As solid as China's growth has been (see Figure 1) and as steady as the government’s hand might seem, a growing list of risks could impede or alter China’s progress.
Foreign multinationals tend to focus on risks to China's domestic economy. What is the likelihood of overinvestment and overcapacity caving in? How is deregulation changing the business landscape and will it increase or reduce corruption? Some even discuss the need to offset their China risk with a presence in Vietnam or Malaysia. Perhaps the biggest risk foreign firms are trying to fathom, however, is the risk of not being in China at all.
Chinese companies, on the other hand, are pondering the risks of greater foreign competition, how to offset it by expanding overseas. "The risk for many Chinese companies is integrating foreign companies into their portfolio, how to make it work," said Edward C. Tse,
Managing Director, Greater China, Booz Allen Hamilton, People's Republic of China.
Many risks lay beyond companies' control. Political manoeuvring in anticipation of the 2007 meeting of the Central Committee of the Communist Party of China to elect the new Party leadership, for example, has distracted the bureaucracy, imposing delays and constraints on foreign investment. And there are utter wild cards, such as an avian flu pandemic or the possibility of an armed conflict on the Korean peninsula.
 | "Today we see a lot of risks in the private sector and the country in general is borne by the banking system, which takes on most of the corporate risk."
John P. Drzik
President, Mercer Oliver Wyman (MMC), USA |
|
One of the greater risks, though, is raised in the World Economic Forum's scenario report China and the World: Scenarios to 2025: an increasingly protectionist world that forces China and the rest of Asia to turn within for growth. The breakdown of the Doha Round appears to have increased the plausibility of this scenario, raising the risks to China and businesses in the country. "What this implies
is that the global supply chain is going to be severely affected and that you’re going to, as a business, have to develop and depend upon regional supply chains," said Jean-Pierre Lehmann, Professor of International Political Economy, IMD (International Institute for Management Development), Switzerland. As bilateral trade agreements multiply, the danger is that increasingly complex rules will raise transaction costs and complicate trade.
China’s vulnerability to imported oil supplies is also fostering a well publicized push overseas to secure oil-rich friends. Beijing’s diplomats and executives have become frequent visitors to Central Asia, Africa and South America. China has also assumed a more proactive role in settling diplomatic disputes in areas it depends on for oil, such as Iran.
While those efforts may help mitigate the risk of an oil supply shock, for those in China the ability to offset risk would be greatly enhanced if its stock and bond markets were more developed. "Today we see a lot of risks in the private sector and the country in general is borne by the banking system, which takes on most of the corporate risk," said John P. Drzik, President, Mercer Oliver Wyman
(MMC), USA (see Figure 2). Insurers also want the freedom to invest in a wider range of assets to enable China’s savers to better hedge risks to the value of their nest eggs. “Rome was not built in a day,” cautioned Tu Guangshao, Vice-Chairman, China Securities Regulatory
Commission, People’s Republic of China. Before China can further liberalize its capital markets, he said: "We need to improve our legal system and also the corporate system as well as our cultural system."
 | "It is not easy for companies from the West, who are often seen as 'wolves', to
get a foothold in the Chinese market and generate a profit."
Liu Changle
Chairman of the Board and CEO, Phoenix Satellite Television Co., Hong Kong SAR; Co-Chair of the China Business Summit 2006 |
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These home improvements are vital, as David Dollar, Country Director, China and Mongolia, World Bank, Beijing warned: “To keep growing quickly, China needs to improve its institutions." For example, a basic impediment to implementing much of China’s transformation plan is
the lack of safety nets for unemployment, healthcare and retirement. Without them, the Chinese will continue to save at prodigious rates, instead of channelling funds to more productive purposes. The absence of social security also limits entrepreneurship and the willingness of investors to take risks. "Savings are high because there is insecurity,” said Pierre E. Cohade, President, Asia Pacific Region, Goodyear Tire Management Company (Shanghai), People’s Republic of China.
The weak rule of law is another risk. Take intellectual property rights. Enforcement of IPR protection, while improving, remains patchy due to feeble commitment at the local level and the lack of a sufficiently independent legal system. This is not just a problem for foreign investors. In fact, about 90% of IPR infringements involve domestic firms. "The general issue is the extraordinary
degree of decentralization in China," Dollar explained.
Yet, the obstacles and risks that could block China's economic transformation offer the very commercial opportunities that could drive new, sustainable growth. Japan and the US could supply China with the technology to enhance energy efficiency. The lack of social safety
nets represents a "humongous opportunity not just for improving the quality of life in China but for unleashing all these savings,” said Cohade. He predicted that "empty nesters", parents born during the years of the Cultural Revolution whose single child has already grown up and left home, would be "the engine of consumption" in coming years. "Understanding the empty nesters is going to be critical” for retailers and financial services providers.
