China needs to look inward -- after many years of looking outward -- to expand its economy.
China's economy has hit a rough patch. Its GDP, which averaged 10% growth from 2000 through 2010, has dipped to single-digit growth over the past three years. Growth in its service sector slipped to a five-year low in January before rebounding in February. And the factory sector, industrial production, and investments aren't showing the robust growth they once did either.
This situation seems alarming to investors because of China's profound impact on the world's markets. But Tao Wu, Ph.D., a Â鶹´«Ã½AV expert on the Chinese economy, says the country is becoming more comfortable with slow growth -- and maybe the world's hand wringers should too. Dr. Wu says China is starting to see the upside of a down economy, including newfound prospects for entrepreneurship and a burgeoning consumer economy, which offer new opportunities to the rest of the world.
Â鶹´«Ã½AV Business Journal: For years, manufacturers have been moving production to China because of the low labor costs. But now, labor costs are increasing in China. Why is this happening now?
Tao Wu, Ph.D.: A simple answer is because the economy has been growing quickly but not efficiently. As a result, the costs of land, resources, production, and labor have all gone up. China has been passionate about its GDP growth, which has been on a fast track for many years. During the economic crisis, the government put in place a package of stimulus programs that created a lot of overcapacities, and that's partly to blame for the increase of labor costs and for driving up commodity prices across the world. China needs to cut production in some areas where it has overcapacity, control its property prices, and shift production to industries that are more efficient and profitable. China needs to look inward -- after many years of looking outward -- to expand its economy.
What is the typical management style in China?
Dr. Wu: Here's an example of the differing management styles I see. When I'm in a meeting at a multinational company based in China, there will be a lot of dialogue -- everyone is trying to chip in, everyone is trying to build consensus through conversation. But when I'm in a meeting at a local company, the management style could be very different. It's often one person making decisions. Everyone else at a meeting brings notebooks -- they're very good note takers. These Chinese managers basically pass orders, and employees are extremely good at executing them. They know how to implement; they will make things happen for you. What the employees need to worry about is whether those actions are moving the company in the right direction and fulfilling the missions of the company. What the managers need to worry about is whether the front-line workers are engaged in doing what they're supposed to do, which is critical to increase productivity.
Considering the workplace culture you describe, do you think employee engagement strategies would work to increase productivity, especially in state-owned companies?
Dr. Wu: Employee engagement is on the management agenda, but it's of lower priority. Employee engagement is probably not as important as customer engagement yet, but management definitely is thinking about it, at least as an intervention tool or as a driver of customer engagement.
As the global economy slows down, where will China's growth come from?
Dr. Wu: China is still going through a rapid pace of industrialization and urbanization. About half the people live in urban areas now, which is where the better jobs -- and better paid jobs -- are. So it's natural for farmers to come to cities to look for those better jobs. That's still the trend, and it will continue. But rapid urbanization creates problems: traffic congestion, higher housing prices, pressure on schools and hospitals, and environmental problems. So China is thinking about how to build smaller cities where it can house and provide opportunities for migrant workers. China also wants to encourage entrepreneurship so people aren't so dependent on city jobs. Urbanization is still one of the key drivers of economic growth for China. But growth should come not just from building factories but also from building housing, hospitals, schools, and -- more importantly -- social services, all of which would be critical to improve the well-being of the migrant workers. This must be an organized process, not a random one.
Wouldn't it be difficult for a government -- especially a centralized one -- to nurture entrepreneurship, because that requires giving up some of its centralized control?
Dr. Wu: But the government is very committed to economic growth and to reforming the existing system, to fully embracing market economies. To create growth opportunities, you must let people create a business, let small businesses create jobs. Policymakers know entrepreneurship is very important.
Where do you see the most entrepreneurship in China? What industries attract the most entrepreneurs?
Dr. Wu: The Internet is big in China, and it's creating many jobs. The environment is a rich area for innovation and investment too. Because of years of development, air pollution has become a serious problem. So the government wants to declare a war on air pollution. That takes better technology, so that's an area where there will be significant investment and economic growth. And of course consumer spending is a big opportunity of growth too. For many years, China's economy has been dependent on state investment, but that has created overcapacity, especially in the manufacturing sector. China must look inward to build a stronger consumer economy.
But it takes time to build a consumer economy, and the process is almost certain to be a drag on growth.
Dr. Wu: For many years, China wanted to achieve high-speed economic growth. But lately, GDP is becoming almost a negative term in China. China is starting to see the downside of excessive economic growth, including overproduction and environmental damage. China is becoming more realistic about economic growth, and it's not seeking growth just for the sake of growth anymore. This year, the GDP growth target is 7.5%. People are becoming more relaxed about slowing down. China is starting to want to strike a balance between economic growth and well-being, to have a quality and better living condition for its people. I think the world should welcome this, not worry about it. I think slower and healthier growth for China is good for the global economy, not bad.
Your position that slower growth can be good isn't typical.
Dr. Wu: I know. People are worried; they think the slowdown of the Chinese economy could be bad for the world economy. I don't think so. In the short term, an economic slowdown could be bad for countries that sell commodities to China, but it also could create opportunities to develop other markets, such as IT and high-tech products that are environmentally friendly. China is a country in which different areas of the country are at different levels of development. There are many opportunities here. The message should be clear: We welcome healthier and more balanced growth here in China. People must understand that.
-- Interviewed by Jennifer Robison
