The Ferrari-Red Communists: China at a Crossroads in Shift from World's Factory to Industrial Power

By Erich Follath and Wieland Wagner

The Chinese are seen as victors in the global financial crisis, and as both a hope and a threat to German industry. Beijing wants to be more than the world's factory. But the country's economic engine is showing signs of stalling and it is uncertain what direction it will take in the future.

Photo Gallery: China Helps, Threatens Businesses Abroad Photos
AFP

A visit with Mr. Huang, one of the richest and most controversial men in the People's Republic of China, is full of surprises. Take, for example, the four pairs of climbing boots lined up like exhibits behind the door to his office. "I was at the South Pole and North Pole, and twice on Mt. Everest with these," says Huang, pointing proudly to a series of photos that serve as proof of his adventures. There are Buddha statues and various animals in the adjacent rooms, including rhesus monkeys and pygmy rabbits in cages, as well as small sharks swimming in circles in a large aquarium leaning against a wall.

"I love nature," says Huang Nubo, 56, a businessman with an estimated net worth of at least $1 billion (€772 million). The founder and chairman of the Beijing Zhongkun Investment Group, Huang discovered a market niche: He builds resorts with an emphasis on sustainable design. His company benefits from the new wanderlust and "green" consciousness of the affluent Chinese upper and middle classes.

He tells the short version of life story while a Siam cat purrs on his lap. He was orphaned at 13, when in 1960 his father committed suicide after a quarrel with a party secretary. His mother later died of grief. He attended Beijing University, joined the Communist Party to further his career and became an official in the party's propaganda division. Then he withdrew from politics and founded his company.

"As an entrepreneur, you have more freedom than you do in politics, and you can usually move around more," says Huang, whose party connections certainly didn't hurt his growing business. But, as he points out, "Chinese society has developed unevenly, which isn't good. Too many people are losing out." This is why Huang gives a substantial portion of his profits to the needy. With charitable donations of about $5 million a year, he is seen as one of the country's most generous philanthropists.

Distrust over Global Buying Spree

Huang has trouble understanding why his latest project is so controversial. "I'm hurt by the mistrust with which I and the entire Chinese nation were met." He is talking about Iceland and, more specifically, about an almost virgin piece of land in the northeastern part of the island, complete with waterfalls and snow-covered peaks, called Grimsstadir a Fjöllum. Huang fell in love with this wildly romantic stretch of wilderness during a visit to Iceland. He wanted to acquire 30,639 hectares (about 120 square miles) of land and invest about $200 million in the property. The plans included a 120-room hotel, a golf course and a riding facility, which could all be reached via a new airport built specifically for the site.

Some of the public in Iceland, a NATO country, saw the potential deal as a sellout and even envisioned looming geopolitical problems. One commentator likened the entrepreneur to Dr. No, the villain of the 1962 James Bond film of the same name. Huang's party connections were brought up, to support the theory that it was merely a cover for sending an agent to Iceland. Many had their suspicions about the "noticeable" proximity of the Grimsstadir site to a deep-water port. Was this man really working for the Communist Party and planning to build a base for Chinese polar ambitions?

Huang has lost his initial enthusiasm for the Iceland project, and now he is retreating more and more into his third passion, next to making money and conquering nature: writing poetry. Several volumes of his prizewinning verses have already been published. At night, after the employees have gone home, he sits among his sharks and pygmy rabbits, writing verses like: "Whose smiling face would be no mask / And whose heaven no exile."

The fears of some Icelanders may sound like paranoia, but they are not unfounded. China and its entrepreneurs are acquiring all kinds of assets all over the world, and in many cases their actions are strategic in nature, including the acquisition of farmland in Mozambique, copper mines in Afghanistan and ports in Greece. China is on a global buying spree, and it sees the current economic crisis in Europe and the United States as an historic opportunity to energetically press ahead with its offensive. The financial services firm PricewaterhouseCoopers estimates that China's so-called red capitalists spent $23.9 billion on shares in foreign companies in the first half of 2012, or three times as much as in the same period last year.

The commodities sector is a case in point. In Mid-July, the state-owned energy giant Sinopec spent $1.5 billion for almost half of Canadian company Talisman Energy's oil and gas rights in the North Sea. Almost concurrently, CNOOC, another Chinese energy giant, bought the Canadian firm Nexen for more than $15 billion. Planners in Beijing hope that these deep-water drilling specialists will help them achieve the breakthrough in industrial policy that they need to expand in the Pacific. CNOOC is the main Chinese player in oil and gas exploration in disputed waters that are also being claimed by neighbors Vietnam, the Philippines, Malaysia and Japan, with which there is even talk of possible war over the claims.

China's Engine Begins to Stall

The one side of the Chinese economy is characterized by an unbroken and even growing thirst for expansion. The other side is the domestic economy, which hasn't been doing very well for some time. There is even talk of a "bubble" that could burst, and of the "Chinese party" coming to an end as a result. China's engine is beginning to stall, with the economy falling well short of the 10-percent average annual growth rates in the last decade. In the months from July to September, the economy grew by only 7.4 percent, and it was the seventh quarter in a row in which the growth rate declined. In July, exports grew by only 1 percent before increasing again.

While these numbers sound impressive in times of European stagnation and American record debt levels, they are disconcerting for the People's Republic, because other indicators are also disappointing at the moment. The Shanghai Stock Exchange Composite Index fell to a three-year low, and growth in industrial production fell short of expectations. Entire industries are suffering from weak demand. With labor costs on the rise, industries like shipbuilding and small manufacturing of products like Christmas decorations are no longer as lucrative as they once were.

The country is experiencing a dual set of developments. Its top companies, like computer maker Lenovo, machine builders Sany and Huawei, a company that experts believe has just overtaken Sweden's Ericsson as the global market leader in telecom equipment manufacturing, are celebrating their triumph. Meanwhile, other industrial firms must largely reinvent themselves in a painful process.

China is shedding its image as the world's factory. The current economic model is "urgently in need of change," states a highly critical March report by the World Bank -- which, astonishingly enough, was co-produced with the Chinese government. The report was presented by World Bank President Robert Zoellick. According to the report, China will jeopardize its previous successes unless it implements fundamental reforms, and it will have to curb the near-monopolistic influence of state-owned companies and curtail the power of those interest groups that benefit from "special relationships with decision-makers." The report concludes that "China has reached another turning point."

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