SHANGHAI: China's commercial capital could soon be a real threat to Hong Kong's position as the region's financial hub

Four hours and 300 kilometres from Beijing, thirty minutes from Datong, the second most important city in Shanxi province, the bus screeches to a halt. The journey this Saturday has been dull thus far-a monotonous landscape of mid-sized mountains and dusty agricultural land enlivened by occasional glimpses of olive green, school and college students in work clothes planting trees on an off-day-but that is about to change. The reason for the stop is a small group of cars blocking the road ahead, a reception committee for the Confederation of Indian Industry (CII) delegation aboard the bus in general, and one member, Ravi Jhunjhunwala, the Chairman of the LNJ Bhilwara Group, who is evaluating an investment in Datong, in particular. Deputy Mayor Wang Yanfeng hops on, delivers a short welcome speech, makes sure to press the flesh with Jhunjhunwala, and hops off. Then the convoy is away, a pilot car, lights flashing, three black sedans, a Volkswagen Passat, a Mercedes E Class, a VW Santana, and the bus.

In today's global economy, countries are either on the bus, or off it. China is firmly on it. India (See India & China: A Comparison) is sometimes on, sometimes off. It isn't just China's economic statistics that impress. The country has constructed some 50,000 kilometres of expressways in the past decade, 25,000 kilometres since 1998, or a little over 17 kilometres a day. Some, such as the 360-kilometre expressway linking Beijing to Datong don't see much traffic, but China is building for the future, not the present. India still can't get over the 13,151-kilometre long Golden Quadrilateral that will be in place by 2007.

The Shanghai skyline alone, by some estimates, has seen the emergence of 20,000 high rises over the past 10 years. India is still raving over Delhi's satellite township Gurgaon and Mumbai's Bandra Kurla complex which, together, boast less than 100 high rises.

And at the time this article is being written, China has 160 million mobile phones (add a couple of million for the week it will take the magazine to hit the stands); India has a mere 6 million. So, if you don't find too many India-China comparisons in the pages that follow, you know why; it was beginning to hurt.

Circa 2002, though, several question marks surround China's ability to become the world's pre-eminent economy by the mid-21st century. The month of March and the first two weeks of April have been devoted to China-bashing in the international media with most publications and channels featuring stories on how China couldn't have grown at over 7 per cent last year without fudging its numbers. Growth at a regulated rate has never been as important to a country as it is to China now. "We must grow at a minimum of 7 per cent to ensure that the benefits of market reforms percolate to the rural areas," says Michael Guo, the General Manager of Gallup's Beijing operations. "But if we grow at over 9 per cent, inflation could set in."

The Chinese leadership must address the issue of non-performing liabilities (NPLs) in the banking system, a staggering 3.6-4.2 trillion yuan ($434-507 billion or Rs 21,25,003-24,79,170 crore) and restructure the country's ailing State-owned Enterprises (SOEs). "The asset management company (AMC) approach hasn't worked," explains Rakesh Sharma, the chief representative of the State Bank of India's Shanghai office, referring to the Chinese government's decision to create four AMCs to take over the NPLs. It isn't hard to see why: the quality of NPLs is such that there are few takers for them despite the discount.

Inefficient State-owned Enterprises (soes) account for 40-70 per cent of China's GDP, depending on the definition. According to the American Chamber of Commerce in China, if joint ventures with SOEs and ventures promoted by townships aren't included the figure would be less than 40 per cent. And the government must ensure that the widening gap between the rich and the poor doesn't result in social unrest. Then, there are concerns over China's zooming fiscal deficit, estimated to touch 309.8 billion yuan ($37.43 billion or Rs 1,82,868 crore) this year. India's own problems look puny in comparison. So, will the middle kingdom take its rightful place in the sun? Or will it flame out in a spectacular burst of Chinese fireworks?

Infrastructural Glut

Signs of construction are everywhere in Beijing and Shanghai. Even Datong isn't immune to the seemingly metropolitan urge to build that characterises China's two most important cities. The roads are new, old buildings are routinely pulled down and replaced with glass and chrome high rises, over-passes abound, and there's a feeling, part Stalinist pride, part Hong Kong Chinese opportunism, about the impulse to build, build, build.

"Infrastructure is the key to attract companies to invest in China," says Laurence Brahm, the Chief Executive of the Naga Group, a Beijing-based consulting firm. "The government should provide the platform (for companies) to lay the empire," adds Wang Bingxin, the Director-General of the Department of Foreign Affairs, Ministry of Foreign Trade and Economic Co-operation (MoFTEC) making a lyrical allusion to a popular Chinese proverb.

Circa 2002, the result may be an infrastructural glut, but there's no denying the relationship between infrastructure and foreign investment. Of the $300 billion (Rs 14,65,650 crore) FDI China has utilised since 1995, a little over 70 per cent has originated from Hong Kong, Korea, Japan, Taiwan, and yesterday's tiger economies of South East Asia. "These export-oriented economies have had no recourse but to relocate their manufacturing facilities in China," says Ratan Malli, the Head of Account Planning at J. Walter Thomson's Shanghai office.

Beijing boasts Asia's largest commercial complex, THE ORIENTAL PLAZA. Spanning 1 million square feet, OP is backed by the Tungs and L-Ka Shing and involves an investment over $2 billion (Rs 9,771 crore). The details: eight towers of office space, four of service aprtments, five malls, a five-star hotel, and a three-storey indoor car-park. Retail is big business in China and one of the country's great hopes in terms of creating jobs.

It isn't just infrastructure that attracts such FDI, it's the presence of cheap labour. The government's initiatives of the past decade created a huge labour market, with surplus agricultural labour migrating to the cities. Thus, China became the destination of choice for most export-oriented companies in the region. Their manufacturing moved on-shore to China where the infrastructure was comparable to what could be had in their own countries, and the labour was plentiful, cheap, and productive. And their expensive managers stayed off-shore.

It helped that Red China didn't (and doesn't) have unions or antiquated labour laws. "My people are all on contract," says Murali Sivaraman, the Managing Director of ICI Swire Paints (Shanghai) Ltd. "I can hire and fire as I like."

Infrastructure and labour come together to create China's much vaunted cost competitiveness. This, despite China's new-fangled initiative to create a social security net by having employers pay 0.53 yuan to the State for every yuan they pay their employees. This, China hopes, will be able to take care of pension, housing, and medical benefits for the employee post retirement. "On an average, the wages here would be around 70 per cent of what they are in India," says G. Maheshwar Rao, the Vice-General Manager of Aurobindo (Datong) Bio-Pharma Ltd, a 100 per cent subsidiary of Hyderabad-based Aurobindo Pharma.

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