Davos 2012: Who's afraid of China?

Crowd outside Apple in Beijing Many in the West worry about being overwhelmed by the sheer size and strength of the Chinese economy

So, who's afraid of China's economic power?

Mention the topic in polite conversation, and chances are that you'll hear complaints about dumping cheap products, stealing jobs and grabbing resources.

If you talk to politicians and economists, you may hear complaints that China is keeping its currency undervalued. There are worries about the size of its foreign currency reserves - currently approaching a massive $4tn (£2.55tn).

So much economic power creates fear and hostility, especially in countries like the United States during an election year, warns Richard Levin, president of Yale University.

Those worries are only bound to increase.

Rich country, poor country?

China's economy, with its 1.3 billion people, keeps on growing rapidly, at a rate of around 10% a year. Already it is the world's second-largest economy. Some here at the World Economic Forum in Davos wonder whether China can still be called a developing economy at all.

Start Quote

We have no hundred-year history of corporate governance”

End Quote John Zhao Hony Capital

China's economic growth, says Pascal Lamy, boss of the World Trade Organisation, "will bump into public perception problems".

"There is this perception that there is a Chinese official behind every Chinese business person. That China is grabbing resources. That there is a new colonial 'something'. That they are after technology, stealing, transferring it, all these negative things that translate into [a view] that this is a country that doesn't play by the rules."

Mr Lamy does not agree with these perceptions.

But China, he says, has to develop "a better narrative", tell the world what it really does or suffer a backlash.

"The world outside China still wonders whether China is a poor country with lots of rich people, or a rich country with lots of poor people," says Mr Lamy.

Beginner's mistakes

China is changing so fast, it's probably difficult to make that call.

Farmer pulling a cart China is already the second-largest economy in the world - and yet most of its population is poor

John Zhao, chief executive of China's largest private equity firm, Hony Capital, reminded the Davos elite that not that long ago, the Beijing government would tell any Chinese travelling abroad "we make you a nice set of suits, so that you don't look poor".

These days, he said, the West sees mainly very wealthy Chinese travelling abroad. "That also gives the wrong impression. They are wealthy, but they are a minority. Most Chinese are still poor."

But what about China's dubious reputation of doing business abroad? Mr Zhao blames it on beginner's mistakes.

The Chinese government did not know what to do with all its foreign reserves, he says, so they did what everybody else did: buy US Treasury bonds.

And yes, while "there are a few bad Chinese companies" that "intentionally commit fraud," most try to learn and follow the rules.

"We have no hundred-year history of corporate governance," says Mr Zhao.

Robert Greifeld, chief executive of the Nasdaq stock market, notes that the West also has a "rich history of corporate misdeeds - from Parmalat to Enron," and reports that Chinese firms have an "insatiable appetite to learn Western corporate reporting standards".

'You never know who you might meet': why a Davos veteran keeps going back

The big imbalance

However, the trouble with China is much more than just a matter of perception or company reports, argues Stephen Roach, former chairman of Morgan Stanley Asia and now with Yale University.

It's about real economic imbalances, where Chinese consumers and companies save too much, while the West saves too little.

Mr Levin believes that it is about time for the Chinese government to use some of its foreign reserves to invest in its own people, for example by building up a social safety net or boosting a pension systems under pressure from a rapidly ageing population.

More importantly, Mr Roach said, nobody should ignore the 800-pound gorilla in the room: China's reluctance to free the exchange rate of its currency, the renminbi.

It is a controversial topic. So controversial that Mr Lamy noted to general laughter that his briefing notes told him "to shut up" should the topic come up at Davos.

Still, he listed what everyone generally agrees on: The renminbi is undervalued, should be "internationalised" (which means allowed to float freely).

"But it gets difficult when you ask how much," he said. "5% or 30%?"

And, Mr Lamy asked, how would the Chinese public take it when their government's stockpile of dollar reserves suddenly loses a lot of its value?

Return to normal?

Some old China hands disagree with the whole premise that China is behaving unusually at all.

"China is not grabbing resources, it is investing in resources that otherwise would not be developed, whether its in Brazil or Australia or Africa," argues one Davos attendee.

"Is China investing a lot? No, it's a little. Given that it's the world's second-largest economy, it is not investing nearly enough."

Another business leader reminded Davos participants that today's "prejudices" against China were just the same as those "50 years ago, when the Americans were flooding Europe with their products".

Just as we all became a bit "Americanised, maybe we all are going to be a bit more Chinese, but that doesn't bother me either," he said.

The dating game

A large illuminated dragon in Chinatown in Singapore Will the Year of the Dragon also lead to new understandings between China and the West?

And what if Chinese companies snap up Western firms?

"More and more Chinese companies are looking at firms like Coca-Cola and General Electric and see their success, so they are learning from them... and are interested in becoming multinationals."

It doesn't always work, though.

Mr Zhao tells the story of a German company that decided to spurn the better takeover deal offered by a Chinese firm and sold the company to a French owner instead.

"They made the right decision," says Mr Zhao. "If they felt they could not operate within the Chinese company, the deal would have been a disaster. So that's why we are telling Chinese companies: work on your corporate culture."

Another Chinese executive compared the corporate relationship between China and the West to courtship: "Before marriage, you should date. And so I hope Chinese companies will open offices around the world, so that they learn the culture."

Win-win

"Get ready for more Chinese investment, it will happen," Pascal Lamy told the Western bosses and politicians in the audience. And turning to the many Chinese in the audience he warned that "for this to be a win-win, China has to address perceptions on both sides, in the West and within China".

Otherwise, China's reputation would end up like that of global trade, where the results "are great, but in politics it's [considered to be] terrible".

The outside world should understand that China is changing, was the impassioned plea of Michael Wong, a young entrepreneur whose company, TouchPal, makes smartphone applications that can be found on 20% of the world's Google Android phones.

Companies like his were pushing for change, for example working hard to ensure the protection of intellectual property.

"The stereotype of China may be true for the past, it may even be true for now, but it will change, much faster than you think, in three to five years," said Mr Wong.

"We are the future of China."

And possibly of the world, he might have added.

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