October 1 is the 60th anniversary of the Communist Revolution, when China effectively isolated itself from international trade. Just after the 30th anniversary, back in 1979, I made my first trip to China, a few months after the blossoming of political liberalization known as the “Beijing Spring.” I was there to attend the inaugural session of the semiannual Canton Fair, a venue for pioneering foreign executives to meet their counterparts at Chinese companies with numbers in their names, such as Radio Factory #5. The world I recall no longer exists.
At the time, not just language but custom and economic incentives separated China from the outside commercial world. In the early 1980s, I worked with one of southern China’s largest newspapers. I asked the editor to increase the print run to accommodate the overflow of foreign advertising. He refused, citing his annual allocation of paper: If he increased his order that year and the ads dried up the following one, he would be in trouble. Besides, because all media in China were state-owned, the extra revenue didn’t mean anything to him. It would simply disappear down a black hole.
Chinese communism has been declared dead by everyone but the Chinese. The country’s economy is still dominated by very large state-owned enterprises. These companies don’t have the same social responsibilities as before — to maintain employment and provide health care and retirement benefits — and they are able to raise enormous amounts of capital on stock exchanges in China and abroad. But all of this does not mean that China has morphed into a true market-driven economy. The global recession has pretty much put privatization efforts on hold. There is a sense of schadenfreude that serves the conservatives’ purposes quite nicely.
The true difference in China today, and much of its economic hope, lies in the tens of millions of small and medium-size enterprises that have sprung up over the past 30 years. These companies have been steadily moving up both the value and quality chains. Their efforts have put China at the center of world manufacturing. They are innovators, engines of growth and, not coincidentally, major job creators. Unfortunately, the recession has been harder on them than on the country’s large companies. Small enterprises are shutting down, resulting in socially destabilizing job losses. Exporters are bending over backward to keep their foreign customers, offering open terms of trade rather than demanding letters of credit from them.
A few trends and flash points: Although Western governments have thwarted efforts by China’s largest companies to invest abroad, smaller firms and individuals, able to fly under the radar, are on a buying binge in the U.S. and elsewhere. The regional inequality resulting from decades of foreign investment along China’s seaboard presents an opportunity for foreign firms willing to invest in the interior. Today’s management talent is impressive but less loyal, giving lip service to nationalism while walking the path of self-interest — a bullish sign for consumption down the road. Market information is still hard to get, and when it is obtained outside the law, the consequences are extreme, as evidenced by the government’s incarceration of executives of Australian mining firm Rio Tinto on espionage charges.
As an old friend, my advice to China is: Don’t let the current recession hamper reform. Work toward making the yuan fully tradable on the world’s currency markets, opening the capital account to allow citizens to invest abroad and allowing free and unfettered access to information so that China’s software is up to the level of its infrastructure.
All that said, there is no country on earth that has witnessed so much change over such a short period. It is a privilege to have witnessed it.
Lyric Hughes Hale is the founding publisher of China Online.
See related article, “China Wants to Reshape the International Financial System”.
