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


By Erich Follath and

Part 2: A New Era for China

China's current problems are in full evidence in Dongguan, a major city in the Pearl River Delta and home to the world's largest shopping mall. Very few consumers can be found in the 660,000-square-meter New South China Mall, and even most of the stores along the central, Venice-like Canal Grande have gone out of business. Chinese gondoliers dose in the evening sun, and the stone "San Francisco Bridge" looks deserted. The mall was planned without taking the real needs of the population into account, and now it has to be reconfigured. Specialization instead of megalomania is the order of the day, as it is throughout Dongguan, which was the country's third-largest exporting city, falling well behind Shanghai and Shenzhen.

Until recently, armies of migrant workers were making vast quantities of cheap consumer products, from watches to mobile phones, for the European and US markets. They worked and lived in a vast thicket of factories and dormitories in the southern Chinese exporting province of Guangdong, near Hong Kong.

But now the Dongguan model is fast becoming outdated, after hundreds of low-wage operations have gone out of business. This is partly a result of reduced consumption in the crisis-ridden United States and Europe, but it's also because the People's Republic, following in the footsteps of Japan and South Korea, is transforming itself with giant steps into a more mature and rapidly aging industrial society. The consequences are rising wages and higher costs, labor shortages in some industries and stricter worker safety and environmental regulations. Many manufacturers of shoes and toys have already moved to cheaper countries, like Vietnam and Cambodia.

'A Concept Worldwide, Even for Nobel Laureates'

China's forward thinkers are tasked with moving mountains, sometimes quite literally, to safeguard the future. A huge, reddish-brown area that is currently taking shape on the outskirts of Dongguan on excavated land is to become a "launch pad into the high-tech age of the People's Republic," and the name Donggan will become "a concept worldwide, even for Nobel laureates," says Zhang Bingyun, a nuclear scientist and the prophet of a new era. In less than six years, he and hundreds of other scientists plan to put China's first spallation neutron source into operation. There are currently only four such facilities worldwide, in the United States, Great Britain, Switzerland and Japan.

"We will make enormous progress in the development of new materials, but also in biotechnology and genetics," Zhang predicts. His hope is that private high-tech companies will set up shop in Dongguan and enhance existing products. For now, however, only the government is building facilities in the area. The Communist Party planners want their investment to expedite much-touted "indigenous innovation," or creativity on command. They're also hoping to find a Bill Gates for the command economy.

The construction site is also a battlefield of the ideologues. Behind the scenes, the party's planners are at odds over the question of what the country needs. Does it need more easily regulated state capitalism and masses of workers, sent from the countryside to the cities to enable the country to produce goods more and more effectively for the rest of the world? Or more private companies with high-tech potential, which are difficult to control and can easily become political trouble spots that could undermine the Communist Party's claim to absolute power?

A Vicious Circle

The political and economic mix that fostered China's economic miracle in the last three decades was ideally suited to catapult a poor, underdeveloped nation forward. But it isn't suited to developing an increasingly affluent and industrialized country.

A fundamental flaw of the current model is that the bureaucrats manipulate the flow of money and set key prices -- like interest rates and the currency's external value -- and pump cheap money into the economy as they see fit. This keeps state-owned companies alive that should have gone bankrupt long ago. Private households, compelled to exercise caution in a country with a poor and rudimentary healthcare and pension system, are hording money instead of boosting domestic consumption.

Last year, the party had no choice but to intermittently cool down the boom that had been created artificially with government funds for infrastructure projects, especially in the real estate market. Real estate prices had risen to dizzying heights.

It's a vicious circle, because a significant portion of the Chinese economy depends on the construction boom. In 2011, concrete makers and steel mills saw a sharp drop in demand. At the same time, expiring tax incentives reduced the Chinese desire to buy new cars. Cheap domestic brands like BYD ("Build Your Dreams") were especially hard-hit by the slump. BYD's consolidated profits declined by more than 90 percent in the first two quarters of 2012, compared to the same period last year, and even executives were selling their company stock.

