ChinaSolved Predictions for China in 2012

Predictions for China in 2012

And we’re back…   This year ChinaSolved will be writing about China, but not from it.   That means better access to news services, but less first-hand  access to the people and events making the news.  If there is anything you think ChinaSolved needs to know, give a shout out on the LinkedIn group at China Solved  , Twitter @chinasolved or at  Looking forward to hearing from everyone in 2012.

I’m going to start the year off by casting my lot with the soft landing crowd.  I think that most of the bad news is known and that Beijing will be able to engineer a relatively mild downturn.  At the risk of sounding positively optimistic, I would say that taking a few percentage points off the GDP growth rate might actually be a good thing for China’s economic development in the medium term.

That being said, China in 2012 will be no picnic.  It’s not the economy, Comrade, but rather a perfect storm of domestic discontent and international political tensions that will characterize the coming year.  As a new hard line administration prepares to take the reins, Beijing will begin 2012 looking even more Hu than Wen, as party doctrine kicks reformers to the curb once and for all.

Assumptions:  China eases into a semi-controlled soft landing while the US economy gradually builds strength.  Europe is down for the count, but that is looking like a 2011 story.  The ChinaSolved view is that Obama will win the 2012 election after a particularly ugly campaign that sees both sides blaming China for America’s woes.

 1. Wealth flight from China to the US accelerates.  As the Chinese economy slows and the US perks up, MWMs (Mainlanders With Money) start taking flight in even more visible – and permanent – ways.  Those involved in higher education have been watching the groundwork laid for years – wives and young children are sent across the water to get educated & green carded while the husband stays in the mainland and tends to business.   In the old days, the assumption was that the kids would eventually come back to China with their western learning to take over the business.   Now that the relative strength of the two super-economies is starting to shift, you’ll see more and more Chinese entrepreneurs try to break into the US market – maybe even pulling up stakes from the mainland if they are successful.  I’m not talking giant SOE or listed companies, but rather smaller privateers who lack the heavyweight political connections to defend their fiefdoms if the economic pie stops expanding.  They’ll have to buy their way into the US market.  Handled correctly this can be extremely win-win.  Chinese bring in money and jobs, Americans get investment and paychecks.  Handled poorly, it will lead to racist recrimination and hostility.

    • Expat managers will have plenty of opportunity to put their hard won Chinese negotiating and management experience to work on the other side of the trade – helping Chinese deal with US partners, regs and clients.

 2. Chinese foreign policy flips from sour to sweet towards the US over the course of 2012. With Europe down and out and the rest of the world looking more unstable than ever, China is going to come to the same realization that corporate America was forced to make about China in the 1990s – there is really no one else to negotiate with.  Warts and all, the US is the only partner worth having.  Sure, China’s new administration will be far more hardline than the Hu & Wen lineup, but that is just what will give them the political cover to start making quiet but significant deals with Washington.  The Republicans and Occupy Wall Street populists will start the year swinging – lashing out against the PRC on everything from job loss to IP theft to human rights.  A 2nd term Obama admin will rediscover its populist roots, especially since it no longer needs Wall St. beneficence.   Beijing and Washington will lock horns and bash each other for a while, but in the end they will realize that it is simply too expensive and distracting to go back to Cold War.   Look for public deals on trade, IP protection, technology transfer and corporate regulation (on both sides).  Quieter deals on cyber-security and Taiwan.  Forex will continue to be the noisy, fake, non-issue it always has been.    Iran, Pakistan and North Korea will stay dicey forever.   Climate and environment fade quietly away.

    • For expat managers, there will be more noise than real danger, but the general environment will continue to deteriorate and informal technology transfers (i.e.: IP theft) will become an even bigger problem.  Most of the expats I know are already resigned to this, so it’s more an issue for those considering entering the market.

 3. Beijing will keep its friends far and its enemies close.  Iran, Pakistan and North Korea form China’s core entourage.  Russia is more of a competitor than colleague, but the relationship will stay drama-free for the foreseeable future.  Troubles on the South China Sea and the ASEAN nations  will continue to be sore spots for China.  The US effort to energize and unite SE Asia to resist Chinese military influence has been one of the significant foreign policy successes of the Obama administration.  If Sec of State Clinton resigns (as she is expected to), it won’t necessarily spell good news for Beijing.  She brought years of experience to bear, and handled the tense situation deftly and professionally.  Her replacement may get occupied with other issues – or he may botch it with a ham-fisted show of force.  Either way, countries like Philippines,  Malaysia, Vietnam, Japan and South Korea will find that they have no choice but to square off with the PLA and its fishing boat flotillas to secure their waters and resources.  Look for 2012 to be tense on the South China Seas – and for Beijing to maintain its public support of some of the world’s scariest regimes.

    • This should be a neutral for most expat managers, though those in the oil, finance and high-tech industries had best be careful about jumping into bed with the wrong JV partners.

 4.  Less freedom at home.  More censorship, less tolerance.  Following a trend that has been accelerating since the mid 2000’s, China will continue cracking down on both the technologies and personalities that stray from the party line.  Beijing has racked up a great record on silencing dissent and controlling the media over the past few years, and there are few signs that it will let up in the near future.  The big local companies are on board with the status quo, and foreign companies continue to be shut out of the media market.  Look for unauthorized VPNs to become less effective and for the Party to take a heavier hand in controlling the message.

    • I still say that media restrictions, the firewall and censorship are awful for international businesses operating in China, but I don’t seem to be in the mainstream on this.  My view is that censorship and media controls dilute the brand equity and management efficiency of global companies.  Others, however, maintain that since censorship and repression affect all players, they don’t represent a competitive disadvantage to anyone.

 5. Slowing economy and  growing discontent brings the CCP  to its “Come to Jesus Moment”.  When the country was booming and everyone thought that their lot in life was on the way up, corruption and inequity were manageable.  In 2012 the prosperity pie will stop growing – and for many will actually shrink.  It’s possible that officials at all levels of government rediscover their revolutionary zeal and love of the people, but it’s more likely that they will accelerate their land grabbing, corrupt ways while there is still opportunity.  Wukan showed the party boys just how expensive public discontent can be, and Beijing will ban any mention of corruption or official misconduct in the media and online forums – further undermining its legitimacy.

    •  2012 could be an awkward time  for the Chinapologists out there.  You know who you are.

2012 will be a rough year for China, but the economy is the least of its worries.  What could have been the PRC’s moment to take its rightful place as a true superpower will likely be squandered by an increasingly inward-looking party leadership.  Back in 2008 China had the chance to step up and help secure the integrity of global markets, but instead opportunistically extended its trade surplus and amped up unfair trade practices.  In 2011, it flipped off the Eurozone in much the same way.  The CCP has failed to step up to any global challenge, opting to heed the voices of its own lesser angels.  2012 may be the year that it finally begins to pay the price.  Its own best and brightest are fleeing while the peasantry are more discontented than ever.   Though the economy will offer plenty of  challenges,  party legitimacy and international relations will be Beijing’s biggest problems.

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