Wednesday's Financial Times had a fascinating article describing the rather incongruent business climate in China.
opening up" policy, when Deng Xiaoping loosened controls on the economy
and unleashed a long stretch of high-octane growth that has pulled tens
of millions out of poverty. Concerts, seminars and speeches will mark
the event. Yet the anniversary is taking place during a period of
soul-searching about whether the impressive run of growth can continue
and whether Chinese capitalism can survive its deep contradictions.
The poster child for these contradictions is the city of Wenzhou, and as a further example, a company called Juyi Shoes.
China from a poor rural country into a manufacturing powerhouse. In
1988, Li Anlian borrowed money from relatives to start a workshop
making shoes from spare bits of leather. Managed these days by her son,
the company now employs 3,800 and produces 10m pairs a year for clients
that include Zara of Spain.
And the "contradiction"?
Wenzhou's reputation for rugged individualism. An entire floor of the
company's office is given over to celebrating the Chinese Communist
party and one of the rooms for party members boasts six imposing framed
portraits: in order, Marx, Engels, Lenin, Stalin, Mao, Deng.
The loosening by Deng helped spark the capitalism revolution, but for the most part it is still "tolerated" and not fully supported. As the global economy slows down, the ability of underground capitalism to overcome the controls of state planning and communism becomes more difficult.
exports declined in November heralds tough times ahead. But the weak
economy has also reignited a debate about whether the entrepreneurial
dynamism at the root of China's success is being stifled by the
remaining government controls over the economy. After three decades of
reforms, the financial system is still dominated by the party-state,
which means that funding often follows political connections rather
than business acumen.
Which is unfortunate considering the growth that has "pulled tens of millions out of poverty." Wenzhou is a good case for how being free of government intervention can spark growth.
Wenzhou helps demonstrate how capitalism flourished from nothing
after Deng took over. Little known outside the country, the city is
legendary within China – evidenced by the many explanations for its
success. Isolated by mountains on three sides, Wenzhou businesses just
got on with it, some people say, at a time when Beijing still frowned
Some also say Mao refused to put important
state-owned companies in the region because its location across the
strait from Taiwan made it vulnerable to invasion, meaning it had to
create its own economic base. Churches with red neon crosses dot the
city's skyline, prompting theories that Wenzhou's business culture is
rooted in a form of protestant individualism.
Some of the stories are truly spectacular.
Tales of cunning entrepreneurs abound. Nan Cunhui repaired shoes
until he and a few friends started to make light switches from spare
parts in the evenings. From that he has built up Chint, China's biggest
manufacturer of electrical power equipment, with sales of $2.3bn
(£1.5bn, €1.7bn) a year. (One of his friends in the early business left
to found his own company, Delixi, which is now the second biggest
Chinese company in the industry.)
the guys at Chint and elsewhere started off as peasants and have got
where they have all on their own," says Xie Jian, professor at Wenzhou
University's City College.
Manufacturing grew up on its own.
because of the authorities in Beijing: "The companies have always been
one step ahead of the government."Wenzhou's private sector is
also rooted in the city's network of informal banks. Many of the
factories got off the ground using money raised by a handful of
relatives and family friends from underground banks, which exist in a
legal grey area, tolerated but not formally approved by the authorities.
And that mesh of informal and formal financial systems is now creating the problem, or conundrum, of how to move forward into the future. A future where low-cost manufacturing now competes against "good manufacturing," which will require additional infrastructure investment.
The Wenzhou model of informal financing, though useful for starting
factories from scratch, is not so effective at taking companies to the
next stage. Formal finance in China is dominated by the
state. The main commercial banks provide the bulk of the credit in the
country and they mostly lend to other state-owned companies. So as
private businesses grow and require more capital or land, some feel the
need to get close to the various arms of the party-state.
Which brings us back to that odd historical room at Juyi Shoes.
In Wenzhou, this has led to an odd courtship over the last decade:
companies looking for official patrons and the Communist party, nervous
about the creation of a new power base, seeking to penetrate the
private sector. The homage to the party and Stalin at Juyi Shoes is one
example, but Chint boasts it was the first Wenzhou company to set up a
party cell, even if founder Nan Cunhui has not been accepted as a party
member. State media reported last year that 3,400 party cells had been
established in Wenzhou businesses.
I wonder… with everyone and their mother getting in line for a U.S. federal bailout, should companies create a "party cell room" at their factories, paying homage to Bush, Bernanke, Paulson, and presumably Obama? It might be a good last ditch idea for the Detroit Three.