The Rise of a New Power (5)

6/20/05
(Page 5 of 6)

Still, many of the old hallmarks of Marxist planning are quickly being junked. Nearly 2,300 outdated laws have been repealed since China joined the WTO, according to Dion Wiggins of the Gartner Group, the U.S. consulting firm. Just five years ago, companies constantly hit roadblocks the government called "internal documents" --secret laws, often meant to protect some apparatchik's personal empire. "We never run into that anymore," says Mitch Dudek, a partner at Paul, Hastings in Shanghai. The central government even seems to be purging corrupt officials--proving that communism can still be ruthless. Last year the government executed four bankers accused of fraud.

Foreigners are usually treated much better. Shanghai woos western conglomerates with favorable tax treatment and other perks, the same way American cities and states compete to lure businesses. Western firms often discover that when it comes to business, an authoritarian government isn't such a bad thing. "Usually, if the government says a road is going to be built by September, it will," says Jerry Nissen, a former U.S. investment banker who is executive director of SmartLink International Holdings, a Shanghai-based consultancy. "There's no second party to create opposition."
The more warmly China's leaders embrace capitalism, however, the more standing they have to pursue territorial or political goals at odds with Washington. In March, the Chinese government adopted a resolution stating its right to use force if Taiwan were to declare its independence. A war with Taiwan, or even an outbreak of anti-Taiwan fervor, is one scenario that could unnerve western businesses. Recent anti-Japanese protests have also worried China's trading partners.
And there are limits on how rapidly China can become an economic superpower and employ the geopolitical muscle that comes with such status. Most big Chinese firms, for instance, are a web of entangled interests, both party and private. "The question about Chinese corporations is always, Where does it begin, and where does it end?" says Marshall Meyer of Wharton. "The line between the government and the corporation is very indistinct." That makes it difficult for firms to get listed on respectable stock exchanges and to raise public money through equity offerings or bond issues. Sometimes it's hard to tell whether a state-owned company is even profitable, since published financial results don't always add up. The lack of standardized accounting and a robust, transparent financial system could keep China out of the world's economic big leagues for a long time. "People see China running," says Jeffrey Bernstein, chairman of the American Chamber of Commerce in Shanghai, "but they don't see how many heavy bags they're carrying."
Big brother. There are also limits to how much control the Communist Party is willing to relinquish. More than 30,000 government censors, for example, monitor Internet and E-mail traffic, which is filtered through eight gateways that the government can shut down at will--making China the only country in the world able to effectively monitor its citizens' E-mail. A true test of the party's commitment to free markets will be the growth of China's own companies. "The question is, To what extent can China tolerate the globalization of its firms, since then you lose control?" says Denis Simon, provost of the Levin Institute, the international relations school at the State University of New York. "These companies are going to face major challenges as they go overseas. They're going to have trouble maintaining their Chineseness."