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DAVOS FORUM: Flexibility the Price for Making Profits in China

By Gustavo Capdevila

DAVOS, Switzerland, Jan 22 2004 (IPS) - China holds surprises for foreign investors, who might find themselves doing business with the president of a major company who is also the leader of the firm’s labour union and local secretary of the governing Communist Party.

If confronted with a situation like this on the Chinese market, the chief executive officer of Nissan Motor, Carlos Ghosn, recommends being extremely flexible and maintaining an open attitude.

In compensation, China will give one solid profits.

“If you do the basics, you can be very profitable,” said the chief of the Franco-Japanese automaking giant, and the subject of a new book, “Turnaround: How Carlos Ghosn Rescued Nissan”, by David Magee.

The Chinese economy, with the glow of a prolonged growth cycle, almost beyond compare, is once again the star of the annual World Economic Forum, underway in this Swiss alpine resort through Sunday.

Corporate executives, financiers, economists and government leaders are gathered for a talkfest, this year to focus on the “Davos Equation”, as the Forum founder Klaus Schwab defines it: “security plus prosperity equals peace”.

China, home to 1.3 billion people, has seen its gross domestic product (GDP) grow an average of eight percent a year over the past two decades – and reached 9.1 percent in 2003.

Following closely on the heels of the United States, “the most competitive, the most efficient, the most profitable,” comes China, says Ghosn.

U.S. Commerce Secretary Donald Evans seconded that interpretation and expressed the favourable impressions that Washington has of the Chinese situation.

“China is headed in the right direction… and is in good hands,” said Evans, who went out of his way to praise the new political route that Beijing is following.

The U.S. official noted that a “new generation” is holding more power in China, and that the “transition is going quickly.”

President George W. Bush has visited the Asian giant twice, and many U.S. officials have followed. Washington “supports China’s integration in the world economy,” Evans said.

He praised China for its “remarkable” household savings, which are the equivalent of 100 percent GDP. Ninety percent of the capital invested comes from China itself, he added.

The functioning of the Chinese banking system won further acclaim during a debate organised by the Davos Forum.

Ulrich Schumacher, German president of the semiconductor manufacturer Infineon Technologies, said it is easier to obtain loans from the European banks operating in China than in those institutions’ home countries.

An expert on Chinese economic affairs, Victor L. Chu, head of the Hong Kong-based First Eastern Investment, says “The best moment to (invest in) China is now because the exchange is fixed at 8.3 yuan per dollar.”

Chu confirmed that Beijing is studying the possibility of pegging the yuan to a “basket” of currencies, not just to the dollar.

Evans commented that it appears China is undergoing a movement of protectionism for industry, particularly in telecommunications.

Another concern of the U.S. secretary was the lack of compliance with international rules on intellectual property.

Ninety-five percent of the DVDs and CDs sold in China are “pirated” copies, he said.

Ghosn said that Nissan has problems protecting its intellectual property rights. Investors need to feel more secure in China in regards to these rights, he said.

Nevertheless, there are no obstacles to transferring royalties and revenues abroad, Chu pointed out.

A survey of foreign companies operating in China, said Ghosn, found that 80 percent recognised that their investments had turned a profit.

But economic activities present other peculiarities, like difficulties in establishing good relations within Chinese society.

Foreign businesses are not successful in China if they are unable to build personal and political relations, said Chu.

Corporate executives and economists expressed concern about the fate of the current growth of the Chinese economy, and fear that it will “overheat”.

Some analysts predict the Chinese economy will continue to expand until 2008 or 2010. Then it will face problems on the supply side of various sectors that are critical for investors.

All cycles include a downswing, said Evans, and China will be no exception. When that time comes, social problems will be exacerbated.

But the Chinese government is closely following the process and is “promoting social harmony,” said Chu.

An overheating of the economy would not pose a major social or economic challenge because the country has developed a “social security net”, he said.

For now, the phenomenon appears to be under control, as inflation stabilised at around two percent. Per capita GDP, which stands at 1,000 dollars a year, leaves room for growth without upsetting the principal economic and social indicators.

U.S. official Evans said the Chinese leadership is attentive to the country’s social situation and has begun a process of democratic elections in cities and towns.

“A more competitive China is good for the world economy,” he said.