What Lurks Ahead?

By Holstein, William J. | Chief Executive (U.S.), March 2005 | Go to article overview

What Lurks Ahead?


Holstein, William J., Chief Executive (U.S.)


CEOs up by "China euphoria" could one day be surprised.

Chief executives of many major companies, ranging from General Motors to Citigroup and from Motorola to Lucent, are investing billions of dollars in China. To a large extent, they have learned how to engage with the Chinese leadership and, in many cases, to make serions money.

But as a journalist who has been watching China since being posted to Hong Kong in 1979 to chronicle Deng Xiaoping's Four Modernizations and then moving to Beijing in 1981, I learned that China is capable of surprise. Current straight-line projections of China's economic progress are almost certainly wrong because China rarely pursues a straight line. That means CEOs who, in a collective euphoria, have invested so heavily in China could one day face disappointment if they aren't aware of the risks.

The fact that Beijing is hosting the Summer Olympics in 2008 will serve as a powerful rallying point for the Communist Party's leadership because national pride is at stake-and nationalism is a potent force today. But in the years after the Olympics, there is a risk that China will have difficulty sustaining its rate of economic growth. Because the very legitimacy of the 68-million member party is based on its ability to deliver 8 percent and 9 percent annual rates of growth (the ideology of Communism has all but disappeared), the risk of political and social instability could increase. Here is a short list of what could go wrong in China:

* Politics. Some Asian experts have argued that, as it gains economically, China will inevitably evolve from a one-party state toward a more pluralistic system, much as Taiwan and South Korea did. But there is no evidence that the party is relaxing its iron grip on the nation's political life despite more than two decades of rapid economic gains. Obviously, there has been a huge expansion of individual liberties in the economic and lifestyle realms, but politics is still strictly controlled. There can be no open discussion of what happened in Tiananmen Square in 1989, for example. And security forces engaged in a thorough crackdown after the death of leader Zhao Ziyang, squelching any real discussion of his legacy. So it's difficult to see how the Communist Party will ever allow itself to be drawn into a genuine multiparty system.

* Stratification. Decades ago, when the party was led by workers, peasants and soldiers, there was a remarkably even distribution of wealth. But today, the elites drive Audis and BMWs, live in well-appointed high-rise apartment buildings and party into the night at karaoke clubs. It's easy to distinguish them from the poor immigrants who have flocked to the cities to find work because the newcomers' clothes are ragged and their faces weathered. There is a dramatic gap between the cities and the countryside, and between eastern China and western regions. Historically, these sorts of gaps have been a source of instability. Already, there are thousands of small incidents a year in which farmers protest losing land to urbanization or workers protest the closing of a state-owned enterprise.

* Corruption. There are high-minded and scrupulously honest leaders within the party. Rut there are also those abusing their positions to make money. Since most business decision-making ultimately hinges on the party, many members are getting rich. There is the potential for the party to emerge as a new dynasty, isolated from the masses. To be in China around the Chinese New Year is to witness huge exchanges of money, flowing upward to those in positions of authority.

* Financial system. One of the crucial tools of development is a country's ability to funnel its wealth toward nation-building. China is awash in liquidity these days, but its financial system is still controlled by the government and party. …

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