To those who have been observing China’s rapid economic development over the past two decades, the obvious question is: Can this last?
Steve Butters, regional leader of Asia Pacific for financial services in the China office of accounting giant Deloitte & Touche, thinks so. As the closing keynote speaker for a recent Wharton China Business Forum, Butters got the last word on the matter, at least for the day.
“Our view is that, yes, China will be able to continue its growth rate, absent unusual events.” And by “unusual events,” he and other China experts mean rather extreme anomalies – such as a world war or civil war, or perhaps a major environmental crisis. In recent years, GDP growth has consistently been in double digits. Indeed, officials this year have been raising interest rates in an attempt to control inflation and prevent the economy from overheating.
“It won’t be a straight line; there will be hiccups,” Butters cautioned, adding that many widely-held notions about the country that lead people to doubt China’s long-term prospects, are outright “myths.” The first one, “that China is a stale, controlled economy, is not really true,” Butters said, noting that 57% of the non-farm portion of China’s economy is controlled by the private sector.
Another myth, he said, is that China is a homogenous market. With its 1.3 billion inhabitants speaking a variety of languages, experiencing a wide range of living standards and hailing from environments as divergent as city versus countryside, the population is necessarily diverse.
And as for the conventional wisdom that foreign companies suffer poor profitability in China, Butters noted that “China looks much like the United States did 200 years ago,” i.e., highly developed on its Eastern coast with a promising, underdeveloped inland “frontier.” According to Butters, 80% of foreign-owned companies in China are profitable.
The Economically Disenfranchised
Having said that, he added, some of the warnings given about China do warrant attention. “There are already many tensions between the haves and the have-nots,” as China produces 40 million new members of the middle class annually. Butters and others at the conference spoke of a popular uprising by economically disenfranchised citizens as a distinct, although remote, possibility.
“Pollution is very notable,” Butters added. China’s pell-mell race to reach developed nation status has, until just recently, been coupled with a devil-may-care attitude about the environment. In addition, he said, China “has a tremendous healthcare issue,” caused in part by unprecedented numbers of Chinese entering retirement and placing a great strain on the national health care system. Finally, of particular concern to foreign companies whose bread and butter is intellectual property, the IP protection laws in China remain relatively weak.
For firms like Deloitte, however, all these apparent drawbacks simply mean that “you do need to have a China-specific strategy,” Butters said. His firm’s growth in the past few years, particularly on the mainland, has been “radical.”
Up until 2003, Deloitte focused on serving multinational clients who did business in China. In 2003, the firm expanded its focus to include the Chinese domestic market – fertile ground because of the country’s continuing privatization wave. Deloitte’s services include accounting, mergers and acquisitions, a range of IT consulting capabilities, auditing and insurance.
In 2003, Butters said, Deloitte had 2,100 employees in China, with 1,400 of them based in Hong Kong. Today, the company employs 6,000 in China, but only 200 were added in Hong Kong – a testament to the amount of business being generated on the mainland.
That has spawned another difficulty for Deloitte and competitors: Even in a land of a billion people, it’s difficult to find skilled, experienced labor. “The resource talent war is extremely fierce,” Butters said. “Our challenge is hiring people with 10 to 15 years experience.”
Auditing Challenges
So what is a respected audit firm doing in China, anyway, what with the notoriously shoddy accounting at so many companies, including state-run ones? Butters conceded that “the risks in China, from an audit perspective, are very high.” Nonetheless, he said, there are companies that are trying to conform to world-class accounting standards – and they are the ones whose business Deloitte pursues.
Butters echoed earlier conference speakers in his concern about the United States’ ability to remain competitive: He said he would not be surprised when and if China surpasses the U.S. in economic power or technological advancement. Unlike the U.S., China has made it a national policy to train the scientists and engineers whose research drives growth.
An oft-cited (and often-disputed) statistic is that China every year graduates 600,000 engineers from its institutions of higher learning. The United States produces about 70,000 engineers a year. The latest such end-of-U.S.-supremacy prophesizing can be found in the 2007 National Academy of Sciences report titled, Rising above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future. Many academics dispute the accuracy and/or significance of those numbers, saying they don’t reflect that on a per capita basis, the U.S. is still significantly ahead in producing engineers.
Such nuances aside, however, “we are not keeping pace with what China is doing,” Butters acknowledges.
Butters was asked about democratization: While there is voting at the local level, China remains a communist country run by non-elected officials. Could the successes of the market economy spread to the political realm? “I don’t think it’s inconceivable that it could happen,” he said. China’s current leadership, led by premier Wen Jiabao, is “pretty progressive.” Yet, he added, so much of China’s population lacks education that a large-scale shift toward democratic reforms would be de-stabilizing. “It’s not achievable in the near-term.”
And finally, Butters noted, as a multi-national corporation, Deloitte takes a somewhat agnostic view of politics and nationalistic sentiment, instead making strategic decisions from a financial risk perspective. The firm is confident enough about its China prospects that it has committed to investing $150 million in the country over the next five years. “Our firm is global,” Butters said. “We’re not going in as an American or European firm.”
