Goure Nails It: China Can’t Compete At The Cutting Edge

My colleague Dan Goure posted a commentary yesterday that captured the core weakness of China’s economy. Although Beijing can stimulate high levels of growth through subsidies and other market interventions, it can’t create the kind of agile, innovative business culture that will be required to prevail in the information age. So even though the Chinese are out-producing America ten-to-one in steel, nobody overseas uses their apps. Maybe that’s why a large number of Chinese millionaires say they would eventually like to leave the country — there’s a limit to what China’s economic miracle can accomplish that becomes increasingly apparent when the country tries to compete at the cutting edge.

If you doubt that, just look at what’s happening in America’s tech sector right now. Microsoft is admitting Windows 8 is a dud, and moving to rework it. Intel’s processor franchise is losing ground as consumers move from PC’s to tablets and smart phones. Blackberry is sinking fast. And even smart-phone leader Samsung is seeing its latest Android offering debut to mixed reviews. Meanwhile, smart-phone rival HTC — left for dead by critics only months ago — looks headed for a resurgence, while Apple sales seem to be holding up remarkably well despite the Android onslaught.

Tech is a cutthroat sector where success typically endures for months rather than years. The notion that a centrally-planned, state-influenced economy could ever compete in such fluid circumstances is laughable. Beijing may be able to build its own stealthy fighter by stealing U.S. secrets, but tapping into Facebook’s computers won’t enable China to become a player in social media. Its processes are simply too slow and cumbersome to keep up (as are U.S. government processes when it comes to countering rapidly evolving cyber threats). Beyond that, the state-influenced structure of incentives only rewards certain kinds of entrepreneurship — which is why there’s no fracking revolution going on in the Chinese energy sector even though the People’s Republic may have more gas trapped in shale formations than America does.

China’s mix of state-driven domestic investment and mercantilism has served it well in lifting a billion of Chinese out of poverty. But beyond a certain threshhold, progress can only continue if the state-influenced model gives way to a truly market-based approach. Since that would require the Communist Party to relinquish much of its control over society, China’s leaders face a real dilemma. It will be interesting to see whether recently-installed General Secretary of the Communist Party Xi Jinping becomes another Gorbachev — a true reformer — or just the Middle Kingdom’s answer to Leonid Brezhnev.