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New Chinese President Faces Looming Economic Decisions

12/12/2012 --

Ross professor says China's economic model isn't sustainable.

ANN ARBOR, Mich. — When Xi Jinping takes over as president of China this year, the lack of immediate change could mask major economic decisions looming on the horizon, says Linda Lim, professor of strategy at the University of Michigan's Ross School of Business.

Lim predicts China's current economic model won't be viable for Xi's entire term, which typically lasts 10 years.

"The Chinese economic model of the last 30 years is losing steam, and that affects the government's ability to manage the economy," says Lim, an expert on Asian business and international trade. "The model may work for another three to five years, but not his entire term. China can no longer grow by selling cheap stuff to foreigners. The rest of the world is heavily invested in China, and the changes needed are major."

Businesses, including foreign investors in China, will have to shift from viewing the country as a low-cost producer to a consumer, she says. Labor costs are rising and the population is aging, which is partly due to the country's one-child policy.

The government eventually must open its economy more if it wants to continue to grow. For example, the Chinese people have large savings that need an outlet beyond the state-run banks, both to provide higher returns and to channel capital to more productive investments.

"China will handicap itself if it doesn't open up more," she says. "But it will take a long time by Western standards. Their government depends on forging coalitions and consensus decision making among different interests."

Still, there's a lot of awareness in China of income inequality, both by the people and the government. Business success in China often relies on a partnership with a state-owned enterprise. But that could lead to trouble down the road if that relationship is seen as too cozy, Lim says.

"In the past, businesses worried about being viewed unfavorably by the government," Lim says. "Now being viewed unfavorably by the people could get you in trouble."

Corruption is a major focus of current president Hu Jintao, and Xi says that will continue to be a priority. But what do they mean by corruption?

Lim says they're not referring to bribery. What's causing friction in China is when local officials use their position to enrich themselves with side agreements or steering contracts in a certain direction.

"It's this morphing of state capitalism into crony capitalism, and that's something the new president will want to attack," she says. "The Chinese tradition is for the central government to fix these local problems. You don't hear about this in the West as much, but there are many incidents of social unrest each year, such as wildcat strikes and protests. They are local and spontaneous but widely reported because of mobile phones. To be seen as legitimate, a Chinese government must also be seen as just."

Like the government, Chinese companies will need to adjust in the coming years as they expand into new markets, Lim says. That's especially true as these companies face extra scrutiny in some countries.

The situation in the U.S. with Chinese telecom equipment giant Huawei is an example of this friction. Huawei wants to build digital networks in the U.S., but the privately held company is getting a hard look from a Congress worried about possible ties to the Chinese government.

"The U.S. concerns in this case are due to a lack of knowledge," Lim says. "It could be that the suspicions are misplaced. But to prove that, Chinese companies have to be transparent and open up. If they want to expand globally, they will have to be more aware of international laws."

— Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu