Economic Development, Government, and Higher Education

World Affairs Council puts China in the spotlight

October 25, 2013
| By Pete Daly |
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At the big Chinese Communist Party meeting coming in November — the Third Plenary Session of the 18th CPC Central Committee — the world is anticipating Xi Jinping’s remarks revealing his blueprint for China for the next 10 years, according to Robert Daly.

Daly, director of the Kissinger Institute on China and the United States at the Woodrow Wilson International Center for Scholars in Washington, will speak at the University Club in Grand Rapids at noon Oct. 28 on “China’s Economic Agenda: Implications for American Businesses.” Then he will participate in a China Town Hall at Aquinas College’s Wege Student Center in the evening. Former Secretary of State Madeleine Albright will also take part in the Town Hall via a live webcast.

Many advocates of reform in China have high hopes, according to Business Week, and Daly says Xi — just completing his first of 10 years as paramount leader of the Party — is thought by many to be bolder and more effective than his predecessor.

Business Week emphasized the historic importance of the third plenum in 1978 when Deng Xiaoping announced that China was at last opening up its economy to global market forces.

Daly said he cannot predict what will happen in November, but it is widely thought that Xi will introduce “something between a plan and wish” for economic reforms.

He added, however: “It does seem pretty clear that despite the wishes of many, he is not terribly interested in political reform.”

Many in the Western world view reform in China as either political or economic, but Daly said that is “a false dichotomy” because China “is so highly politicized, and because it’s a one-party state, all economic reforms are political.”

There is growing interest in attracting Chinese investment in the U.S., he said, and Xi may propose a “capital account” that would allow more foreign direct investments by Chinese capitalists.

But Daly also stresses that whatever Xi indicates he wants to do, “none of it constitutes a direct order or policy” because the Communist Party’s designated leader in China “cannot simply impose his will on China.” As a “first among equals,” the leader has to build coalitions among the Party and build consensus, which involves “a lot of horse trading.” It also includes surveying the local governments and the businesses that will be affected by any proposed policy changes.

Daly advises U.S. businesses to consult individuals and organizations already in China, such as the American Chamber of Commerce in the People’s Republic of China, for better understanding of what may ultimately result from the Third Plenary Session.

As for its economy right now, he said there is “considerable debate on how the Chinese economy is doing,” with some observers bullish and others bearish. “The economic news would almost seem to vary from week to week.”

In an interview last week, Daly noted current news reports about an apparent uptick in China’s manufacturing sector and a rebound in the Chinese GDP, back up to 7.8 percent.

Bloomberg News on Oct. 24 said Chinese manufacturing grew more than anticipated in October, “a sign the recovery is gaining momentum even as leaders struggle with surging home prices and local-government debt.”

Daly said there is debate about whether or not there is a real estate bubble in China — “but there is so much money sloshing around in China that there’s room to invest all the time.”

He said sometimes the state-run news media launches vendettas against foreign companies such as Starbucks and Samsung, and it appears to him the reason may have more to do with those companies increasing their market share there.

There have been arrests of representatives from American firms providing due-diligence services to other American companies in China — a needed service — and they are “paraded on television in orange prison jumpsuits and handcuffs.”

Local government officials in China wield a lot of power, so much so they have been known to hold as prisoners the CEOs of companies that failed to deliver on promises in return for being allowed to set up shop in the region, “and the central government saying, ‘There’s not much we can do about this,’” said Daly.

Those situations are akin to companies in the U.S. that receive local tax abatements in return for promising to create a certain number of new jobs but failing to do so. Here, those companies sometimes have to refund money to the local government. In China, said Daly, instead of being allowed to re-negotiate the deal, the business executives are “kidnapped and held hostage for ransom.”

However, the Chinese people know what their economic issues are and for the most part are extremely smart and hard working, Daly said. The thought in China is that Xi will try to shift the economy away from an export-driven model, based on investment, to a demand-driven model. It is thought he may want to increase internal consumption, which could slow down the long-term growth rate, but provide “a much more sustainable, less bubble-driven model” for the economy.

Daly said many believe that despite the huge amount of exports from China, not enough of that money is making it into the hands of the Chinese people, “so he’s going to try to make a shift toward domestic consumption.”

But there is a challenge: There are vested interests in China that make a lot of money from the exports, “mainly what are called the SOEs — state-owned enterprises,” he said, that are politically powerful groups.

Daly also touched on what he called “the tremendous amount of debt held by local governments in China. They somehow have to tackle that.” Some experts have suggested that local government debt might be as much as 60 percent of the Chinese economy.

He said in his experience, most American companies report they are profitable in China “and some very profitable.” However, surveys have indicated only 28 percent of American companies doing business there believe business conditions are improving, while 19 percent say they are getting worse. Barriers to business range from “a lot of bureaucracy” to arbitrary and capricious regulations and thefts of intellectual property.

“So, how’s the (Chinese) economy doing?” said Daly. “Even people — unlike me — who are really trained in economics, argue about this. They look at the same data and they come to very nearly opposite conclusions.

“One of the reasons for that being, that it remains true in China that state government provided data are extremely suspect. It’s very hard to get a proved statistical snapshot of what’s happening.”

The China Town Hall meeting Daly will chair Monday night will, he hopes, generate a great many questions from the audience because “China is having an impact all over America.”

While speaking in Alaska recently, he learned from the audience that China is now the number one market for Alaskan salmon, replacing Japan. In Oklahoma two years ago, he found a rural school district with an extensive Chinese language program.

“China is having an impact in every aspect of our lives, all across the country — good, bad and indifferent. It can be extremely enriching; it can be a wonderful thing. Some people see it as a threatening thing. So I would very much like to have a discussion about that and hear about how people (in Grand Rapids) are viewing China,” said Daly.

Daly, 51, has lived a total of 11 years in China; he visits there several times a year and is fluent in the language. He began his career in U.S./China relations as a diplomat, serving at the U.S. Embassy in Beijing beginning in the late 1980s, and later in two other major Chinese cities. He has been on the faculty at the University of Maryland where he was a member of the Maryland China Initiative, and American director of the Johns Hopkins University — Nanjing University Center for Chinese and American Studies in Nanjing for six years.

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