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Is China becoming more troubled than amazing?

Any Westerner visiting China leaves in awe of its new airports, buildings and hotels. Its cities bustle and its people hustle.

As head of the Consumer Electronics Association, I travel to China at least annually. But after several awe-inspiring trips, I returned from China this month less in awe. China may have “jumped the shark,” veering from amazing to troubled.

For one, the building boom appears to be over. There are still plenty high-rise construction sites marked by cranes, but many, if not most, of the projects showed no evidence of any activity. They were simply stopped.

In one area, we drove past scores of quiet high-rise sites in various phases of completion. We were told that in this one small and amazingly beautiful coastline area, construction had begun and was halted on 100,000 housing units. Chinese banks are holding some serious uncollectible debt.

While this may have been an extreme example, the reversal in construction stems in large part from the government’s new rules aimed at cutting speculation by restricting second home ownership. Buyers must put down 50 percent in cash, and interest rates are less than favorable.

Of course, this may just be a temporary blip. It’s been estimated that 400 million people are moving from China’s villages to its cities. Indeed, there are more than 171 Chinese cities that now have more than one million people, compared to only nine cities in the U.S.

You wouldn’t worry about a construction slowdown if you read the China’s recently released Five Year Plan. By 2015, high-speed rail will cover 74,000 miles, up 30 percent. Another 64 airports are planned by 2020, adding to China’s 180-airport inventory. And 41 nuclear plants are planned or are under construction. Ambitious.

Another warning sign is that the Five Year Plan envisions a shift away from manufacturing to innovation. China is targeting biotech, information technology (IT) and green industries. China is becoming a less competitive manufacturer thanks to the one-child policy that results in a shortage of labor. The minimum wage is experiencing double-digit annual growth.

Chinese culture and its walled-off approach to information may limit its ability to innovate. Innovation is the art of connecting unrelated dots. If you can’t access the Internet, how can you even see the dots?

The Plan calls for investing in research and development, but its hard push for innovation may encourage greater stealing of other’s secrets. The laughingly specific stated goal of 3.3 patents per 10,000 people may encourage patent filings, but hardly encourage worthy innovation.

As part of its innovation strategy, China is wisely looking outward to educate the next generation. Some 160,000 Chinese students attend U.S. schools not only to learn the substance, but also because they want to absorb our culture of innovation. Although no statistics are available, anecdotal evidence shows that most of these students, including many pre-college, are children of government officials. Makes one wonder how a civil servant can afford the cost.

China’s behavior is less like the innovative emerging world power and more like the amoral heavy. It has aggressively challenged Korean and Japanese fishing boats in border spats. It cornered rare earth minerals, and prices skyrocketed for non-Chinese manufacturers. It extorted Apple to pay a licensing fee to a Chinese subsidiary even though Apple had a deal with the parent company. And its vague laws, lack of intellectual property (IP) protection and limits on foreign companies from accessing its markets give China an “unfair” moniker for business.

If all of this doesn’t raise questions, here’s another interesting tidbit from my trip. I heard repeatedly that our Ambassador to China, Gary Locke, has mixed popularity. He’s a minor celebrity with the Chinese people as he flies coach and forsakes five-star hotels. And for this same reason, Chinese government officials resent him because the Chinese media contrasts Locke’s frugality with their own officials’ penchant for luxury when attending the same events. This is so sensitive that the Chinese have announced new rules limiting luxury expenditures by government official, including a ban on shark fin soup.

Of course China is not in dire straits. With a $31.7 billion trade surplus and a middle class expected to hit 400 million in 2020, China has many favorable winds at its back. But history has shown that a government-centric approach to the economy will only get you so far before cracks begin to show. If my recent visit to China is any indication, those cracks are showing and that could spell doom for China's innovation future.

Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA)®, the U.S. trade association representing more than 2,000 consumer electronics companies, and author of the New York Times bestselling book, “The Comeback: How Innovation Will Restore the American Dream.” Connect with him on Twitter: @GaryShapiro


 

Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA)®, the U.S. trade association representing more than 2,000 consumer electronics companies. His latest book is "Ninja Innovation: The Ten Killer Strategies of the World's Most Successful Businesses," (William Morrow, January 2013). He is also author of the New York Times bestselling book, “The Comeback: How Innovation Will Restore the American Dream” Contact him on Twitter at @GaryShapiro.