threefold in the next eight years; and a staggering 100 million or more people emerged from "absolute poverty."

(Much of this story lies beneath the surface. "The official figures about China are gibberish," the Economist claims. Officially China's gross domestic product is in India's league; unofficially, when adjusted for purchasing power, it may be half as high as our own.)

The growth of local industries was an unanticipated, mind-boggling byproduct of agricultural reform. In 1978, 1.5 million rural industrial firms (not owned by the central government) employed 28 million people; today some 19 million "town and village enterprises," or TVEs, employ 96 million. Rural industrial growth has run 30 percent a year for the past decade; accompanying exports leaped from $3.9 billion to $15 billion between 1985 and 1991.

Most TVEs are owned by local governments. Nonetheless, they are capitalist in spirit. Some of their profit goes to support local infrastructure development, some to new investment in the company, and the rest to employees. Competition is "ferocious," says the Economist. Businesses are not protected from failure; neither are employees. In fact, the churn is enormous, with many business shutdowns—and, of course, far more start-ups.

Deng also moved quickly to open China to foreign trade, focusing on the coastal provinces (Guangdong, next to Hong Kong, has grown 13 percent a year since 1978); he also created several Special Economic Zones as magnets for foreign investment.

Again, the results have been phenomenal. Since 1980, the value of China's trade has increased 12 percent per annum, and some 20,000 foreign ventures have invested $22 billion ($3.5 billion in 1991 alone). In the first nine months of 1992, 27,000 new joint-venture applications were approved! These activities are aided by some 3,700 new local trading companies, which Deng wisely decided not to control from Beijing.

The Economist profiles the transformation of Wuhan No. 2 Dyeing & Printing factory under Hong Kong ownership. The new chiefs dismissed three-quarters of the old operation's 3,000 employees (many went to work in newly established shops, others are on the dole), raised wages threefold for those retained, reduced administrative departments from 35 to three, and invested in modernization. Production and quality have soared, and the firm is turning a profit; exports account for 70 percent of output, up from a small fraction just a few months ago. The contrast with Wuhan Iron and Steel Co., a wobbly state-owned factory employing 120,000 in the same town, is stark.

But even the outfits owned by the central government are improving, the Economist claims. Productivity is still dismal, but up smartly overall. Many of these huge firms now appoint businessmen, rather than politicos, as bosses—then hold them to tough standards (e.g., new bosses post performance bonds amounting to one-half of their projected pay—Fortune 500 honchos take note). Better still, China no longer counts so much on turning around the slugabeds. Production from enterprises owned by the central government is down from 78 percent of total output in 1978 to about 50 percent today; a further drop to 25 percent is projected by 2000. All in all, the numbers support the Economist's startling claim: "Chinese industrial output is dominated by a huge number of small firms."

But Deng will not live forever ("When the black Cadillac comes for Deng," reads one of the report's subtitles), and turmoil will likely mark the post-Deng era. Nonetheless, the Economist suggests the economic changes are "pervasive and irreversible," mainly because China's future leaders, conservative or progressive, have little choice. Eight-hundred million farmers have tasted economic freedom, as have the wildly entrepreneurial denizens of the coastal provinces. Moreover, 180 million new workers must somehow be absorbed into the Chinese workforce by the year 2000. No leader would dare put a lid on growth.

Even if the Economist's view is too rosy, the implications of a very formidable China, nukes and economic prowess combined, are worth considering. In the end, the Economist reminds us of Napoleon's observation, circa 1800: "When China wakes, it will shake the world."


(C) 1993 TPG Communications.

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