How China Can Harness Its History & Overcome Its ‘Great Wall’ Slowdown

WUZHEN, China -- Weaving between motorbikes and makeshift carts in an air-conditioned tour bus as we approached this town’s commercial center, the memories of Shanghai's glittering skyscrapers quickly faded, replaced by what a native friend called "the real China."

We had crossed over into one of the many other Chinas that coexist in this vast, mysterious, sometimes contradictory country, whose sweep of history, geography, culture and economics tends to confound the Western mind.

China's economic narrative encompasses many centuries of booms and busts, and its singular distinction of having been the only empire in world history to reprise its previous role as an economic superpower. In the 18th century, China had the largest GDP in the world. Today, it is heading in that direction again. England, Greece, Rome -- no other empire has rebounded the way China has.

The story of China's many dynasties and epochs, reaching a modern low during the oppressive years of Chairman Mao Zedong, can be seen as the prelude to the boom of the last two decades. And now that China’s economy has begun to slow down, many Western prognosticators are writing off the recent growth as having run its course. But as has been the case since long before the days of Marco Polo, outside observers underestimate China’s ability to adapt, grow and prosper at their own peril.

One reason China has managed to continually reinvent itself can be seen in the tension between Wuzhen and Shanghai. The galloping commerce and futurism of Shanghai may be the picture China projects to the world, but a key counterpoint exists in dusty Wuzhen, where ancient culture and crass modernity exist side by side just 80 miles southwest of Shanghai.

Wuzhen is not what it is billed to be, nor what it appeared to be upon our arrival. Like China as a whole, it is a place that can be truly appreciated only through the lens of history. It can't be defined in a propaganda brochure, a snapshot, or an economist’s talking point.

Three Chinas

I was stunned when we arrived at Wuzhen, one of Southeast China’s ancient water towns, which we had been led to believe was a little Venice of quaint canals, stone bridges and centuries-old shops offering goods still made in the traditional manner.

What greeted us instead was a wide, pitted, half-paved road strewn with trash, rundown cement buildings that appeared to have been built in the 1970s, and damaged neon lights advertising all sorts of modern businesses.

This part of Wuzhen is where most of its 12,000 permanent residents live, but it’s also the part that Chinese authorities would prefer you never read about; it represents the downside of one of China’s best-preserved towns as well as its booming capitalism, where rugged strivers gather car parts and trash in hopes of hauling it to a junkyard and scraping together a living. In this depressed area, the only available hotels are little more than big rectangular dormitories with dribbling spigots for showerheads, and the stream that runs past the room windows is muddy-brown and cluttered with floating garbage.

Yet just a few blocks away, tourists can pay a few dozen yuan to gain access through a towering wooden gate to one of two other versions of China. The first is the much-vaunted ancient section, about 80 percent of which has remained largely unchanged for a millennium, earning it a Unesco World Heritage Site designation. As they have for centuries, the residents of this district still dye silks, bang out copper sculptures by the water, and buy food from wooden gondolas that glide past the windows of traditional curved-eave homes.

And through another gate, visitors can pay about 100 more yuan to ride a rowboat ferry to the luxury version of Wuzhen. The architecture there has been revamped and upgraded over the past 10 years to make it less rundown and more Suzhou-chic, and high-end stores and restaurants sell faux antiques and gourmet cuisine in air-conditioned buildings along pristine streets and waterways.

In this Disneyland version of Wuzhen, the refurbished White Lotus Pagoda shines late into the night over outdoor bars full of revelers spending upwards of $10 on beers and cocktails -- some of the most expensive drinks we found in China.

These three visions of modern China, all within a few hundred yards of one another and separated by gates and admission charges, can be seen as representative of the state of the nation today. China is an unfinished, seemingly haphazard amalgam of wildly divergent zones, from the farms of the far western Uighurs in Xinjiang to the shopping centers, suburbs and slums of Shanghai to the commercialized, packaged history of the most pleasing districts of Beijing, Hangzhou and Nanjing.

In a way, these different sides of China reflect the different periods of China’s history, from the Mongol domination of Kublai Khan to the cultural vandalism and oppression of Mao Zedong to the uber-capitalism of today. And they all combine to paint a complicated picture of a people and empire that continue to evolve, now at a faster rate, perhaps, than any other in human history. It is against this backdrop that any assessment of modern China should be made if one hopes to reach a comprehensive conclusion or projection.

Bright lights, big money

When China began its most recent ascent, many predicted it was on its way to overtaking America as the lone economic superpower, as the nation built and sustained massive, often double-digit, growth. Get ready to learn Chinese, the commentators warned.

But since 2010, as China's spectacular expansion has rapidly decelerated, the narrative is being rewritten, and most economists now seem convinced that China is entering a long period of decline. Conversely, there is a growing, quieter school of thought that contends that the slowdown -- which was actually in large part orchestrated purposely by the government -- represents a maturing of the Chinese economy, and that the nation's leaders are acting swiftly to ensure that it enters a new paradigm of innovation, consumerism and sustainable growth.

