Dr.Kai Alexander Schlevogt Professor of international strategy
leadership at the National University of Singapore Business School
He serves as a Program Director of the Nestle Global Leadership Program
delivered in association with London Business School.
issue, it can be
revived by opposition forces in the
future and ignite a democratic
firestorm.In some respects, Russia is
ahead of China, since it has already
shed the official communist ideology
and at least tries to convey the
impression of being a democratic
state, even if it is ruled with an iron
fist. It thus pretends to resonate with
the zeitgeist instead of opposing it.
The Asian Financial Crisis, which
started in mid-1997 and did not hit
China hard, highlighted the instability
of the region. And as if these major
upheavals were not enough, the
outbreak of the Severe Acute
Respiratory Syndrome (SARS) epidemic from November 2002 to July
2003 showed that unexpected events
can bring China to a virtual standstill.
During this crisis, schools and
factories were closed for months. In
December 2004, a powerful
underwater earthquake triggered
several Tsunamis that created havoc
in most countries bordering the
Indian Ocean. Even though China was
not hit by the waves, this event
brought to light the danger of natural
catastrophes, which some people
believe will occur more often due to
environmental changes such as global
warming.
In the future, further surprises are
possible, which would prove linear
growth forecasts wrong. Due to
pernicious system dynamics, events
can easily spiral out of control. Here is
one potential seed of disaster: After
the Tiananmen bloodshed, the
Communist Party lost its moral claim
to leadership dating back from the
successful resistance fight against the
Japanese invaders. It is replaced by a
fragile unwritten economic contract
between the government and its
people. The rulers can stay in power
as long as they deliver strong
economic performance in terms of
high growth and low inflation. Going
ahead, any economic downturn may
lead to its downfall and chaos. Other
forces that may threaten the further
rise of China include environmental
degradation, its ageing population and
associated cost explosions, tensions
emanating from the increasing
disparity between rich and poor, the
negative consequences of migration to
the cities, and separatists in areas with
a high proportion of ethnic minorities.
Ironically, the Communist Party,
which is now caught in the capitalist
web, allows poor working conditions
and extreme imbalances to proliferate,
even though Karl Marx identified
them as drivers of a working class
revolution.
Besides, citizens in developed
countries may rebel against the
competitive pressures from China and
demand protectionist measures from
their leaders, which would dampen
net Chinese exports and thus
negatively affect China's GDP. In fact,
such changes only depend on their
will to push through their demands.
Any government is paralyzed when
unions organize a general strike and,
unless it cracks down on dissent, will
need to accommodate their demands
if those persist for a long time. Already
now, we are witnessing a backslash in
Western countries against investment
from China's sovereign fund and
Chinese companies in "strategic"
sectors, which some believe even
includes yogurt production!
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In the recent past, there were reports
of the Chinese economy getting
overheated. What are your views?
In recent history, high rates of
inflation have been one of the most
potent factors causing unrest in
China. They are often more visible to
ordinary people than lackluster GDP
growth rates. Consumers see price
hikes whenever they shop and
directly experience the erosion of
their purchasing power.
"Overheating" is not a scientific
term. There are no commonly accepted
thresholds indicating when it occurs. It
is also important to distinguish
between the overheating of an
economy and specific sectors. To
detect signs of overheating in the entire
economy, I suggest watching the
Consumer Price Index (CPI) carefully.
As long as price increases in certain
markets do not exert a strong influence
on the CPI, the national economy
cannot be said to be overheating. In
individual sectors, you should not only
track prices, but also examine whether
speculative forces are at work. Let us
look at the evidence:
Until recently, China had to worry
more about deflation than inflation.
The decrease in price levels was partly
a result of inventory buildup and price
wars. Yet in recent months, inflation
has reached the highest levels in a
decade. Besides, prices in Chinese real
estate and stock markets are soaring.
Those whom I call "Red Heads" seem
to hold a fair proportion of assets. In
contrast to the more rational "Blue
Heads", they acquire assets for
speculative reasons, detached from the
underlying fundamentals. Their
presence contributes to the growth of a
bubble, which will eventually burst.
For example, in the stock market, many
inexperienced citizens just follow the
herd and buy popular shares. As a
result, share prices increasingly move
away from earning prospects. Many
speculators even borrow money to
invest, which increases their risk
exposure. When market sentiment
deteriorates, the Red Heads are more
prone to panic sales than the Blue
Heads. They are like dry wood that can
be easily ignited.
