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Sure, China's Slowing Down but Don't Turn Your Back

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TIANJIN - Few know about this city even though it is only half an hour from Beijing by fast train and has a population equivalent to Ontario's. The population of the two cities is equivalent to Canada's. Tianjin is a port, fifth largest in the world, and one of China's five designated "national cities." Today the metropolis has grand boulevards, hundreds of high rises, towers, sculptures, massive arts complexes, shopping areas and a grand canal with bridges that resemble those in Paris and London.

It is a knock-off city, with an imperial, European vibe, but beneath the grandiosity is China's army of entrepreneurs who are as capitalistic, abrasive and hardworking as New Yorkers. This is the up-and-comer in the G2 world and is in the midst, like the Americans, of a power struggle over who will run their nations. America is undertaking a noisy and disruptive election process while China is undergoing a power struggle behind closed doors as to who will run the superpower for the next 10 years.

This top-down autocracy goes through such struggles every decade as ambitious leaders jockey to gain seats on the nine-member committee that runs the country. This struggle is no different than others, in the past, but this time a designated President has been chosen but has been radio-silent for two weeks. This has led to speculation about a power struggle and his whereabouts, along with his uncharacteristic cancellation of meetings with Hillary Clinton and others.

Power is opaque here, a problem in a globalized world, and the government controls information flow. His name, Xi Jinping or discussion about his health or succession, have been blocked on China's Twitter-like service. Twitter itself is not available across China although I have had access in Beijing. But business and life goes on, in both countries, despite the uncertainty at the bottom as to who will end up on top this fall. Both have suffered downturns in growth due to the after-effects of the financial crash and European problems.

China's growth, while enviable, is slowing. Consensus among experts at the World Economic Forum in Tianjin held this week was that China's medium-term prospects are 4 per cent GDP growth, and America's 2 per cent. On the more positive side, both countries will remain tied in first place as the world's biggest manufacturing powerhouses. But ironically, China faces challenges in this sector more serious than the United States faces.

"There's a huge productivity gap between China and the U.S.," said New York Times columnist and author Tom Friedman in an interview at the Forum. "Both manufacture $1 trillion, but 100 million are employed doing this in China and only 10 million in the U.S."

The export-led model fades and the only replacement for China to stay in the game is to outsource to cheaper manufacturing sites, or to be able to transition to a knowledge economy like America's. This won't be easy because it will require a complete overhaul of its capitalism "with Chinese characteristics."

Chinese factories are starting to move to countries like Bangladesh or to Africa where wages are even lower than in China. This also mirrors U.S. policy concerns about outsourcing as it affects unemployment. Joblessness harms political careers, but China must create 300,000 jobs a week, or 15 million a year, to keep unemployment low and a revolution at bay. (By contrast, Canada's entire workforce is 16 million and America's unemployed is 16 million.)

An even bigger challenge for China is they have mastered copying things, as did Korea and Japan, but must become innovative and inventive on their own to continue their growth trajectory. As Tom Friedman put it: "The rule of law, intellectual property protection and an independent judiciary are required to become a knowledge economy." And China has none of these attributes as yet.

China also lacks resources, and has been shopping for them in Africa, Australia and Canada. The most recent audacious bid worldwide is for control of Nexen in Calgary by CNOOC, worth $15.7 billion, which I am opposed to.

The reasons for my opposition -- lack of reciprocity, sovereign immunity enjoyed by these corporations if they control companies inside Canada -- have been articulated. But these were echoed by China-watcher, Arvind Subramanian, senior fellow with Washington's Peterson Institute, who agreed that Canada must be cautious about this initiative.

"I would be understandably nervous like you are. Canada must build in safeguards that can be reliable and enforced," he said in an interview. "You are right about reciprocity and the issue of sovereign immunity is a good argument too."

But the issue is not about China, but about any state-owned enterprises controlled by any foreign government with political agendas such as Russia, Abu Dhabi, Saudi Arabia. Business is one thing, but colonization is another. Besides that, Canada's governments have yet to demonstrate that they can, or will, have the muscle to impose safeguards and enforce them even within Canada. They are no match for a China that is cohesive and expanding at breakneck speed.

My last trip here was seven years ago and the transformation of Beijing, Tianjin and others into world-class, sophisticated cities is shocking, admirable and a warning to the West, and the rest.

This article orginally ran in the Financial Post.