In the first decade of the 21st century, as China’s government reported year after year of staggering GDP growth, most Western economists and industrialists accepted as a foregone conclusion that the country would be king of the mountain within a decade or two. The evidence of that rise is still found all across China. Walking the streets of Pudong -- the area of Shanghai east of the Huangpu River that has gone from farmland to gleaming financial hub in the 20 years since the Chinese government declared it a Special Economic Zone -- one gets a powerful sense that China is leading the world into the future.

The world’s 15th-tallest building stands in the shadow of the sixth-tallest, while nearby construction workers toil day and night on what will be the second-tallest. Meanwhile, throngs of consumers flock to snatch up Chanel, Tiffany and Dior goods at the six-floor, ultra-luxury IFC Pudong super-mall nearby, and Maseratis and Rolls Royces glide along eight-lane roadways, guided by fully-digital traffic displays. Shanghai's opulence, cosmopolitanism and energy are a testament to China’s economic rise since the Tiananmen Square protests of 1989.

That feeling is still pronounced, though in the space of a few financial quarters the conversation about the economy of the People's Republic has been turned on its head. Now the script focuses on the stagnation that could result in the world's second-largest economy losing much of the ground it has so swiftly gained. The speed with which the conversation shifted has been remarkable, and has set the world’s thought leaders searching for ways to comprehend and explain the seeming end of the Chinese Century before it truly got under way. Nobel Prize-winning New York Times economics columnist Paul Krugman breathlessly declared last month that “the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.”

Others say China's rise to dominance was not inexorable, and neither is the current trend toward economic stagnation. According to this line of thought, the slowdown was not entirely unexpected, and doesn’t spell the end of the Middle Kingdom's growth. On the contrary, these pundits say, China is charting a new kind of trajectory that will not be restrained by the old rules. The fact that China's annual GDP growth rate has fallen from 11.9 percent in early 2010 to just 7.5 percent late last year is actually "a good sign” in the view of one of those pundits, Peter Adriaens, a professor of environmental engineering and entrepreneurship strategy at the University of Michigan.

“You’re looking at a couple of percentage points, but a lot of the numbers that come from within the country are driven from building things, construction, whether or not anyone actually occupies these buildings, [tech] parks or malls or whatever,” Adriaens said. “We’ve finally gotten to the point where people building in China with artificially cheap loans and money are not doing that as much anymore, and that's reflected in slower GDP growth, and that’s a good thing.”

Fundamental shift

Many China observers see its history as one of constant change, and this as one of its watershed periods when the nation again takes stock of itself and finds a way to move forward. They point out that China is one of the oldest civilizations and for long periods the most dominant, that the country has been at the top before, and that this is not the first time it’s been reborn.

For decades after Mao’s Cultural Revolution, which eviscerated China’s culture, history, religious traditions and economy in the 1960s and '70s, the nation struggled to get back its bearings. Once the chairman died and his widow's Gang of Four were unseated, the path was cleared for new leaders to make the necessary changes to revive China's past vibrancy.

The country then played catch-up with the nations (Europe, America and Japan) that had surpassed its economic might for the previous 200 years and began reclaiming its position in the world, says author Allan Topol, who has published a number of heavily researched novels about China. Though his books are fictional, Topol's knowledge of the country is vast and nuanced, and he looks at the recent history of China as a resurgence rather than an emergence.

“China was a very powerful economic country in the 16th and 17th centuries. In fact the GDP in China was higher in about 1790 or so than it was in Western Europe, and consumption of luxury goods was higher than it was in Western Europe,” Topol pointed out. “It’s sort of mind-numbing that here they had this economic powerhouse by the end of the 1700s but they lost it.”

China’s history is fraught with turmoil, and in Topol's view, the events of recent years have shown the resiliency of an ancient nation to ride the ebbs and flows of fortune and time.

There is little disagreement that China has again come to a crossroads. The country has spent the past few decades building up its manufacturing industry, making giant leaps in state-sponsored infrastructure, rejuvenating its culture and establishing itself as a world power to be reckoned with. Yet it appears to have outgrown the limits of that economic model. Many observers believe China is entering another phase of transformation -- one centered on fostering innovation, moving into new industries and making the transition from a construction and export-centric economic model to one based on invention, research and devleopment and domestic consumption.

“The GDP growth that China has experienced historically has been as a low-cost producer," explained Selig Sacks, co-chairman of the U.S./Greater China Transactional Practice at the Milwaukee-headquartered international law firm Foley & Lardner. "Now China is finding the need and the imperative to go up the value chain and produce higher-value goods." He described "a re-shifting going on in China and a rethinking as to what fuels the GDP, and what do they need to do to produce higher-quality and higher-margin goods.”

It is important to recall that this is not China’s first time at the ball, as ancient China yielded some of the world’s most important discoveries, including such game-changers as paper, gunpowder and the compass.

China’s leaders are taking steps to help spur that kind of innovation once again, though their effectiveness remains to be seen, and even if they succeed, such a shift will take time. Some experts believe the combined effects of the government’s changing economic and social policies and the rise of a Chinese middle class will be instrumental in ushering in a new phase of more sustainable and inevitably slower growth.

