Inside China's Economic Boom

Chinese businesses are facing big-budget challenges from multinational corporations eager to gain millions of new customers in China, while homegrown manufacturers are struggling to keep their markets overseas. And there are questions whether increasing wealth is bringing political change to the communist nation.

Ken Zhang has an evangelical zeal for his product: toothpaste. For 10 years, he's worked at making Crest, the Procter & Gamble brand, market leader in a country where, until recently, almost 60 percent of the rural population had never brushed their teeth. The consultancy, McKinsey, estimates that there are 42 million middle-class households in China, and there could be 200 million such households in 10 years.

The purchasing power of this emerging middle class is leading Western multinationals to rethink their products with Chinese characteristics. I visited two companies with different strategies; toothpaste maker Crest which has launched a panoply of new tastes for the Chinese palate, with different products aimed at different levels of consumer; and Estee Lauder which has stayed unashamedly up-market. Both companies agree that China, with its geographical diversity and range of purchasing power, should be viewed as a collection of different markets. The potential rewards of operating in China can be huge, but the cost of doing business here is also immense; both companies have invested millions in new research and development centers in China in a bid to crack the market.

The manufacturing industry plays a massive role in China's economic juggernaut, accounting for almost two-thirds of economic growth and more than one-third of gross domestic product. The manufacturing town of Qiaotou offers a look at the impact of China's economic rise.

Once a poverty-stricken area, the town's residents became rich by setting up their own button factories. Now Qiaotou dominates the world market in buttons, yet its once-bustling markets were almost deserted during a recent visit. This is partly due to new technology which means customers can buy the products using the telephone, fax and Internet rather than in person. But it also reflects the challenges faced by Chinese manufacturers, who have succeeded in saturating markets in low-tech labor-intensive products with little profit margin. Competition with other local firms is fierce, and as the button factory owners diversify into other fields, they're pondering how their upward trajectory can be maintained. Their experience also sums up how China's ravenous appetite for raw materials is sending worldwide commodity prices soaring, and leading to power and labor shortages at home.

One sign of the economic boom is construction, and China is reinventing itself with an orgy of it. Many of the new buildings are aspirational; sleek gleaming towers of glass and steel and Western-style luxury villas seemingly uprooted from Houston, Texas, to house China's financial cowboys. But the figures tell their own story. Developers invested $24 billion in residential housing in the first quarter of the year, but only 3 percent of that was spent on low-income housing. The market isn't catering for the masses, but for the precious, moneyed few. Housing has now become a matter of political sensitivity as well. Even official figures show that in some areas of China, 90 percent of land requisitioned by the government is seized illegally, and often that land is used to build property few can afford to live in. The central government is taking action to try to cool the market, but this, too, has its victims.

China's anti-counterfeiting organization says fake products now account for 27 percent of the country's industrial output. It's a booming market, with counterfeiters reproducing just about every product under the sun. But this is no longer just a question of counterfeit purses and watches. It's become a far deadlier trade. A fake drug made in northeastern China has killed at least 11 people over the last few months. And two years ago, at least 13 babies died after being fed fake baby milk which had no nutritional value. This widespread counterfeiting reflects a society where profit rules above all else, and consumers sometimes pay a deadly price.

It's almost accepted wisdom that the emergence of a Chinese middle class could hasten the development of civil society, and ultimately democratization. In Zhejiang province, some 80 percent of elected village chiefs are local businessmen and not Communist Party members. The businessmen-turned-village chiefs that I met there all espoused democracy, but a version offered by the Chinese Communist Party. Several said they decided to run for office because they wanted to give something back to the country and the party as thanks for becoming rich under its policies. As stakeholders with the most to lose in the system, they're unlikely to want to push for radical change. This suggests that economic growth could ultimately insulate China against political change, rather than driving it.

(Contributed by NPR)