Davos, Switzerland, January 26, 2005 — Amidst the optimism, real challenges still lie ahead if China is to build domestic private companies to serve not only its burgeoning domestic market but also to play upon the global stage against the world's multinational corporations, says Deloitte CEO William G. Parrett, who participated in the World Economic Forum panel on China.

The effort required, Mr. Parrett says afterwards, will amount to a "fifth modernization" of the country, similar to the famous Four Modernizations initiative launched 25 years ago by Deng Xiaoping when the premier singled out agriculture, industry, national defense, and science and technology as the critical areas where reform was most urgently needed for China's economic prosperity (Related thought leadership: "Business in China, The Next Stage: The Fifth Modernization").

Today, Mr. Parrett emphasized, the focus for China ought to be to continue with necessary infrastructure reform such as following through on commitments to improving transparency in corporate governance and reforming capital markets. These are fundamentals needed to underpin a competitive private sector that can stand on its own at home and serve as a foundation for China's entry into the global marketplace.

"We see tantalizing glimpses of a new future for China, with companies like Lenovo and Haier, which clearly intend to compete on a global scale immediately," said Mr. Parrett. "But these early successes do little to alter the magnitude of the true challenge China faces as its companies move from low cost to creating greater value. I am confident though that Chinese companies will represent 10% of the global Fortune 500 by 2010."

As Mr. Parrett sees it, there are three areas where progress must be made:

• First, Chinese companies must develop strong brands and value add, moving away from competing on price alone and differentiating themselves through marketing, distribution and innovation.
• Second, Chinese companies must prepare to operate on a level playing field, as the government severs its ties to unprofitable companies and eliminates rules that protect local producers from foreign competition.  Ultimately, a level playing field will help viable Chinese companies become strong, world-class players, but in the short-run the new competitive landscape may favor global players. Accordingly, the sooner Chinese companies wean themselves from a system that provides undue government support and protection, the better.
• Finally, world-class corporate governance standards must continue to emerge. Rightly or wrongly, independence and credibility continue to be a major source of concern for foreign investors. Yet without access to capital, domestic Chinese companies will be unable to expand in fast-growing Chinese markets, much less become major global players. Developing the legal, regulatory and corporate framework necessary to achieve good governance will take significant time and effort, both by the government and the developing private sector.

The Davos session covered many issues including the role of China in global security, cross-strait relations, currency, interest rates and other economic issues. Mr. Parrett concluded that the factors discussed on the panel represent the significant risk to the overall potential success of China.

He said, "this is natural in any emerging economy yet investors are seeing the potential return on investment in China more than compensating for the risk. This extraordinary opportunity has led to a significant increase in foreign direct investment both directly on the part of overseas companies as well as recently through mergers and acquisitions, a trend that will only increase."

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