Will China Stumble? Don’t Bet on It

By Steven Rattner, a contributing writer for Op-Ed and a counselor to the Treasury secretary and lead auto adviser. He is a longtime Wall Street executive.

Hardly a day goes by without news of yet another economic problem facing China. A frothy real estate market. Quickly rising wages. A weakening manufacturing sector. Tightening lending standards. The list can seem endless and frightening.

But after a recent visit to China, I remain staunchly optimistic that it will continue to be the world’s greatest machine for economic expansion. While developed countries bump along with little growth, China’s gross domestic product is expected to increase by 9.2 percent in 2011 and an equally astonishing 8.5 percent next year.

The country pulses with energy and success, a caldron of economic ambition larded with understandable self-confidence. Visit the General Motors plant on the outskirts of Shanghai and watch Buicks churned out by steadily moving assembly lines almost indistinguishable from those in plants in Michigan.

That shouldn’t surprise, as G.M. strives for uniformity across its Chinese facilities. Perhaps more startling is that G.M. achieves American levels of productivity, quality and worker safety — with pay that is a small fraction of levels in the United States.

This illustrates China’s great strength: its ability to relentlessly grind down costs by combining high labor efficiency with wages that remain extraordinarily low. At Foxconn’s largest plant, in Shenzhen, 420,000 Chinese earning about $188 per month assemble electronic components for megacustomers like Apple, Hewlett-Packard and Dell.

Often criticized for just being a nation of “assemblers,” China has been increasing the value it adds to exports as more components are produced there. G.M., for example, uses 350 local suppliers.

China’s economic success is colored by its opaque political system, repressive and riddled with corruption. But the unusual mix of authoritarianism and free enterprise should continue to work because of its ability to deliver rising incomes, satisfying a populace that appears more interested in economic advancement than in democracy.

China has a plethora of tasks on its economic to do list, but none are impossibly daunting. Just as in the United States a century ago, jobs are needed for vast numbers of rural migrants moving into cities. Inefficient state-owned companies must be restructured (as they were in recent decades in many European countries). The other evident stresses, like the indisputable property bubble, are manageable and far short of what brought down the American economy.

Meanwhile, an opportunity lurks in China’s seeming inability to create innovative products with international identities. In an era of global corporations, a country that reveres brands, especially luxury ones like BMW and Louis Vuitton but also Starbucks and Häagen Dazs, has yet to give birth to its first.

Lenovo, one of the best-known Chinese companies, has achieved limited success with its 2005 acquisition of IBM’s personal computer business. Astonishingly, Chinese auto companies have the lowest share of their home market of any major country. So China has emphasized building products like ships, where brands don’t matter.

Not unlike the United States in the 19th century, China’s early stage of industrialization has brought with it an unsavory wild West flavor, from cronyism to fraudulent accounting, that justifiably worries investors. But behind those distractions is a country that is investing substantially in its future — about 46 percent of its gross domestic product, compared with 12 percent in the United States.

And while total government debt in China is high — by some estimates, higher than in the United States — much of the Chinese debt was incurred for investment rather than consumption, far better for longer-term growth. Notwithstanding accounts of “roads to nowhere,” China has vastly improved its core infrastructure. Its government arguably does better than ours at allocating capital.

The antipathy of Chinese households toward personal debt (a quarter of homes are bought with cash) has resulted in a savings rate of nearly 40 percent of income, compared with less than 5 percent for Americans.

Underpinned by a reverence for entrepreneurship, China has made starting new businesses easier, paving the way for the accumulation of vast fortunes; there are more billionaires in China than in any country except the United States. (China’s income inequality also rivals that of the United States.)

A gradual move toward reform appears evident. Controls over interest rates, foreign exchange, cooking oil and gasoline, to name a few, are being liberalized. There is even attention to the environment, with tax subsidies for fuel-efficient autos and limits on new-car purchases in the largest cities.

The frustrating mercantilist approach taken by China — it manipulates its currency and trade rules with abandon — has served it well. It has accumulated vast foreign currency reserves ($3.2 trillion and rising) while blocking access to its market and gaining competitive advantages internationally in everything from solar panels to toys. Congressional saber rattling notwithstanding, China is likely to continue to get away with reforming only slowly.

While China hardly lacks challenges, I am betting on its continued success.