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China: Davos Looks At Emerging Giant's Impact On World Economy

Construction in Beijing (file photo) (AFP) China has a booming economy, increasing demand for natural resources, and its companies are on a corporate shopping spree. What will be the impact of its integration into the world economy?

PRAGUE, 26 January 2006 -- One of this year’s hot topics in Davos is China. Davos is the Swiss town that hosts the annual World Economic Forum, which brings together chief executives of the world’s largest corporations and government leaders, for a week of roundtable talks.

Government officials and business leaders who are charting the country’s phenomenal ascent today discussed where China is headed, what problems it could face and how the world will cope with this emerging economic superpower over the next decade.

Taking Over The Top 500

One measure of a country’s economic success is how many of its companies are ranked on "Fortune" magazine’s annual Global 500 survey, a list of the 500 leading global firms in terms of an algorithm combining sales, profits, assets, market value, and employees.

Currently, China has 16 companies on the list. A few years ago it had none. By 2010, Chinese officials say, they aim to have 50.

Orit Gadiesh, chairwoman of Bain and Company, a top international consulting firm, challenged participants in today’s roundtable to understand the significance of those numbers.

"That says that China would hope to replace 34 of the largest companies in the world in four years," Gadiesh said. "Just as a contrast, India has five [companies among the global 'Fortune' 500], Russia has three."

China's Transformation Strategy

As head of China’s central bank, Zhou Xiaochuan bears key responsibility for setting his country’s economic policy. He explained the stages of China’s economic transformation, starting two decades ago.

"In the 1980s, Chinese companies tried to get out of the traditional, centrally planned economy and become market players," Zhou said in Davos on 26 January. "In the 1990s, many Chinese companies tried to restructure their company structure, to have ownership diversification, to go public domestically or internationally, and then to learn to set up new corporate governance. And after that, I think Chinese companies are looking more and more to the global competition."

In recent months, Chinese companies have gone on what has been described as a foreign acquisition “binge.” Chinese firms have bought stakes or obtained majority control in some important foreign corporations.

Probably the most notable example was Chinese computer manufacturer Lenovo’s buyout of IBM’s personal-computer business. The $ 1.75 billion deal created the world’s third-largest personal-computer maker and was seen as highly symbolic.

Deepak Advani, a top manager at Lenovo, said Chinese business, through such acquisitions, is quickly integrating into the world economy and entering a new stage.

He said foreigners are going to have to get used to the idea that China will no longer be just a cheap base for manufacturing, but will soon emerge as a place where concepts originate.

From Cheap Manufacturing To Design Innovation

"The perception right now is that the core competence that Chinese companies have, the comparative advantage that China has, is in manufacturing in scale, which is definitely a true statement," Advani said. "But there's a shift happening from 'Manufactured in China' to 'Designed in China.' There are a lot of design skills that China has and they're growing. And this focus on innovating in a way that is relevant to customers, at least at Lenovo, it`s in the fabric of the company's culture."

The world, Advani predicted, will soon become familiar with Chinese brand names.

"If U.S. companies, Germany companies, Korean, Japanese companies can have global brands, so can China," he said.

For all the rosy forecasts, China’s phenomenal growth has led to many problems: a growing gap between rich and poor, corruption, increasingly bitter battles over property rights, massive environmental pollution.

Political Backlash

There has also been a backlash in the rest of the world against what many see as a Chinese behemoth that is driving down global wages, stealing jobs from Western workers, and even threatening national-security interests.

Stephen Roach, chief economist at Morgan Stanley, one of the largest U.S. investment banks, highlighted the case of the attempted takeover of America’s Unocal oil corporation by a Chinese competitor. The Chinese had to abandon the deal after U.S. politicians threatened to block it, citing national-security concerns.

Europe too, has been fighting its own political battles with China over cheap textile imports, which have flooded the continent.

Hard To Make Predictions

Roach said he expected similar political interventions in the future, complicating any economic forecasts.

"We may not like it and as economists we may abhor it, but there is a growing political backlash to the globalization of these labor arbitrages that are holding down real wages and employment growth in the wealthy developed world," Roach said. "And that sets the stage for politicians to intervene when the Chinese want to acquire -- at least in this case -- what was viewed as an important U.S. asset. I don't think the rejection of the Sinoc/Unocal transaction was just a one-off thing. It's emblematic."

China is becoming an economic superpower but it is happening so fast that the world is having trouble digesting the news, making the future difficult to predict.