Mr. China (40 page)

Take the banking industry, for instance, which in 2005 absorbed billions of foreign capital despite a series of well-publicized scandals. Towards the end of that year, the China Construction
Bank raised eight billion dollars on the Hong Kong Stock Exchange, which was, according to the Financial Times, the world’s largest IPO ever for a bank. The shares were oversubscribed forty
times in the retail market even though the Chairman had been forced out six months earlier because of a corruption investigation by the Central Disciplinary Committee. Even he had been in the job
for only two years after the previous Chairman had been convicted of taking bribes and was jailed for twelve years. Investor confidence wasn’t even dented by the sixty-four frauds mentioned
in the prospectus that occurred in the year, or the storm that erupted the day before the offering when the Chairman of the SEC said that the bank wouldn’t have been able to list in New York
because it couldn’t have met ‘regulatory requirements’. Meanwhile, the Industrial and Commercial Bank is busily preparing for an even bigger listing with plans to raise ten
billion dollars.

There’s even the occasional regression back to the 1990s with foreigners paying stratospheric prices in traditional industries. In the epic battle for control of the Harbin Brewery between
two testosterone-crazed multinationals in 2004, one of them eventually agreed to pay nearly $750 million for the brewery; three-quarters of a billion dollars for a medium-sized brewery up in
Harbin’s old rustbelt, in a non-core market with high unemployment, where it’s well below freezing from late October to April so no one drinks beer! The valuation was reported as being
equivalent to a price/earnings ratio of nearly fifty; a
dot.com
price for a brewery.

So the business environment is improved but what about the more general picture? In the past twenty years, the Chinese Government has presided over the longest sustained period
of wealth creation in history. Set against the background of the past two centuries, the achievements are even more impressive.

China in its present form has been a unitary state only for less than the average human lifespan. Before that, there was more than a hundred and fifty years of chaos as the Qing Dynasty slowly
buckled under the weight of a corrupt court, colonial invasion and repeated rebellions. As early as 1775, cracks started appearing in the edifice when Wang Lun, a martial arts expert and herbal
healer, supported by a motley collection of peasants, bean curd salesmen, travelling actresses and money-lenders, led the White Lotus Rebellion. This was the first in a series of huge uprisings
against the Qing court and was put down only after the Qianlong Emperor ordered the mobilization of almost the entire army. Wang was eventually cornered and met his death, according to contemporary
accounts, ‘wearing a purple robe, cross-legged and motionless, his clothes and beard aflame’.

After that, there were several Muslim revolts until, in the middle of the nineteenth century, a massive rebellion erupted when insurgents set up a rival state known as the Taiping Heavenly
Kingdom. Orchestrated by a young Chinese who, after failing the Imperial Examinations for the third time, emerged from a delirium convinced that he was the younger brother of Jesus, the Taiping
rebellion lasted twelve years and, together with other civil disturbances, was the main cause of a decline in China’s population of fifty million people. In four out of five of the worst
affected provinces, it took a hundred years before the population returned to the same level.

During the same period, in a scenario strikingly relevant today, foreign trade imbalances between China and the West eventually led to war. The Qing tried to stop the importation of opium from
British-controlled India, because of the appalling effect on the local population. Britain launched the Opium Wars. Defeated and forced into a series of humiliating treaties with foreigners, the
dynasty eventually collapsed completely in 1911 and central authority dissolved. China descended into a state of warlordism in which the lives of millions of ordinary people were dominated by the
threat of famine or an immediate violent death.

Over the next few decades, the variations of suffering were endless: in 1931, flooding in the Yangtse inundated an area the size of New York State and left fourteen million homeless; a few years
later, the Japanese invasion culminated in a frenzy of killings at Nanjing that saw off three hundred thousand civilians in seven days. In a desperate attempt to halt the Japanese advance towards
central China, Chiang Kai-shek ordered the blasting of the ditches along the Yellow River. The giant flood destroyed four thousand villages and changed the course of the river by hundreds of miles.
Then, when Japan fell in 1945, China slid into full-scale civil war.

