Chinese Economic Reform: The World's Big Bet

A Hong Kong billionaire thinks China is on pace for spectacular, Industrial Revolution-style growth. Is he right? Ronnie Chan, the billionaire Hong Kong investor, says there is only one comparison for China's economy over the next decade: The enormous period of U.S. growth between 1890 and 1914, as industrialization and land grabs combined to rocket the country to prosperity.His audience at the Asian Pacific Business Outlook conference in Los Angeles, largely executives at U.S. companies looking to export goods to Asia, were salivating. But Chan also had a warning."The last ten years have been a very sad period of Chinese history," he said. "China had a great opportunity to launch, if not complete, many of the necessary social reforms. For the past ten years, China basically did nothing in that regard, and they will pay dearly for it."Everyone watching new Chinese President Xi Jingping and his team have wondered how far they will take promises of reform. Most important is support for China's domestic market and its poorer citizens, which many economists see as necessary to continued stable growth.

Chan brought up the recent debate over the wisdom of investing in China between hedge fund short-seller Jim Chanos and Stephen Roach, the former Morgan Stanley Asia economist. While he conceded that social unrest, particularly growing income inequality, could disrupt the Chinese economy (Chanos' concern), he thinks shorts will miss an enormous opportunity."What if social unrest does not happen? You never know when it's going to happen. If it doesn't happen in the next ten years, and you short the market, you're really really in trouble," Chan says.But he has one caveat for his $11 billion of shopping mall investments in China -- he didn't borrow any money for them. Nice financing, if you can get it.The view from the U.S. State DepartmentNearly 30 years ago, Richard Drobnick, the director of the University of Southern California's international business center, helped raise the money for the first APBO. That year, the talk was Japan, then the Asian economic dynamo, with a session nearly every hour of the two day event focused on its economy. Today, it's China.You could sense the mood when Dorothy Lutter, the top U.S. commercial diplomat in Mexico, began a discussion by mentioning "the North American Free Trade Agreement between the United States, Mexico and China -- whoops, I've got China on the brain, must be those speakers this morning."

William Zarit, the senior commercial diplomat in Beijing, was circumspect in assessing the new leadership team. A key worry is that new vice premiere Zhang Gaoli, a supporter of state-owned business, had been appointed to run most economic policy, replacing the more reform-friendly Wang Qishen. However, Wang's job in the new government is fighting corruption, and while that may be seen as a demotion, it's also integral to the reform process and perhaps a sign of the new team's priorities.Policy changes around the margins will effect the economy, but the central test is whether Beijing will adhere to a growth plan it endorsed along with the World Bank last year. It recognizes that the ruling communist party needs to have less direct influence on business, even as state-run companies remain the focus of Chinese growth. So Zarit will be watching how much power the new officials concede to the private sector.

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