An Uncertain China

As the world shifts its political positions and emerging countries flex new found muscles in the aftermath of the global financial crisis, how has China reacted to the situation? As always when it comes to this enigmatic nation, the signs are mixed, and are not consistent. It is also becoming apparent, at least, that U.S.-China comparisons are not really valid. Should a comparison be made with any country, surely it would have to be with India. Not only are the two nations neighbors, they also have massive populations, emerging domestic markets, and until recently, shared religious values. On the other hand, there is mutual mistrust, still simmering border disputes, and completely separate political systems. The similarities and differences between the two are far more aligned than those between China and America.

China’s position over India remains odd. Disputes caused long ago, before India became independent, and before the Communist Party was even established in China, continue to worry both nations like an itching scab. The Great Game between Russia and Britain, and the use of Tibet as a buffer state to separate the two superpowers, has resulted ultimately in a Tibet under communist rule for the first time, a border war between China and India in 1962, and several border disputes, which although both sides recently “agreed to disagree” about, have recently flared up again.

China’s use of its veto at the Asian Development Bank to deny India, for the first time ever, a loan for the development of Arunachal Pradesh, was purely a political issue, and nothing to do with finance or development. China has never controlled the region, yet used its veto to deny India the funds to develop an area close to its border, and upon which China has claims. This is neither consistent, nor particularly statesmanlike.

Elsewhere, China’s issues appear to stem from the difficulties the country now faces in managing itself as a one party state. Make no mistake, this is not an easy thing to do, and to remain benign, committed to development, economic progress and integration with the global community while utilizing such a system has never been attempted before. People forget; while China may appear to have been stable over the past three decades, the Chinese social experiment still remains unproven. Cracks can and do appear – with unemployment rising, graduates leaving, and local corruption fuelling peoples anger, the masses can quickly get out of control. This remains a problem with a one party state, where locals cannot just vote an unpopular or corrupt official out of office, and whose party apparatus largely protects those who sin.

This remains in stark contrast to India, where national elections are currently being held under relative peace, security, and transparency. Over 670 million people are voting, while newspapers from all political views promote their candidates and are dismissive of others. The system used is courtesy of Infosys, is electronic and provides, according to Infosys founder, Nandan Nilekani, “faster settlement than most Western stock exchanges.” China meanwhile is stuck in a system that is patriarchal, yet not answerable to the people at the same time. It’s these internal conflicts that provide China with its own fault lines. They are likely to get worse. China’s population is aging, and this will bring greater stress on a social system that does still not cover all its citizens nationally. As people age, social welfare costs increase, workers salaries have to rise to cater for their aging responsibilities for families at home. The stress levels on the Chinese government under such a system are huge, and not entirely understood. The fact remains, that as an experiment in managing over a billion people, without permitting them the right to vote or rule of law to challenge the system, China is taking a huge risk. It’s never been done before.

India on the other hand, has a young population, and with no state mandated population control in place, is going to be producing much of the world’s low cost labor for decades to come. Younger populations have long been recognized as primary drivers for growth and consumption, and India’s is overtaking China’s right now in this regard. It will be India’s population that begins to drive the global economy, just at the same time that China is slowing down.

India’s democracy, while shambolic at times, is a system that can be absorbed by the population, and largely is. Corrupt officials, if caught, face intense media scrutiny, and are accountable to their voters. If serious offenses are committed, government officials can go to jail. While that is also true of China, the procedure is a closed session process – after all, it’s the party apparatus that is on trial, not just the errant official. Newspapers are barred from reporting, and judges are ‘advised’ not to hear cases. That is not stability. Neither is it sustainable.

In short, while I weigh up the pro’s and con’s of both China and India, it is the rise of both economies that is the real global question. Perhaps controversially, I would state that it is India that is winning the game. China to me – and I lived there for 16 years – is erratic, uncertain, and has reached a glass ceiling in its development. I think it will struggle to get over without extensive changes to the government apparatus. Take for example Chinese companies investing overseas. Apart from state-owned enterprises securing energy and other vital resources for the nation, Chinese companies are not free to invest abroad. They must still seek permission from the government. This impinges upon the ability for China to grow and develop its own breed of truly global entrepreneurs capable of selling “brand China.” This is in direct contrast to India, whose businessmen – and businesses – are developing into global behemoths. Formula One is a good example. While China made the headlines in hosting an annual race in Shanghai, it was India who put together a team, racing under national colors and exposing itself to all 17 races instead of just the one.

None of the scenarios I mention are reasons to abandon China. In fact, I believe the domestic opportunities to sell to the <a href="http://www.dezshira.com/en/china-services.html">Chinese market</a> are improving. But when it comes to strategy, the dreadful term “Chindia” doesn’t fit the bill. Both China and India need separate attention, and understanding as to their differences and developments. Longer term however, China in my mind looks uncertain in its apparently new-found role as a focal point of the global engine for trade. Fingers are being pointed, questions asked, and it is not used to this. Meanwhile, India continues to develop and looks more confident on the international stage. I will continue to invest and develop business in China. But longer term, I am also putting my money and investing in India. A China-only strategy, when it comes to global development, is no longer enough.

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About the author

This article was written by Chris Devonshire-Ellis, for the China and India business news forum, 2point6billion.com. Chris also writes for the Chinese business news website, China-briefing.com, which is contributed to by the China tax and law firm, Dezan Shira & Associates, who have been doing business in China for over 20 years, assisting with China tax, legal and company set up such as China WFOE's.

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