Free exchange of ideas

China's leaders meanwhile face the crucial question of how best to adjust their governing approach to avoid hitting Krugman's “Great Wall.” There is no clear template for success, though most experts agree that the Communist Party needs to loosen some its oppressive policies if it hopes to spur innovation, attract outside investors and create a sustainable, business-friendly environment.

Innovation is clearly a major priority of the Chinese government, as its last and current five-year plans have focused largely on making changes that will help it transition to an innovation-driven economy. One of the biggest criticisms of China regards its policy of not granting its citizens a fundamental right to engage in free speech or to use the Internet freely. Political bloggers and artists are routinely arrested and Western websites such as Google, Twitter and the New York Times are blocked by government censors.

Such policies may not have been major inhibitors of economic growth as it went through its recent period of rapid industrialization, because building widgets, subways and highways is not particularly dependent upon free discourse. But now that China's construction and residential markets have become saturated, its infrastructure is mostly in place, and it has begun to price itself out of the international manufacturing market as costs and wages have risen, innovation must play a greater role, and it will be limited by such government censorship.

“The lack of total and complete political freedom is actually an inhibitor in China to free thinking, and that’s going to ultimately be the one thing that really inhibits them from realizing their full potential,” said Shan Nair, co-founder of Nair & Co., a firm that provides outsourced services across the world. “There's a reluctance to engage in free exchanges of ideas. Add to that the fact that they’ve put up a wall to free Internet communication. Those things will have to change if they're really going to have a Silicon Valley.”

Nair and other experts are pessimistic about the prospect of China embracing freedom of expression, though it does appear that the leadership is becoming more aware of the importance of free communication, especially when it affects its economic interests. “They're building a massive technology park that is kind of self-contained, where people can talk about anything under the sun as long as it doesn’t pertain to politics, so in that sense they almost have freedom of speech there,” Nair pointed out. “They're allowing a lot more freedom of speech within that technology park.”

If the project -- a sort of “Sichuan Valley” -- turns out to be a smashing success, with major companies and technologies emerging from within its bounds, it could signal to the Chinese government that loosening its restrictions on free discourse would yield real benefits for the nation's economic future.

And China has overcome mighty systems of oppression in the past. Machiavelli may be the best known philosopher of cynical tyranny and ruthless power-hunger, but his predecessor Han Fei, who lived nearly two millennium before “The Prince” was written, was even more Machiavellian than Niccolò himself.

And when Fei’s ideas were adopted by the tyrants of his day and used to harmful effect against their subjects, one key result was an opening for China’s first emperor, Qin Shi Huang -- still a vicious man himself, as China was only in its Iron Age -- to come in and give birth to the resilient, unified entity we now know as China. In other words, the Chinese have been here before.

Structural reforms

Yet even if the chains on free speech were thrown off today, it would take time for the effects to fully manifest themselves, as long-paranoid citizens slowly came to believe that they could truly speak without fear. More important at this crucial moment, many economists say, is the need for China to make the transition from a state-controlled economy to something closer to a free-market economy.

It's not clear that China will ever truly open itself up entirely to the whims of laissez-faire economic policies, or even that it should. But as the country passes the point in time when government-backed construction and infrastructure projects can sustain meaningful GDP growth, economists and business leaders say the state will need to take a lighter-handed approach to managing its changing economy. And some leading China observers say recent events suggest China is already making concrete moves toward such a less intrusive role in economic affairs.

Tracy Chen, a senior research analyst and portfolio manager for mortgage-backed securities at Brandywine Global Investment Management who earned a master's degree at Sichuan University in Chengdu, told IBTimes she is “cautiously optimistic” that China will succeed in making the economic and fiscal policy changes needed to rejuvenate the economy and put it on a sustainable path.

“Without true structural reform, I don’t think that in fact true economic growth is sustainable,” Chen said. “So I think the new government is willing to sacrifice some quantity for quality of growth speed, so in their structural reform, their reform agenda includes financial reforms and that will focus on liberalization of interest rates, and the second item would be to open their capital market, and the most important thing will be to reduce the role of government in the economy to make it more market-driven.”

She and other experts emphasize that the shift to a market-driven model needs to take place gradually if China hopes to fill many of the tech parks, commercial centers and new residential buildings it has built in hopes of bringing people to its chosen economic hubs.

“You see China transitioning from the central planning, command and control structure to one that’s more based on free market metrics, and that’s what capitalism is all about,” said Said E. Dawlabani, an economist at Memenomics Group in La Jolla, Calif. “I don’t see full free market forces being a benefit to China right now. There will be a transition to free-market economics. It is needed, but you can't just immediately drop the central planning economy, so perhaps a decade of transition will be needed."

The next decade will be a critical one for the future of China, and opinions on what needs to be done for the country to mature into a fully-modern economy differ widely. But as evidenced by their growing Shanghai's skyline out of the forgotten Huangpu River marshland over the course of just 20 years, the Chinese have surprised the world before, and may very well do it again.