Recently, though, China’s ODI profile and geographic footprint have been changing. China is ramping up its investments and purchases across Asia, Latin America, Europe and the United States. Chinese buyers are snatching up all kinds of assets—residential and commercial properties, factories, industrial parks, research-and-development facilities, farms, forests, mines, oil and gas fields, and various other resources. Chinese corporations are aggressively merging with or acquiring foreign companies. Individual Chinese have also been buying large amounts of valuable art on the international auction market. Thus, the profile of Chinese outbound investment is rapidly changing, but its impact remains uncertain.
What about Chinese multinational corporations? How competitive are they abroad? As in other categories, there is much more weakness than strength. On the surface, judging from the Fortune Global 500 rankings, Chinese companies now rank second only to American multinationals. But these rankings are calculated on the basis of total revenue and profit—not where a company makes its money. When examining the Chinese companies on the 2013 list, it is quickly apparent that relatively few even operate abroad and only a handful earn more than half their revenues overseas. So these are not truly multinational corporations, but rather domestic corporate actors.
Many firms may aspire to go global, but thus far those that have tried have not fared particularly well. There have been more failures than success stories among aspiring Chinese multinationals. Chinese mergers and acquisitions often have stumbled because China’s corporate leaders did not do their due diligence beforehand or because of the clash of corporate cultures. By all accounts, the major weakness of Chinese multinationals is human resources—particularly management. There are precious few multilingual and multicultural managers, and Chinese companies do not generally hire foreigners with such skills for upper-level management (Huawei and Haier are exceptions to the rule). Chinese companies and their management have frequently displayed an inability to escape their own national corporate culture and business practices. Because of their preference for hierarchy and clearly defined workplace roles, Chinese tend not to adapt well to “flatter” management structures that prize decentralization and individual initiative. These proclivities have resulted in repeated culture clashes in Chinese mergers with Western companies. Chinese companies have also demonstrated difficulties adapting to foreign legal, regulatory, tax and political environments. Transparency and corporate governance are not attributes normally associated with Chinese companies—whose decision-making processes are usually opaque, business practices are frequently corrupt and accounting procedures are often fraudulent. Many Chinese companies have been found to have filed fraudulent information with securities regulators in the United States prior to their IPOs.
The lack of Chinese corporate competitiveness is also evident when it comes to international brands. Only a handful of Chinese companies have been able to establish a brand presence abroad: Tsingtao beer, Haier white goods, Huawei telecoms, Air China, Geely automobiles and a handful of others. But not a single Chinese company ranks among the Business Week/Interbrand Top 100 global brands.
OTHER MEASURES of China’s domestic capacities also do not indicate very high or positive global rankings. In 2014, Freedom House ranked China as tied for 183rd out of 197 countries for freedom of the press. Since 2002, the World Bank’s composite Worldwide Governance Indicators have consistently ranked China in the thirtieth percentile for political stability and control of corruption, fiftieth percentile for government effectiveness, fortieth percentile for regulatory quality and rule of law, and below the tenth percentile for accountability. The World Economic Forum ranked China only twenty-ninth globally on its composite Global Competitiveness Index in 2013, along with sixty-eighth for corruption and fifty-fourth for business ethics. Transparency International ranked China even lower (eightieth) in its 2013 international corruption index. In virtually all these estimates and categories, China has deteriorated over the past decade. By these and other measures, it is clear that China’s global presence and reputation is mixed at best. In many categories China finds itself clustered together with the least well-performing and least respected countries in the world.
The 2013 United Nations Human Development Report further illustrates that despite the considerable and admirable socioeconomic progress China has made since the 1980s, the nation remains very much a developing country. The PRC ranks 101st in the overall index, out of 187 countries surveyed. The average per capita income is now nearly $8,000 in purchasing-power-parity terms, yet 13.1 percent of the population still lives on under $1.25 per day. In life expectancy, infant mortality, health-care provision, educational quality and inequality, China still lags well behind industrialized nations. Its environmental contamination and pollution are the worst in the world and are contributing to rapidly rising cancer rates. Despite recent government efforts to expand primary and catastrophic health-care delivery and insurance, most Chinese still face great uncertainties when illness strikes. Its Gini coefficient (which measures income inequality, with 0 representing perfect equality and 1 representing perfect inequality) is now nearly 0.5, among the highest in the world. China’s primary and secondary schools are producing world-class test results, but the university system still lags well behind global leaders.
These observations are not meant to belittle China’s miraculous developmental accomplishments over the past three decades, but they are simply further reminders that China is nowhere near the top of the global tables in many categories of development.
THIS IS a snapshot of China today. Ten or twenty years from now China’s global position may well improve in all of these categories and it may be operating on a global basis similar to the United States’, but for now China is a partial global power at best. Yet one should not simply assume that China’s growth trajectory will continue unabated. It could, but there are also two other possibilities—stagnation and retrogression.
Many China watchers are coming to the conclusion that the country is reaching a tipping point on multiple fronts. Aggregate growth is leveling off (owing to rising costs of production and declining comparative advantages) and the government is struggling to maintain the 7 percent annual growth rates deemed necessary to maintain reasonably full employment, absorb new entrants into the workforce and sustain social stability. Try as it may, the government has been unable to accomplish its announced shift from an export- and investment-driven economy to one based on increased domestic consumption and an innovative “knowledge economy.” Production is not appreciably moving up the value chain and technological ladder, and the grip of the middle-income trap is setting in (and could become an indefinite condition). Local debt is soaring and many subnational governmental authorities teeter on the brink of insolvency. Social inequalities are getting increasingly acute, corruption is rampant in both state and society, frustrations abound in every social sector, the rich are fleeing the country in increasing numbers, the middle class is stagnating, and the political system remains ossified and repressive. Meanwhile, the country is not undertaking the political and legal reforms needed to spur the next phase of growth because they would directly impinge on the monopoly power of the CCP.
Several Sinologists now argue that the CCP itself is the principal impediment to future growth and development in China. The party is an increasingly insecure, sclerotic and fragile institution that has become paralyzed since 2008. Part of the reason for the paralysis was the leadership transition in 2012 and the factional struggle leading up to it (including the Bo Xilai affair), but it also had to do with the growing unrest around the country (particularly in Tibet and Xinjiang). There have been other contributing factors to the party’s retrenchment and repression over the past five years, including fears generated by the Arab Spring, but we have not seen forward movement in political reform since the leadership transition and Xi Jinping’s consolidation of power. To the contrary, the political crackdown has intensified since Xi took office. Even the vaunted Third Plenum of November 2013, which was heralded as a reformist breakthrough, has so far proved to be more hype than progress.
This is the dangerous cocktail that many China watchers see gripping the country today. It is a sobering and daunting set of challenges for the people and government of China to tackle. Thus, observers should not blindly assume that China’s future will exhibit the dynamism of the past thirty years, or that its path to global-power status will necessarily continue.
David Shambaugh is a professor of political science and international affairs and director of the China Policy Program in the Elliott School of International Affairs at the George Washington University. He is also a nonresident senior fellow in the Foreign Policy Studies Program and Center for East Asian Policy Studies at the Brookings Institution. His most recent book is China Goes Global: The Partial Power (Oxford University Press, 2013).
Image: Patrick Denker. CC BY 2.0.