Incremental Progress

by Robert Poole

The first quarter of 2011 brought important developments that will affect the course of business in China for US companies. PRC President Hu Jintao made a state visit to the United States in January, helping set a broad framework for further contact and cooperation between the two countries. And China’s National People’s Congress (NPC) met in March for important sessions to review and approve China’s 12th Five-Year Plan, which will guide the government’s social and economic development initiatives for 2011-15. Looking forward, next year’s NPC will see a leadership transition, as the Chinese Communist Party’s fourth-generation of leaders completes their second five-year term of office and the fifth-generation takes over.

Considering the upcoming political transition and that the global economic crisis has mainly reinforced conservative economic policy, aimed principally at ensuring stability and moderate growth, few observers expect to see radical changes to China’s political or economic policies in the near future.

Despite this “don’t rock or sink the boat” pragmatism, major economic rebalancing efforts are underway. Some of China’s broad goals are to change its growth model to increase domestic consumption alongside exports, boost the services economy and its share of gross domestic product, refocus on high-quality and sustainable growth, and balance economic benefits across urban and rural areas. The government must also tackle pressing energy, environment, urbanization, housing, stock market, and hot money challenges in the process.

China has numerous reform efforts beyond these broader goals, too, though they don’t always make for exciting headlines and often proceed in small steps. For example, the country is moving to reform its energy and resource pricing, financial services sector, social safety net, rural and other land and real estate markets, healthcare system, state-owned enterprises, and the private sector. With so much at stake, a cautiously hopping rabbit may be the most appropriate symbol for this “Year of the Rabbit.”

US prescriptions and China’s reactions

I often tell visitors that China’s economic goals of stability and manageable growth drive the country’s economic and industrial policy, sometimes at the expense of what Western experts would consider better or brighter ideas. Though major reforms or Western-style changes may benefit China’s markets, companies, and citizens, they seem unlikely to come soon.

But China does listen to American advice, and changes will continue. The remarkable amount of bilateral contact and cooperation in recent years will proceed in 2011, from visits by high-level officials (likely including the US vice president) to working-level exchanges across a spectrum of trade, commercial, and other issues. Furthermore, based in part on great successeses of the past 30 years of reform and opening, the PRC government generally believes that reforms are beneficial, but only after the overarching goal of stability is served.

Business menu—more of the same

On one hand, China has offered an astounding market to US companies, and rising prosperity will ensure more of the same. How many other countries have at least 140 cities with populations of more than 1 million—markets that foreign companies have only begun to reach in recent years? Many aspects of business activity—such as US exports to China, sales by China affiliates, and services trade—have skyrocketed at rates that should only increase.

On the other hand, companies will likely continue to face challenges while working in China’s hyper-competitive environment—fighting intellectual property infringement, seeking equal treatment and a level playing field, and coping with the rising costs of labor, materials, and land. And, no doubt from time to time, China might release inward-looking policies in one industry sector or another that contain unwanted protectionist bias (and generate headlines and trade friction).

Even considering the known challenges—and allowing for unpredictable events—America must remember that the China market is significant for the United States and that incremental changes will continue to bring improvements ahead.

Robert Poole is vice president, China Operations, at the US-China Business Council in Beijing.