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    Myth and modernity: China is feared and revered by the West

    Myth and modernity: China is feared and revered by the West

    The next horizon

    3 October 2015

    Given that the chaos which engulfed China over the summer included the bursting of the stock-market bubble, a double currency devaluation, and a slew of data pointing to a bumpy economic landing, it’s worth remembering what the country was, is, and would still like to be. And it’s important to remind ourselves what China’s continuing if unsteady rise means for British business.

    Let’s start with the traditional (but misplaced) British view of China. For centuries, the West struggled to define a country it alternately feared and revered. Europe plundered the mainland for art and silk, while America corralled Chinese workers to build its railroads. Yet we also imagined a land of myth, mysticism and Marco Polo — akin to the Tibetan paradise of Shangri-La in James Hilton’s 1933 novel Lost Horizon. This stylised image of the Middle Kingdom has stuck firm in our mind. On the one hand, we see a bellicose nation seeking world domination — an echo of 19th-century fears of the ‘Yellow Peril’. On the other, we place the country on a spiritual pedestal.

    The more prosaic truth, as an American banker recently put it to me over breakfast in Beijing, is that modern China is ‘just like everywhere else, only a lot bigger, dirtier, and more densely populated’. Its leaders, though unelected, are much like ours: clever, mostly well meaning, and sensitive to public opinion. Cities are no longer encircled by towering walls and bronze dragons, but by ring roads jammed with German cars conveying harried commuters to work. Shopping takes place less in street markets and more in malls full of European brands. Chief executives tap away on Japanese laptops; in the evening, the young frequent bars where they listen to the latest Korean pop sensation.

    And like the rest of us, China has economic crises. For years we forgot this, lazily assuming that what has become the world’s second-largest economy could carry on ballooning for ever. Investors in the City and on Wall Street certainly hoped so. In the aftermath of the financial crisis, Beijing took up much of the global slack, flooding its economy with so much cheap money that it barely stumbled during the dark days of 2009.

    So it came as something of a surprise this summer to realise that China was run by mortals, not mystics. A rather cack-handed reaction to an eight-month share bubble saw the government spend £100 billion to prop up stock prices before admitting defeat. When the central bank devalued the Renminbi twice, ostensibly to create more wiggle room over monetary policy, the decision was poorly communicated, leaving other Asian economies in fear of a new currency war.

    When premier Li Keqiang later spoke at the World Economic Forum in Dalian, he sought to blame stock market gyrations on global imbalances, and described China as not a ‘source of risk but a source of growth’. Yet he seemed ill at ease, wagging his finger at the audience and reinforcing the impression that Beijing was no longer entirely in control of events within its own borders. Li in particular had good reason to sweat: it was his decision to prop up stock prices in the summer that had undermined the state’s credibility.

    Yet much of the turbulence stems directly from the fact that China’s economy is still more akin to Manchester in 1860 than London or New York in 2015. Thirty years of breakneck development have polluted much of the country’s air, land and water, and created a huge but lumpy economy almost entirely devoid of good governance. The world was shocked by the deadly industrial explosion in the port city of Tianjin in August. What’s actually surprising is that major accidents don’t happen more often.

    Where China goes from here matters to us all. In recent years, party leaders have stressed the need to build a more ‘balanced’ economy less dependent on exports and heavy manufacturing and more dependent on consumption and services. ‘This is a serious long-term shift in Beijing’s thinking,’ says Chang Liu, chief China economist at London-based Capital Economics. ‘China transformed itself into an agrarian society in the 1950s and a manufacturing powerhouse in the 1980s. The 2020s will all be about services and creating a joined-up economy.’

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    Making this shift won’t be easy. There are plenty of vested interests determined to maintain the status quo, from the heads of unwieldy state-owned enterprises to powerful governors ruling over industrial provinces. Those at the apex of the system know that any transition to a services-based economy has to be carefully managed. It cannot come entirely at the expense of broader growth, which generates jobs and underpins the Communist party’s credibility and legitimacy.

    Yet Beijing has little choice. Most seasoned analysts reckon the economy is growing at between 4 and 6 per cent — below the government’s rosy projections of 7 per cent and close, for a mass-population economy at this stage of development, to recession territory. Slower but healthier growth is imperative if the country really wants to claim Great Power status. Besides, pump-priming no longer works: £700 billion has quietly been spent on stimulus measures this year in an attempt to engineer growth, to little effect.

    China’s long-term aim of creating a Singaporean style of governance (lots of state control wedded to clean technology plus service-based growth) should be good news for the UK. The kinds of products that Beijing desperately needs — high-quality legal, architectural and business services among them — are the kind at which the British in general, and London in particular, excel. If German and Japanese manufacturers profited from China’s desire to build its basic superstructure, leading British companies — from information service providers such as Experian and outsourcers such as Serco and Capita to risk consultants (Willis Group) and advertising and PR specialists (WPP, Huntsworth) — can benefit from the need to stitch it all together.

    You can already see this happening. Two years ago, the City-based law firm Clyde & Co opened a fully operational joint-venture office in the southwestern city of Chongqing. It was quite a coup: until then, international firms were restricted to ‘representative offices’ that could advise foreign clients but not local enterprises. Clyde & Co Westlink can do both: partner Michael Cripps describes it as a ‘fully documented revenue-generating service’ providing advice to major logistics and transport firms. The office employs ten mainland-trained lawyers, and Cripps says the firm plans to open two more outlets soon.

    Indeed, anyone who doubts the Party’s desire to build a modern economy — while retaining legitimacy — should take a look at the wider implications of its legalistic ambitions. In recent months, Beijing has quietly unveiled a circuit court employing 32 well-paid judges who are dispatched to the provinces to oversee commercial and criminal cases. Modelled on the common-law system with its roots in 12th-century England, it has provoked extraordinary responses. Local judges have raged at incursions into their territory, while being taken aback at the level of demand for the judicial incomers from local citizens and companies desperate for fair trial.

    This is the point at which the Party’s desire to remain in power and its willingness to embrace foreign ideas neatly bisect. ‘If China wants to get a serious handle on commercial certainty, intellectual protection, pollution and corruption, they need rules and laws in place,’ notes Clyde & Co’s Michael Cripps. Moreover, if political leaders cannot tackle chronic corruption, literally eye-watering levels of pollution, and an acute sense of the deck being stacked in the favour of those with powerful connections, ‘the Party’s days are numbered’, says a Beijing businessman with links to the ruling Politburo. ‘They know how angry people are — and that they need either to change the system radically or start to look for another job.’

    So this desire to change the way the world’s rising superpower is run stems less from wanting better to serve the people and more from the Party’s calculation of how best to perpetuate its grip on power. No matter. The world needs a strong China — more robust, certainly, than the one we now have. That its long-term ambitions also happen to represent a boon for Britain’s army of talented service providers is a huge opportunity — and one we can’t afford to miss.