Reading Tea Leaves

Our speaker today from CNN compared the way journalists used to operate in China to reading tea leaves; since they were restricted for various reasons, financial and political, all they could do was sit in Beijing and attempt to discern the potential future implications of the few news items they were reporting on.

I think we’ve seen some of this tea-leaf-reading on our company visits. The big question facing everyone doing business in China and, arguably, everyone doing business everywhere, is: What does this all mean for the future of China and of my business? For these businesses, predicting China’s future fate is an essential part of their business planning. At Jones Day today we heard, for at least the second time on this tour, that the RMB will replace the USD as the common currency within five years, and we heard that China’s monetary policy will be opened up, “it’s only a matter of time.” These predictions are widely debated, but the important fact is that the issues are pressing enough to be commonly discussed.

Our CNN speaker today touched on some of the challenges that have the potential to derail China’s astonishing growth. He revisited the topic of harmony in China, one of the government’s main concerns. Coincidentally, minutes before our speaker arrived, my phone dinged indicating I had a new e-mail from NYTimes.com. As it was 3:21PM in Beijing, it was 3:21AM back home, and the e-mail was a list of the day’s headlines. The first one reads: “Inflation in China Poses Big Threat to Global Trade.” I just had time to read the article before our speaker began. As he talked about the wealth gap in China, I had this article in mind.

The impetus for the article is the Chinese central bank’s recent decision to raise reserve rates. One reason the article gives for the rate hike is that it is meant to curb bank lending. This stuck out to me because our speaker at Citibank spoke at length about the lack of a culture of consumer borrowing in China; the idea of borrowing money just to spend it is still pretty alien here. Clearly there is a difference of opinion between our Citibank speaker and the author of the article.

The second point that struck me when I read the article was, I think, the author’s intended point: what happens in China affects us all. The author writes: “…money problems here can reverberate from Wal-Mart to Wall Street and the world beyond.”

If I were to summarize all of our business visits so far in one quotation, that would be it. It summarizes the massive economic power of China and our (America’s, the world’s) reliance on it for continued growth. Simultaneously it is a reminder of the fragility of that growth. If the central bank cannot control the rampant growth of China, or at least minimize inflation, the chance exists for derailment. The importance of maintaining harmony in China is closely linked to the importance of maintaining stable economic growth. The article points to the challenges of not having a single leader of the central bank in China a la Ben Bernanke. This was a point I had not yet considered, and it is an added layer in the challenge to form China’s future monetary policies. The article also highlights a fundamental contradiction: reigning in inflation requires slowing economic growth, which could lead to unrest; not reigning in inflation leads to rising prices and runaway growth, which could lead to unrest. I believe this is what Dr. Olson would call an adaptive challenge for the Chinese government.

Reading the tea leaves, it is hard to see how China could not be the new economic center of the world. At the same time, it’s hard to see how this train could not derail. Coming to China has confirmed for me my impression that this country is the future… except for the times when I read news reports like this one from NYTimes.com. Then I see that the future might be less certain than we would like to think.

Urbanization Express

China’s Business Climate

Today, our third official day in Shanghai, allowed us a further glimpse into China’s dynamic business setting, with a large focus on the financial industry.  We spoke with Frank Sirna, CFO of Citi (China), Keenton Chiang of the US Commercial Service, and Henry Yu of Shanghai Bosun Capital Advisors, Ltd.  A central theme of each of the speakers seemed to be the growth of the affluent middle class as a target market for both Citi and for businesses hoping to enter the Chinese market.  While Chiang was less optimistic about China’s GDP surpassing that of the US by 2017 (as Sirna was), his reasoning was perhaps more realistic; a large majority of the Chinese population is still living below the poverty line in rural, undeveloped areas.  While each speaker expects increased migration to urban areas, they also stressed the importance of China’s 12 year plan to promote consumption in 2^nd and 3^rd tier cities.

Sirna’s presentation illustrated Citi’s focus on targeting the increasing affluence (and disposable income) of the younger generation and the growing entrepreneurial culture largely surrounding them; Citi hopes to build relationships within this segment through service leadership and innovation.  As one of our visits yesterday (Continuum Innovation) also demonstrated, innovation is necessary for companies to compete and to grow in the Chinese market.  Unfortunately this type of company culture is not developed overnight, and many domestic firms are struggling to harness outside innovation (similar to our discussion of Indigenous Innovation in our International Law course) while foreign companies are trying to enter the Chinese market with some type of IP protection.  Interestingly, foreign companies are no longer looking to China for outsourcing, but are instead concentrating on the foreseeable growth in their domestic consumption. 

            Not only did each of the speakers address China as an opportunity, but they also noted that other nations should not view China as a potential threat but more as a partner with which to grow.  While China is focused on increasing domestic business and innovation, a large part of their growth and financial stability will continue to come from foreign investments.  They may have extensive regulations and national (legal and financial) systems that need reform, but foreign companies that are willing to enter the Chinese market will grow alongside this maturing nation.