Shattering the myths about the Middle Kingdom

David Mahon first went to China to lay 12km of carpet in a high-rise building for Feltex Carpets. Since then, China has been at the centre of his world – a period far longer than the buzz that has accompanied the country’s recent emergence as a global economic heavyweight.

Now based in Beijing, where he has worked for more than two decades, Mr Mahon runs private-equity firm Mahon China Investment Management Ltd and has direct responsibility for the management of 19 Chinese companies. He also advises a range of firms in a variety of sectors on their China operations and is Chair of New Zealand Trade and Enterprise China Beachheads Board.

In October 2010, Mr Mahon was a keynote speaker at the Go Global forum on international business, held at Sky City in Auckland.

The view of China presented by the New Zealand media as powerful and set to dominate the world, supplanting the United States, is a flawed one, said Mr Mahon.

New Zealand government ministers visiting the World Expo 2010 in Shanghai may have regarded the event as a window on China – but Shanghai is not China.

The image of the country projected by the relatively affluent coastal cities in the country’s east is misleading. China is not a developed country. Its GDP growth is fast, but its actual GDP per capita is the same as Angola’s. The country’s interior is mostly very backward economically.

Photo: New Zealand Pavilion at Shanghai Expo

China does not have the ability to reach beyond its borders and dominate the world. The US-China currency squabble is politically driven and US proposals that China boost the value of the renminbi are not rational. The Chinese currency is not working against the world. In China, gradual change is favoured and the currency issue is one of those areas in which the government is still feeling its way. Its approach is in keeping with former leader Deng Xiaoping’s famous maxim, “crossing the river by feeling the stones”.

There are many myths about China. A common one is that its rapid rate of GDP growth won’t last and that a property bubble will bring it crashing down. The truth is that there is no property bubble in China. Mortgages there require a 50 percent downpayment, leaving few people with the money to buy a second property, and the government has imposed restrictions on purchases of multiple homes. China is not a heavily leveraged economy.

Another misconception is that the Communist Party will fall. In its development, China has avoided the pitfalls suffered by many other countries. The 1949 revolution offered the victorious communists the chance to build a wealthy country. Although Mao Zedong made many mistakes (such as the catastrophic Great Leap Forward, as a result of which millions died of starvation), he realised that the first step to making China an economically powerful country was to make sure its people were in good health and educated. By the time Deng came to power, less than 30 years after the revolution, most of the population was healthy and literate.

Normally a government has to wait a whole generation for development to take place before it can participate in the economy, but the Communist Party was running China’s economy early in the life of the new People’s Republic. The party’s initial mistake was to think it could control everything, but with the rise of Deng, it learned to pull back and regulate the economy rather than command it.

China has also seen a succession of “revolutions of aspiration”. The Tiananmen Square movement in 1989 was one such revolution, with students demanding more individual liberties. Despite the crackdown that followed the protests, the movement produced a successful revolution. The Communist Party continues to adapt to the demands of its people, and an overall trend of increasing liberalisation and openness has taken hold.

A third myth about China is that it is a monolithic entity. In fact, China is not one economy; it is a set of regional economies.

So what opportunities does the China story offer New Zealand businesses?

Curiously, the Anglo-Saxon tradition of self-deprecation may prove to be an asset in the Chinese context. The Chinese abhor arrogance, and New Zealanders’ relative humility allows them to get closer to Chinese people than perhaps some other nationalities. New Zealand businesspeople with an eye on China should look for other such affinities.

Many people misread the Chinese. Hospitality offered in China, for instance, is related to a sense of sharing but also to an ability to treat guests lavishly. Supposing the mayor of a Chinese city or town drowns you in local spirits and treats you to a sumptuous banquet: you might readily conclude that he or she is your best friend. But that’s just typical hospitality, which involves putting time in to get to know people on a more personal level.

China is a competitive market. The dairy giants in China, for instance, struggle. Why did Bright Dairy buy a stake in a processing plant in New Zealand? Because it was having difficulty getting traction in its home market, which led it to invest offshore.

New Zealand’s has a positive image in China. New Zealand’s support of China’s admission to the World Trade Organisation, its recognition of China as a market economy and its free-trade agreement with China – China’s first with a developed country – have all contributed to this. But awareness of these high points in the bilateral relationship exists only among the higher echelons of government. More widely, Lord of the Rings put New Zealand on the map for many Chinese, who now see New Zealand as place of imagination and poetry.

New Zealand companies need to get into China in a more consolidated way and PGG Wrightson should have gone into the Chinese market three years earlier. Fisher & Paykel also should have gone in earlier. Because of some hesitation, Chinese whitegoods giant Haier, as a shareholder in Fisher & Paykel, is now in a much stronger position than it might have been.

In the past 12 months there have been 18 New Zealand ministerial visits to China. The Chinese are really our top trading partners now. To succeed in their market, New Zealand companies must work together. But how well are they doing? What do we need to do to increase momentum? In New Zealand we love to do things alone. But we need to get away from the “man alone” mentality and invest in the Chinese economy.

The capacity for growth in key commodities exported to China – wool, wood and milk powder, which has grown rapidly in the past three years – is limited. We therefore need to focus on exporting products with a greater technological component – and our products need to be of high quality in order to meet the expectations of China’s increasingly affluent and discerning middle classes.

David Mahon produces a free, quarterly survey of the Chinese economy entitled China Watch.