Structural Problems

Prime Minister Wen Jiabao has recognized that there are structural problems in China's economy, which lead to "unstable, unbalanced, uncoordinated and ultimately unsustainable development."

But when he boldly linked thoughts of restructuring the economy with political liberalization two years ago, the state media didn't publish his remarks, and Wen didn't even object. He will not stand for office again at the upcoming 18th party congress in Beijing, which will mark a change in China's leadership and possibly even set a new political course for the country.

When it comes to foreign operations, the party's policy is to encourage activity that can best be described as "swarming out." China is also active in the entertainment industry. The Dalian Wanda Group, a Chinese conglomerate, acquired AMC Entertainment, an American chain of movie theaters, for $2.6 billion in May 2012. And American sports fans no longer have to worry about whether the Chinese should be allowed to invade their sanctum, because it's already happened. In late July, the computer company Lenovo, which had already acquired IBM's PC division in the past, became the technology sponsor of the National Football League. A state-owned company in Beijing has also acquired Italian luxury yacht maker Ferretti.

Mickey Mouse is already part Chinese, while Donald Duck is becoming a Peking duck. Both Disney and director Steven Spielberg's animation factory DreamWorks felt compelled to seek partners in Shanghai so as not to miss out on the important market in the Far East.

Emulating Germany and Buying a Little of It Too

On their long march to the top of the global high-tech industry, China's capitalistic communists have their sights set on one goal in particular: Germany. While a few backward-looking party strategists warn against too much influence from countries in the West, domestic pioneers like economist Li Daokui openly encourage their fellow Chinese to emulate the "outstanding German model." Li becomes very enthusiastic when he thinks about Berlin. Despite the global financial crisis and the troubles facing the euro, he feels that all key indicators are positive for Germany.

China has the world's largest foreign-currency reserves, a $3-trillion treasure chest, from which it's currently scooping money to buy up companies all across Germany. For the Chinese, the weak euro is turning a buying spree into a bargain hunt, with acquisitions of German companies in recent years growing from 84 in 2009, when the People's Republic first unseated Germany as the world's top exporting nation, to 158 in 2011.

The Chinese are primarily interested in acquiring the latest technical knowhow. A handful of German auto parts suppliers have fallen into Chinese hands in the last few months. In late August, it was announced that a subsidiary of the Chinese construction equipment maker Shandong Heavy Industry had acquired Kion, a forklift manufacturer based in the western German city of Wiesbaden. And after lengthy debates, the Düsseldorf-based operator of mobile wireless network provider E-Plus hired the Beijing company ZTE to expand its network. According to industry insiders, ZTE undersold the bids of Western top dogs Ericsson and Nokia Siemens Networks by almost half.

But probably the most strategically important investment of the year for the Chinese was their January acquisition of a traditional German industrial company, the world market leader in its industry. When Chinese construction equipment giant Sany acquired Putzmeister, a maker of concrete pumps based in Aichtal near Stuttgart, it was the first time Chinese buyers had managed to absorb one of the "hidden champions" of the large group of German small and midsized companies known collectively as the Mittelstand. All in all, the Chinese paid about half a billion euros for one of the pearls of German industry.

Sany Chairman Liang Wengen, 56, orchestrated the deal. One of the most successful Chinese pioneers operating in Germany, his net worth of $8.1 billion makes him one of the five richest men in China. Liang is a completely different type of person than the colorful entrepreneur-poet Huang. Levelheaded, goal-oriented and always very close to the reins of power, Liang is a self-made man. A former bamboo basket weaver in his native Hunan Province, he worked his way up through a weapons factory and later developed his own, small factory for welding equipment. He joined the party early on, and in addition to receiving an award for being a "model private entrepreneur," he was named an "Architect of Socialism with Chinese Character."

Liang is the kind of business leader with whom politicians feel comfortable, and who they like to have at their side. For instance, he was allowed to accompany Xi Jinping, the current vice president and designated new party leader and future president of China, to the United States. At the upcoming party congress, Liang is expected to be the first private businessman to be appointed to the party's Central Committee, the illustrious circle of China's most powerful men and women.


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