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Thursday, Feb. 7, 2008

CHINA SYMPOSIUM

Playing by U.S. rules compels China to change and adapt


Staff writer

Contrary to the stereotype that China is "playing a different game" in its bid to outcompete developed economies, it has achieved rapid growth by integrating with the global supply chain on the terms set by major powers — in particular the United States.

News photo
Edward Steinfeld (right) and George Gilboy discuss China's economic, social and political changes during the Jan. 23 symposium. SATOKO KAWASAKI PHOTO

This has forced a dramatic transformation of Chinese society. Meanwhile, the Chinese political system, despite one-party rule, is also undergoing rapid changes, including greater competition within the Communist Party as it tries to reform itself in a bid to remain in power.

These were the assessments of MIT experts who discussed ongoing changes in China during the Jan. 23 symposium.

Edward Steinfeld, an associate professor of political science and director of the MIT-China Program, said the familiar picture of China's growth and rising U.S. trade deficits with China lead many Americans to believe that China is rising at America's expense.

"Many Americans tend to feel that China is outperforming the U.S. by playing the competitiveness game by utterly different rules," Steinfeld said. These people focus on what they view as China's currency manipulation, government support for key enterprises, and alleged shortcuts on environmental, labor and intellectual property standards.

Such a view — though not entirely wrong — misses key aspects of China's economic development, he said. "The Chinese economy is developing by playing our game — an essentially American game, or the game of advanced industrial economies," he noted.

"The Chinese system over the last 20 years has been forcing domestic institutional change by integrating with the global economy on distinctly American terms," he said.

This process, he said, has taken place in such a way that allowed multinational firms investing in China to move higher up the value chain. China, meanwhile, "is still contributing a very small portion of the value to the product it touches. Many of the products we use today that are 'made in China' have quite a small Chinese contribution," he added.

A typical example is Apple Inc.'s popular iPod portable music player. An iPod — stamped "made in China" — sells for about $300 in the U.S. and carries a wholesale price of roughly $220, and Apple takes a gross margin of about $80. Of the roughly $144 factory cost of an iPod coming out of China, much of the value goes to the non-Chinese suppliers of key components while the Chinese assembly operations are owned by foreign firms as well, Steinfeld said.

"This is an absolutely typical story of global production today. It's a story that shows up in the Chinese trade surplus with the U.S. as a $144 tag on the Chinese account, but the amount of value contributed in China — and certainly the amount of value contributed by Chinese-owned producers — is virtually nil," he said.

Steinfeld noted that pressures from China's integration with the global supply chain have meanwhile caused a dramatic social transformation.

"China has been pushed — and in many cases has done so on its own volition — to dismantle socialist institutions, particularly the socialist social security net, and in so doing it has moved toward a rather American style of social service provision on a fee-for-service basis, (which) has then exacerbated income inequalities in China that are increasingly looking like income inequalities in the U.S.," he said.

"This transition into a more capitalistic form of social organization — one that no longer involves lifetime employment but flexible employment, employment on terms set by management rather than by labor, and flexible employment in the context of no real public social safety net — has facilitated China's integration into the global economy," he said.

George Gilboy, a research affiliate with the MIT Center for International Studies, pointed to an "incredible dynamism" in Chinese politics and society today, where, he said, experiments and adaptation are being pursued by the Communist Party, the state, and on the part of citizens with new wealth and new interests.

"Chinese politics is not stagnant, and there are emerging signs of change," said Gilboy.

One of the key changes happening within the party, he said, is the emergence of two major power groups within its elite ranks, which was highlighted in the selection of nine new members of the Politburo Standing Committee at the party congress in October.

"Unlike in the past, the party did not identify a single person as heir apparent to replace Hu Jintao" as party chief and president of the state when his second term expires in five years, he noted. "Instead, the party elevated two men to new positions . . . and gave some indications that they will have to engage in competition to gain support from the broader party membership" if they want to move to the top slots, he said.

Li Keqiang, a Hu protege, is from the Youth League group, who are generally trained in law and social sciences, and have work experience in China's rural, inland areas. "They seek to redress imbalances in China's growth and to help people who have been relative losers in China's growth story thus far," he said.

Xi Jinping, Shanghai's party secretary, belongs to the "princelings" group — an elitist group comprising the sons and daughters of former senior officials, he noted. "They have a background in engineering, trade and finance, and they have worked in urban and coastal areas. They seek to prioritize growth, especially in coastal areas and cities," he added.

These two groups have a lot in common and they agree that the Communist Party should maintain its monopoly on political power — and assist each other for that goal, Gilboy said.

"But they also compete and they balance against one another. The importance of this emerging trend . . . is that the Communist Party itself is changing. It is adapting and is trying to improve its ability to govern," he said. "These changes offer further opportunities for reforms as each group competes to win greater support from within broader segments of the party and, potentially, within broader segments of society."



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