Time now to look to China for economic model

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By Crocker Coulson (China Daily)
Updated: 2009-03-20 07:42

As we enter the second year of our Lesser Depression, Americans have no little cause for anxiety. Each day's newspaper is splashed with fresh stories of layoffs, write-offs, foreclosures and ruinations. What was supposed to be a gentle little postmodern recession has grown sharp teeth.

I often tell my employees that if they would only absorb two lessons from the Chinese, they would never have an economic care in their lifetimes. First, work 12 hours a day with no complaint, and, second, save 25 percent of your compensation each and every year.

Despite the headlines in US newspapers about widespread layoffs among exporters in Southern China, there is absolutely none of the feeling of despair or limited possibilities when you travel around Chinese cities. In the past two months, I visited 20 cities in China and with the CEOs of 30 small- to large-sized enterprises. In every city I visited, the malls were busy, the restaurants were full, and the mood was cheerful and bustling. With a few exceptions - in industries such as electronics, apparel, steel, commodity chemicals, and coking coal - the outlook of the CEOs was resolutely upbeat. These business leaders were not planning to make meaningful layoffs, scrimp on capital expenditures, or cut research and development. In fact, their biggest concern was when the international equity markets would reopen so they could fund future expansion plans.

What's behind the optimism? Most Chinese believe that growth in domestic consumption, urbanization, and industrial productivity in their country now has an unstoppable momentum. Second, Chinese people believe that their government has the commitment, expertise, and balance sheet to do as much as possible to shield China from the global meltdown. And the third factor is that amazing savings rate - even laid-off migrant factory workers have been accumulating an enormous nest egg over the past decade.

Our political system, too, could stand to learn from the Chinese example. China's government has accomplished an economic miracle that is unprecedented in world history by lifting hundreds of millions of people out of poverty in 15 years. Many of those have now ascended to China's middle class, which is expected to number 700 million people by the year 2020 - making it far larger than America's middle class.

Among the Chinese economic policies and practices America should consider adapting to our needs are:

A Five-Year Plan

Every five years the National People's Congress (NPC) comes together to hammer out a new five-year plan that provides the framework for economic and social development. The leadership takes these plans incredibly seriously as it regards delivering consistent and rising prosperity its top priority. They assign many of the best minds in the nation to do the planning and analysis, and they hammer out consensus among provincial-level officials well in advance of the NPC.

The 11th five-year plan (2006-10) includes very specific targets for things like GDP growth (7.5 percent), R&D spending as a percentage of GDP (2 percent in 2010, up from 1.3 percent in 2005), and expansion of the old-age pension plan (223 million covered in 2010, up from 174 million in 2005). Because China's economy is now so permeated with free enterprise, the government is no longer able to issue economic fiats. But the five-year plan does establish a very clear and consistent framework for private businesses to plan within. It also sets clear parameters for companies and local leaders who wish to access government resources, win government contracts, and enjoy government support for their expansion in the form of land grants, tax breaks, and fast-track business licenses.

No Chinese CEO would ever invest in a business that contradicted the key goals of the five-year plan. For too long America has wandered away from the path to future prosperity, and we need a clear strategic plan that transcends the election cycle to get us back on track.

Industrial Policy

China has a very clear and extremely granular industrial policy that manages to set broad directives while leaving the majority of the innovation and capital allocation to achieve these objectives to the private sector. China's National Development and Reform Commission (NDRC) plays an enormous role in executing and overseeing the board policies set in the five-year plan.

Right now the NDRC is developing and executing wide-ranging directives to ensure China's continued prosperity and economic rise in the coming decades, including:

Creating a fast-track, massive stimulus to support sustained growth in 2009, bolster infrastructure, and enhance rural incomes;

Moving China's industrial mix away from low-value, low-wage assembly to precision manufacturing and high-technology enterprises that will move China up the global value chain;

Encouraging growing investment in R&D and collaboration with research institutes to develop "made in China" technologies;

And driving wide-ranging energy-efficiency initiatives to reduce China's dependence on foreign oil and reduce energy consumption per unit of GDP produced.

Ask Chinese CEOs how much they plan to invest in R&D, and 75 percent will say their target is around 2 percent of revenues - exactly in line with the 2011 guideline. Coincidence? Maybe. Want to know which company applied for the most international patents in the world in 2008? Not Microsoft, not Google, not Cisco - but rather Huawei, the "Cisco of China", which also does a lot of work for the Chinese Government. It filed 1,737 patents last year. Got your attention yet? Declining innovation by a country whose place in the global value chain is based on our marketing, branding, and technology edge does not bode well for our future. We cannot afford to wander into the future with no national industrial policy.

Sound Fiscal Footing

China's government is as frugal as its citizens, while the United States' profligacy now exceeds that of its consumers. China is sitting on $1.95 trillion in foreign reserves at the end of 2008. To fund our stimulus bill, the United States will have to continue to borrow at an epic scale and/or spin the printing presses, inevitably devaluing our currency and placing a crushing burden on future generations of taxpayers. China's two-year 4 trillion yuan ($586 billion) stimulus package is far larger relative to the size of their economy than anything the Obama administration has announced. And they could repeat it four times over without getting into debt.

China and the United States are the gargantuan conjoined twins of the world economy, sharing one blood system in constant circulation of money, goods, labor, and ideas. While China can make it through a year or two of a global recession without lasting damage, in the longer term, the United States must be healthy for China to feel in bloom. After all, we are by far their largest investment. China's biggest challenge now is to encourage its consumers to spend some of their accumulated savings, build service jobs, and reduce their addiction to overcapacity for exports that fewer people around the world can afford to consume.

I suspect that over the next four to eight years of the Obama administration, America's approach to managing our economy will start to look a lot more like the one developed by Deng Xiaoping, the late leader of Communist Party of China. And that, my fellow Americans, is not the damning statement that many so-called conservatives would have you believe. It may just be the only way we will preserve our standing in the world and conserve the prosperity we have come to enjoy in these many decades since our last depression.

The author is president of CCG Investor Relations, CCG Asia (China) and CCGK (Israel)

(China Daily 03/20/2009 page9)