Even if China's growth slows, it still will surpass theUnited States' GDP leadership in the next 10 to 12 years, but don'texpect the same with its technology innovation, says Anil Gupta,professor at the Smith School of Business at University ofMaryland, in remarks made during a discussion about innovation andthe economy at the EuroFinance International Cash and TreasuryManagement conference in Miami, Fla. early this month.

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Gupta, aleading expert on strategy, globalization and emerging markets,says that “sometime in the next 10 to 12 years, it is certainChina's GDP as a percent of global share will overtake the U.S.[GDP]. But technologically, it will not overtake [the U.S.] for atleast two decades.”

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As evidence, Gupta notes although China now has 20% of theworld's population, 9% of global GDP and 13% of world spending onresearch and development, it holds only 1% of the world's patents.In biotech publications, only 3% of articles are by Chineseauthors, while 60% are by U.S. authors. “This is a huge gap,” hesays.

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China's involvement in new energy further points out the lapse:it has 50% of the world's investment in new energy, but only 5% ofthe patents. “China's strengths are investment and manufacturing,not innovation,” Gupta told the audience of corporate financeexecutives in Miami.

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Most finance executives polled at the meeting believe China'sgrowth will slow. Gupta agrees, noting that in the past 30 years,China saw average annual growth of 10%, while this decade it willgrow between 6% and 7%. The reasons include strains in the laborforce, capital investment and total factor productivity (TFP). Henotes that China's one-child policy has finally caught up with it,so the labor pool will shrink. Capital investment also will slow,while TFP has peaked, Gupta says, noting for example autopurchasing. He sees the market penetration in autos already has hita near-term high, which appears to be the case for housing aswell.

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Gupta also argues that in the next five years, China could see arevolution—possibly violent—if political reforms don't happenfaster. “At the very top of the leadership of China, there areserious ideological conflicts…reformers vs. conservatives,” hesays. “Reformers want economic and political reform.”

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Political reform means moving toward a freer society, whileeconomic reform means reducing the number of state-ownedindustries. “It seems very clear the reformers are gaining,” Guptasays, citing the recent release of Chinese dissident ChenGuangcheng. Both rural and urban populations are increasinglyunwilling to put up with the current political situation, he says,and high literacy rates and access to technology, as well as beingbetter off economically, allow people to be more assertive. Andmost likely the renminbi will become convertible in next five to 10years, allowing Shanghai to become a true global financial center,a key goal of the Chinese government.

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With Chinese growth slowing, although it remains high comparedto mature economies, and the potential for a volatile politicalsituation, should U.S. companies still expand into China? Inconsumer goods, “China already is an open market, and state-ownedcompanies don't play a role,” he says. But when it comes toindustries that largely are state-controlled, like steel productionor banking, expansion into China is still a question mark.

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Ginger Szala

Ginger Szala is executive managing editor of Investment Advisor magazine. She covered the financial business and alternatives industry for 30 years while editor of Futures Magazine Group. MSJ Northwestern, BA University of Wisconsin-Madison. She is based in Chicago. Go Blackhawks!