has only begun to tap its potential as an economic powerhouse, according to Manoj Singh, regional managing partner in Asia for Deloitte Touche Tohmatsu.

What’s more, as the country enters its next stage of economic maturation, its growth will no longer be driven solely by low wages and low costs, he said. Chinese firms have begun to step up their investments in research and development. Productivity is rising fast among Chinese workers, and Chinese scientists are filing an increasing number of patent applications.

“You have to assume that what’s happening right nAow will be sustainable through this generation” and perhaps longer, said Singh, who spoke at the 2008 Wharton China Business Conference. “China today is fourth in the world in gross domestic product. Over the next 20 years, it’ll become the largest economy in the world.”

Emergence of a Robust Consumer Economy

Perhaps the most important single development over the next decade or two will be the emergence of a robust consumer economy in China. “China’s economy won’t be dependent on exports in the future,” Singh predicted. Consumers will not only fuel the country’s continued growth, but their demand for the sorts of goods that Westerners take for granted will present lucrative opportunities for foreign firms to sell into the Chinese market.

China has four times as many people as the United States, and at this point, only 16% of them have access to the Internet, compared with 71% of people in the United States, Singh said. Consumer spending accounts for about a third of gross domestic product in China compared with more than half of it in the United States. “Think about what happens when one billion additional people have cell phones and telephones,” he noted.

“There’s no large company in the world where the impact of China isn’t being debated — how to understand it and how to participate in the opportunities,” he added. “China will have an increasing impact on companies’ efforts to enhance shareholder value.”

Singh, based in Shanghai, has overseen the Asia practice at Deloitte Touche, a worldwide accounting firm and consultancy, for the last several years. Deloitte has 8,000 professional staffers in China and intends to expand there, he said. It, like many Western consultancies and investment banks, sees enormous opportunities as Chinese firms mature into multinational corporations. “China’s government has said that, by 2010, 50 Chinese companies will be part of the Global Fortune 500. That’s why firms like ours want to be in China.”

Two Chinese oil companies — Sinopec and Chinese National Petroleum — are already among the top 25 on Fortune’s global list, and a total of 24 Chinese companies made the 2007 ranking. After the United States, Britain, France, Germany and Japan, no country put more firms on the list than China. China may not achieve its goal of 50 by the end of the decade, but it will soon pass several of these countries on this and other economic rankings, Singh predicted.

Amazing Pace in Infrastructure and Privatizing

In the near future, China will probably make its biggest strides thanks to its massive infrastructure investments. The Chinese government is spending heavily on such things as airports, roadways, railways and power generation, but it can barely keep pace with demand. “With 1.3 billion people and 8% [average] annual growth, they can’t do enough,” Singh said.

Some of the government’s investments already have yielded impressive results. The new air terminal in Beijing, built especially for this summer’s Olympic Games, is a showpiece, he noted. The largest building in the world, it cost $3.8 billion and can handle more than 50 million passengers a year. “Even in the second-tier cities, the quality of the infrastructure is unbelievable,” Singh said. “The airports put our airports to shame.” At the same time, the Chinese government is channeling money into the construction of coal-fired power plants and hydro-electric projects like the Three Gorges Dam on the Yangtze River. 

China has also made much progress in privatizing and modernizing its lumbering state-owned enterprises. “In 1978, when Deng Xiaoping came to power, 1% of China’s GDP was private,” Singh said. “Today, it’s 40%.” That number will continue to rise both because the private sector is surging and because the government seems intent on pushing forward with the creation of competitive markets. Even where state-owned firms continue to exist, they’re expected to be able to compete with private players on the international stage. One of China’s most ballyhooed companies, BaoSteel, is state-owned but has become the world’s largest steel maker and does business worldwide. 

Serious Economic and Social Challenges

Despite its potential, China faces serious economic and social challenges that could slow its development if they’re ignored, Singh said. The government, for all of its liberalizations, remains protectionist, limiting foreign firms’ access to domestic markets. If Chinese officials want their country to realize its potential, they will have to more fully open its markets to the rest of the world, he said.  

More immediately, China is grappling with “social unrest, rampant corruption and resource shortages,” he stated.

Even with a booming economy, many Chinese, especially those in the country’s vast rural areas, struggle to get by. Their standard of living can be severely pinched by inflation, which hit its highest level in more than a decade earlier this year. Accelerating prices for basic goods can lead to strikes, protests and even riots. China watchers have long blamed severe inflation in the 1980s for the unrest that culminated in the Tiananmen Square protests in 1989.

Another source of potential unrest is, surprisingly, unemployment. China’s economy is producing tens of millions of new jobs each year. But the country’s teeming population is clamoring for more. Farmers and rural laborers are crowding into the cities in hopes of bettering their lives, and many recent college graduates have difficulty finding positions, Singh said. 

As for corruption, Transparency International, a nonprofit research group, ranks China as number 72 on its corruptions-perception index. (Transparency International surveys business people to discern the perceived levels of corruption around the world. Denmark, perceived as least corrupt, ranks as number 1.)

Resource shortages loom as another potential damper on China’s growth. With constrained reserves of its own, China imports oil and coal. The coal is used in electricity generation, where new plant-construction isn’t keeping up with demand. “Oil and electricity will continue to be challenges for China,” Singh said. “You can’t downplay that.”

Recommendations for Westerners

Singh had a host of recommendations for Westerners who want to make their careers in China or introduce their firms to its markets. First off, he said, you must take time to understand the Chinese government and its goals for your industry. “China’s officials want to see you help build the intellectual capital there, not just take advantage of the low costs,” he said.

As in any country, knowing the local language is a huge advantage. Although China has many dialects, business mostly gets conducted in Mandarin. “If you know the language, your potential there is unlimited,” he said.

Deloitte Touche has increased its cultural and linguistic capabilities in China by recruiting ethnic Chinese employees from the United States and Europe to do stints of two to four years in the firm’s offices there. “We seed our practice there with talent from the outside,” he explained.

Singh predicted that Deloitte Touche’s demand for qualified people in China, whether locals or expatriates, will continue to grow. As China’s economy matures, its companies will demand more of the sorts of knowledge-intensive services that consultants can provide. Smart Western companies understand that and are preparing.

“China isn’t just about low cost anymore,” he concluded. “As the world economy cycles and China’s wages grow, companies won’t jettison China. Companies want to sell into China, and relationships with China will become interlocked with the rest of the firm. The full value of China is far from being realized.”