Making Book on China
Japanese pundit Kenichi Ohmae sees the awakening giant as a customer, not a threat. Unless democracy comes too quickly--then all bets are off.
By John Heilemann

(Business 2.0) – Just as outsourcing was clearly last year's biggest story on the globalization beat, this year's honor indisputably goes to the rise of China. So, to get a bead on the 21st century's ascendant economic titan, I hopped a transpacific flight--and landed in Tokyo. My destination wasn't quite as incongruous as it seems, for the brain I wanted to pick belongs to the Japanese management guru Kenichi Ohmae. As head of McKinsey's Asia-Pacific operations in the 1990s, Ohmae was a prophet of what he dubbed "the borderless world." Now, as a pundit and all-purpose wheeler-dealer, he's focused on the future of China.

Ohmae, 62, is a small man possessed of large ideas, considerable charm, and mammoth self-regard. The walls of his office are lined with the books he's authored since the mid-1970s--which he quotes and touts so shamelessly that it's difficult to suppress a giggle. "When I published The China Impact in 2002, it was a best-seller in Japan and also widely read in China," Ohmae says as we sit down to chat. "Before that, the Chinese didn't understand their own success. But after reading my book, they said, 'Oh, my God! Now we see why we are suddenly so prosperous!'"

Full of himself as Ohmae is, he's also brimming with insight. His analysis of China's commercial dynamism defies much conventional wisdom. At its heart is a claim that China is now in effect a decentralized economy, more akin to the United States than to Japan. For Sinophiles and Sinophobes alike--and everyone in between--it's a bracing and timely message.

For Ohmae, China is the ultimate exemplar of a theory he's long held: In a global economy where information and capital flow freely from place to place, turning traditional borders into "dotted lines," nation-states are being replaced by regions--city-centric hubs of 1 million to 10 million people--as the relevant units of measurement. In his new book, The Next Global Stage, Ohmae writes, "The growth level of China averages around 9 percent per annum. But this is a figure for the whole country. It embraces vibrant region-states such as Dalian and Guangzhou, whose growth rates [are] between 11 and 15 percent ... and regions farther west such as Ningxia and Gansu, which are still enmeshed in poverty."

Ohmae's interest, naturally, centers on the burgeoning industrial clusters powering China's economy. Situated mainly along the coast, they have taken off, Ohmae argues, because of the reforms launched in 1998 by then-premier Zhu Rongji--reforms that granted unprecedented autonomy over economic policy to mayors and other local bosses. "The mayors were told they have to grow by 7 percent a year or they will be fired," he says. "But they were also given freedom to import technology, capital, and corporations from the rest of the world. They were allowed to forget about politics and embrace the global economy."

And so they have--with abandon. In 2002, for the first time, more direct foreign investment flowed into China than into the United States. On a regular basis, Ohmae says, Chinese mayors lead delegations of businessmen to Tokyo in search of partnerships and cash. And that's nothing compared with how the Chinese court attractive Taiwanese investors: "There's partying, drinking, offers of cheap land," Ohmae explains with a chortle. "Now, politics says China and Taiwan are fighting, missiles pointed and all that stuff. But on the economic level, that means nothing. Taiwan has 90,000 companies operating on the mainland. Japan has 30,000--and Taiwan has just one-sixth our population. It's unbelievable!"

To illustrate China's boom at the regional level, Ohmae points to Dalian, which up until 1992 was a sleepy northeastern port city with a large contingent of Japanese-speaking residents. But during the next decade, a pair of reformist mayors (the first of whom, Bo Xilai, is now China's minister of commerce) jacked the city into the global economy. Today, Dalian plays host to Dell, Hewlett-Packard, Microsoft, and other American high-tech giants. And also to 3,000 Japanese firms, many of them pioneering the practice of Japan-to-China outsourcing. (Ohmae, in fact, founded one such firm.)

To Ohmae, the essential question facing China is whether it can propagate more Dalians. He has no doubt that it can. He points to the astonishing fact that, from 1990 to 2000, China created 146 new cities with populations exceeding 1 million--while 800 million people remain in the countryside. Meanwhile, Ohmae notes another trend: "Chinese students who study in America or Japan used to stay. But now one-third of them are coming back, because China is the new frontier. These students are called 'turtles,' because turtles return to the beaches where they were born."

Views of China as bullish as Ohmae's tend to provoke either fear or skepticism in the West. The fear, of course, we see all around us, most notably in the halls of Congress, where various mercantilist measures are being crafted to strike at China's solar plexus. To Ohmae, this reaction has a familiar whiff of the anti-Japanese hysteria that gripped the United States in the 1980s. Acknowledging that many Japanese harbor worries about China too, he notes that Chinese demand has been "like Viagra" for Japanese industry. His message to America, Ohmae says, is the same as to his countrymen: "China should not be seen as a threat but as a customer."

The skeptical reaction to the Chinese boom tends to come from businesspeople and financiers. Let me boil it down: China is in the midst of a megabubble, its economic surge built on bad debts and overinvestment. When I put this to Ohmae, he doesn't disagree: "Chinese companies have gone overboard, and the bursting of the superbubble could kaput quite a few companies."

Yet Ohmae goes on to argue that, in the long run, such a scenario wouldn't hamper China much. Because the government still owns most of the country's land, it could, at any point, decide to sell the property and use the proceeds to pay off bad debts. In the meantime, even with all the talk about a Chinese bubble, foreign investment continues to pour in--an example is Bank of America's recent announcement that it intends to buy a 9 percent stake in China Construction Bank for $2.5 billion.

Personally, I'm neither a fearmonger nor a skeptic regarding the Chinese economy. It's Chinese politics that give me the heebie-jeebies. For two decades now, it's been plain that the People's Republic faces a day of reckoning with democratization--and the results will range from turbulence to total breakdown. Once again, Ohmae agrees. Once again, he isn't worried. In The Next Global Stage, he writes, "It no longer matters whether [China] is one country.... It is de facto an assembly of many region-states."

This view strikes me as rather too sanguine--and rather too naive. And it's one that even Ohmae hints he doesn't entirely believe. His hope is that demands for democratization will come gradually. But he knows that there's another plausible scenario. "If democracy is introduced too quickly to China," he tells me, "it is going to be the most violent country that you've ever seen. You give 800 million rural people the right to decide their future and you know what's going to happen? Robbery of the coastal regions."

Businesspeople around the world, I've learned, love to talk about revolution. But they know that actual revolutions are rarely good for business. Lately, China has provided the kind of balance between order and chaos that capitalists thrive on. But should the balance swing to chaos, all bets will be off in China. Even Ohmae's beloved turtles may decide that they can't go home again.