AUROBINDO PHARMA may well have hit upon the ideal entry strategy into China. In 1998, it formed a JV with Shanxi Tongling to set up Aurobindo Tongling. Now, Aurobindo is investing $50 million (Rs 244 crore) in a 100 per cent subsidiary. Tongling may have nothing to do with the new venture but its Chairman, Hanyan Lin (second, from right, below), is thrilled to show people around the plot where the Aurobindo plant will come up. Estimated start of production: August 2002.

Not all multinationals are here because of the infrastructure or the cheap cost of doing business. "I wouldn't compare the quality of infrastructure here with that in Hong Kong or Canada or Mexico," says Michael Furst, the Executive Director of the American Chamber of Commerce in Beijing. "But it has improved relatively." As for the cost of doing business, adds Furst, it may be less in China than in Western Europe or the US, "but there are a number of other places like Thailand or Indonesia that are cheaper."

If these companies are in China, then, it is because the country is a market that just can't be ignored. At 900,000 units a year, the size of the Chinese car market isn't large, but by 2025, it is expected to touch 16 million units a year. "Already, 38 million urban families can afford to pay 100,000 yuan (Rs 5.9 lakh) for a car," says Gallup's Guo. And, as everyone who has been reading the papers knows, China boasts the world's largest mobile phone market. The huge market has its advantages. ''The Chinese really understand the volume manufacturing business," points out Prakash Menon, the General Manager of NIIT China, Shanghai, (a general manager in China is the equivalent of a CEO elsewhere). Menon's argument: the domestic market's size, apart from factors like the quality and cost of infrastructure and labour, helps the Chinese cut production costs and is the source of their global competitiveness.

Only, the Chinese domestic market isn't one homogeneous mass buzzing with growth angst. By 2001, 83 per cent of the products and services sold in China were in over-supply mode. "We are in the midst of a transformation," explains Guo. "From a shortage economy to a surplus one; from deflation to price wars between companies; and from an era of stable jobs to one of layoffs." There's more: channel costs in China have traditionally been high and it is only now, with the emergence of large organised retail chains, that these are coming down. Product penetration levels in the top 20 per cent of the population in China's four largest cities range from 91 per cent for cameras, through 97 per cent for refrigerators, to 100 per cent for colour televisions. Ergo, in some categories-fast moving consumer goods, for instance, where the likes of Unilever have found the going tough in a market where 35-40 per cent of products sold are fakes-the domestic market isn't growing, it is shrinking.

SHANGHAI'S SKYLINE would put Manhattan to shame. By some estimates, over 20,000 skyscrapers have come up in the city in the past 10 years. For the trivially inclined, the city was once home to 18 per cent of the 'sky scraper cranes' used to build high-rises. Even today, it is home to 15 per cent of them. But the hectic construction has caused a glut: close to 40 per cent of residential and commercial space in Shanghai is empty, and the city just doesn't have the retail traffic to support all the stores that have opened.

Exacerbating things is the growing divide between the rich and the poor, and the decrease in salaries that inevitably accompanies the government's efforts to restructure SOEs. Shanghai's steel-workers-turned-cabbies, for instance, have seen their salaries fall from 2,000 yuan (Rs 11,805) a month to 800 yuan (Rs 4,722).

Cooked Goose; Cooked-Up Numbers

If last year's popular refrain concerned China's ability to become an economic superpower then, this year's has been the "Coming Collapse Of China" (also the name of Gordon Chang's recent best-seller). Going purely by reports in the media, nothing is right in China: its economic statistics are cooked up; workers at SOEs are rioting because they don't like being laid off (or they simply want to be paid); and the government's huge spends on infrastructure-another $40 billion-odd (Rs 195,419 crore) will be spent over the next six years, just on getting Beijing ready for the Olympics-have caused the country's fiscal deficit to swell.

Some Chinese believe much of this criticism stems from the US' efforts to ''do to China now, what it did to Japan in the 1980s''. "I think the coverage has been a little harsh," says Brahm of the Naga Group. Liu Jin Ping of Shanghai's Foreign Economic Relations and Trade Commission doesn't budge from the figure of 7.8 per cent growth in GDP ''that was mentioned at the People's Congress," and says the truth must be evident in "China's thriving domestic economy''.

"Infrastructure is the key to attract companies to invest in China." Laurence Brahm, CEO/Naga Group

Most foreign companies operating in China are veering around to the view that even if the GDP didn't grow by 7.8 per cent, it must have certainly grown by over 5 per cent. And that, in an economy with a GDP of over a trillion dollars, isn't an insignificant rate of growth. "I don't think there is a doomsday scenario," says Furst of Am-cham. If there is one number that indicates the solidity of the Chinese economy, though, it is the accumulated savings of its people: some 6,500 trillion yuan ($785.34 trillion, or Rs 38,36,81,100 crore) at the end of 2001. A portion of this (no one quite knows how big) goes into government bonds that fund infrastructure projects.

"There are a number of otehr places like Thailand or Indonesia that are cheaper." Michael Furst, ED/American Chamber of Commerce, Beijing

China's fiscal deficit, at 3 per cent of GDP isn't as scary as India's 5.3 per cent, but that isn't the worst of the country's problems: creating a social safety net and narrowing the gap between the rich and the poor are. China has set the first in motion-but the 53 per cent rule may just end up making life tougher for soes that employ over 50 per cent of the country's workforce-and is hoping growth in the services sector and the government's diktat to businesses and investors to "Go West" to the under-developed hinterland will solve the second. "The most important means to reduce the gap between the rich and the poor is the taxation policy, which means to help the groups who are yet to get rich through our taxation policy. I believe that this problem will be solved after a certain period of time," said Chinese Premier Zhu Rongji in his address at the recently concluded People's Congress.

"We must grow at a minimum of seven per cent to ensure that the benefits of reforms percolate to rural areas." Michael Guo, GM (Beijing)/Gallup

Still, there are enough positives that point to this being China's century. The first is the ability of the Chinese to take an idea and act on it. Then, there is the Chinese political and administrative system. Autocratic it may be, but China has managed to evolve two parallel streams of governance that work well for it. The first is the administrative layer: from deputy mayors to the Premier, who take care of the business of administration. Most people in this layer are educated (highly qualified would be the term to use if one is comparing them to Indian politicos). The second is the Party-layer. ''This runs right to the top, alongside the other stream, and is a way to reward outstanding party workers without really giving them positions they cannot manage,'' explains Menon of NIIT. Corruption is an issue, but the fact that the only way individuals can rise up the hierarchy is through performance-a mayor, for instance, would be appraised on his ability to attract foreign investment and develop the region under his control-ensures that it doesn't hamper growth. Finally, the Chinese have developed the art of compartmentalising things. Thus, rather than try and address all issues facing the economy, the Chinese leadership has earmarked some of them, such as the one concerning NPLs, for the next generation of leaders.

How that eventually works out is debatable, but by most counts, the Chinese are unlikely to let their economy flag till 2008; they'd hate to have anything spoil their Olympics party. If they can keep it going past 2008, China could well become the world's largest economy by the middle of the century (some analysts say sooner). If they can't, the fabled middle kingdom could find itself where it was in 1980, perhaps worse off. End word: As Rongji said at the People's Congress, "China's kung-fu (economics) is fairly good." For now.

-additional reporting by Ashish Gupta

1 2 3