Even after Mao declared the founding of the People’s Republic, there were a series of policy-induced disasters, including the Great Leap Forward, which led to sixteen million starving to
death, and the Cultural Revolution. So it’s only really in the past twenty-five years that China has got its act together. And the progress is spectacular.

Since the Open Door policy in 1979, China has lifted two hundred and fifty million people out of absolute poverty, probably the greatest improvement in the human condition ever. The country has
attracted more than five hundred and fifty billion dollars of foreign direct investment, and currency reserves have risen from about thirty billion at the time we were first looking at the
factories out in the Third Front, to nearly a trillion dollars today if one includes Hong Kong. A colossal manufacturing infrastructure has been assembled on the Yangtse Delta, which is creating
the most profound challenges to businesses everywhere in the developed world. The lives of millions of ordinary Chinese have been improved beyond recognition as the effects slowly trickle down to
street level. They now have choices which we take completely for granted but which would have been unimaginable two decades ago: choices in clothing, in housing, schooling for their kids, maybe the
chance to buy a car or take a holiday abroad. So the progress is fantastic.

But the challenges that remain are of a completely different order to those faced by western governments; the complexity seems overwhelming and it looks as though China may
have reached a key moment in its history. To use a Chinese analogy, the boat has reached the middle of the river: there is no turning back to the old Maoist certainties of the planned economy; but
equally there is no chart to help that very small group of people, the seven or eight men and one woman who constitute the core Chinese leadership, to navigate more than a billion passengers safely
over to the other bank.

China suffers huge wealth imbalances between the coast and the inland provinces, which have sent a hundred and fifty million itinerant workers swirling towards the sea. That’s the
equivalent of the entire US workforce tramping the streets of the coastal factory towns in search of a job. Corruption in the middle ranks of the Chinese Government means that the central
government has to make the most extreme efforts in order to transmit sensible national policies down to the local level and tackle the root causes of recurring unrest – forty million people
took part in demonstrations in China last year, almost all of which were against corruption in one form or another, mostly involving land. There are massive challenges to core structural industries
under the WTO; the protective barriers have come down and domestic industries are no longer shielded from direct competition with much larger and more powerful multinationals. In many senses, given
the different stages of business development, it is difficult to imagine a more unlevel playing field. In the financial sector, integration of the Chinese banks with the global financial markets
brings with it the most extreme dangers because of the astronomical sums of money that have started to flow through creaking systems in China. On top of all this, there are comprehensive foreign
policy challenges as China tries to access resources it needs to grow and deal with the great sparking point over the Taiwan Straits.

Finally, further inland, in many places there is almost complete degradation of the natural environment: seven out of the ten most polluted cities in the world are in China. In places, the sun
sets at two o’clock in the afternoon; the sky is black, the ground is black, the riverbeds are just smashed rocks and thorn bushes; the deforestation and dense smog that hangs over the cities
are unbelievable; it will take billions and thirty years to fix. In the meantime, China has to feed nearly a quarter of the world’s population on a seventh of the planet’s arable
land.

The people with their hands on the tiller – that small band of political and business leaders – are attempting to manoeuvre the boat through all these obstacles knowing that China is
fragile and difficult to govern. They know that, every so often, at regular intervals in its long history, China has suffered complete system collapse and that the whole of its political economy
and civil society has dissolved into chaos. If that happened again it would be a catastrophe that would render the whole of the past twenty-five years’ progress to be completely meaningless
and, because of the size of China and the degree of integration with the global economy, it would be a disaster for the whole world. So it is in the context of this huge struggle to modernize
China, with the knowledge that the cost of failure is so immeasurably high, that the full magnitude of the task faced by the Chinese leadership finally becomes clear. As they take on this awesome
responsibility, we should hope for all our sakes that they find a way to succeed.