The China Dream

Studwell, a business journalist who edited the China Economic Quarterly, wrote this in 2002 as an attack on the assumptions underlying foreign investment in China during the 1990s.

The historical argument frames the period as the latest instance of a recurring pattern. Foreign businesses have repeatedly convinced themselves that the size of China's population implies a proportional market, and have invested on that basis. Studwell traces earlier episodes, including the nineteenth-century treaty port era and the 1930s, and shows that the returns disappointed each time.

The contemporary analysis covers the 1990s investment wave. He documents the joint venture requirement, which forced foreign firms to share technology and profits with partners selected by the state; the fact that most multinational operations in China were losing money while reporting strategic progress; the gap between announced investment and deployed capital; the role of Hong Kong round-tripping in the foreign investment statistics; the state-owned enterprise sector's losses and the banking system's non-performing loans; and the political system's unwillingness to permit the market outcomes that would resolve these.

Studwell's forecast was that the disappointment would become visible and that the banking system's bad debts would force a reckoning.

The forecast was wrong in the way that matters. China's growth continued for two more decades and many foreign firms eventually made substantial returns, particularly in automotive and consumer goods. The banking system's non-performing loans were resolved through recapitalisation and growth rather than through crisis. Studwell's later book, How Asia Works, is the better statement of his analysis. This one remains useful as a corrective to extrapolating market size from population, and its documentation of the joint venture terms and of the gap between announcements and reality is accurate for its period.

Journalist and author on East Asian business and development; founding editor of the China Economic Quarterly.

How Asia Works argues that Japan, Korea, Taiwan and China grew by sequencing three policies - household-scale land reform, export discipline imposed on manufacturers, and finance directed to both - and explains why Southeast Asian states that skipped the sequence stalled. Asian Godfathers documents how the region's tycoon conglomerates earn returns from licences, property and cheap deposits rather than from operating skill.

China Economic Quarterly