A woman walks past the China Central Television (CCTV) building amid heavy fog in Beijing, Dec. 5, 2011. (China Daily/Reuters)

The sixth-floor windows of the American Chamber of Commerce in China face onto Beijing’s boxy CCTV tower. I met Christian Murck, the chamber’s outgoing president, on a clear enough day to make out the tower’s outline from the conference room, though many days the smog can be thick enough to render it invisible from only a few blocks away. Air pollution, a growing and complex economy, a rapidly urbanizing population — these are all challenges that the Chinese leadership, from its seat in this capital city, confronts as it works through the first year of a new administration. They are also challenges the American business community tackles as its presence and investment increase in China.

Murck has lived in Beijing for 17 years, and has served as president of the Chamber of Commerce in China for the past three of those, overseeing a membership of roughly 1,500 American corporations doing business in the Chinese market. As he prepares to retire from the post, Murck reflects on the issues shaping U.S. business in China in this interview, which has been edited lightly for length and clarity.

Q. What’s your outlook on the Chinese economy today? 

A. The Chinese economy is at a very significant turning point, where we see structural changes coming that will have a big impact on the business environment. We had a very successful period over the past 30 years or so of the development of the Chinese economy. But when we look at the next 30 years, it’s very clear that the economy is not going to develop along the same path or in the same way. Demand has to shift from external demand to internal demand, one way or another, if the economy is to continue growing.

Christian Murck, at the American Chamber of Commerce in China, June 24, 2013.

Secondly, there has been a significant change in patterns of compensation. China is no longer a low-labor-cost environment. The increases in labor cost are now faster than economic growth. We don’t think that’s cyclical. We think that’s a long-term trend.

Third, there is significant demographic change, which affects more than just compensation. It also affects the availability of the workforce. The workforce is now shrinking every year. The number of retired people is dramatically increasing. That will be a huge fiscal challenge for the government going forward.

Are these shifts affecting the way Americans manage businesses in China?

Many companies routinely had 15-, 20-percent growth in revenue every single year. That hides a lot of problems. When you have your revenue growing that fast, what you’re really worried about is: How am I going to make the stuff fast enough? How am I going to transport it to clients? And where am I going to find the people and train the people? Managing growth had been the theme.

That’s going to downshift. If you look at the pharmaceutical sector, for example, they’re still seeing about 20-percent growth. But if you look at construction equipment, it’s negative. If you look at personal commuters, it’s sort of flat to single digits. So it’s become much more differentiated by sector, with a general shift down on the revenue side.

And then everyone is experiencing increase in cost. Land is more expensive, less available. Labor of course is going up quite dramatically. Commodities and raw materials also, depending on the sector, are going up. So all of a sudden, in the last 18 months, the focus of management has shifted from simply managing growth to managing costs and controlling costs as well. And we don’t think that’s going to change any time soon. We think that will be a continuing problem.

We’re now seeing people apply the same disciplines in this market that they apply in North America or Europe. People are trying to figure out how to do more with less. Generally speaking, large American multinationals are used to that sort of environment. We think we can work with it and continue to do well in this market, but it does mark a significant change.

If you’re in a capital-intensive industry like automobiles, you cannot be a global leader in the next several decades unless you have a major presence in China, because you will not have the volume required to amortize the huge cost of developing models.

Interestingly, Chinese companies face the same strategic problem. There are lots of Chinese companies that want to be global leaders — not just leaders in the Chinese market, where they are national champions and have some protection. And for them as well, you can’t be a global leader in many sectors without a strong presence in Europe and North America. So we’re seeing now a wave of Chinese investment. Last year, we saw $6 billion foreign investment from China into the United States, an all-time record. Twice that went into Europe — $12 billion. We’re going to see, I think, a continuing and deeper integration of China into the global economy.

How much confidence do you have in the new Chinese leadership’s ability to support some of these changes?

Our view of the new leadership is that they represent a very deep and broad consensus within Chinese society that these structural changes I’ve been talking about have to be adjusted to by accelerating the process of market reform — accelerating the process of shifting to market-based pricing in energy, accelerating financial liberalization, doing away with the financial repression we’ve had the past few years, improving capital allocation, reducing the role of government, reducing the administrative burden of government approval.

That doesn’t mean they’re actually going to do all that, of course. But I think the new leadership has deliberately tried to distance themselves from their predecessors, who talked about these issues quite a lot but accomplished very little in the last five years that they were in office.

President Obama and Chinese President Xi Jinping, left, walk at the Annenberg Retreat of the Sunnylands estate June 8, 2013, in Rancho Mirage, Calif. (Evan Vucci/AP)

The expectations are very high in the business community and the academic community that significant new programs will be announced in October at the third plenum. We were very happy that President Obama and President Xi were able to meet in California, because right now is the period when the Chinese government is trying to decide exactly what they are going to put before the public at the third plenum, which I hope will be some detail and some specifics behind the acceleration of market reform.

If it is not, it will also be very interesting. Because if they go through the third plenum and they don’t release anything, that will tell us they don’t have a consensus and they’re not going to move aggressively.

You mentioned the switch from managing growth to managing costs. What exactly are these U.S. companies doing to manage costs?

Usually not downsizing, because we’re still seeing growth. Usually they’re investing in capital equipment for automation. And they’re looking at business process, doing a certain amount of outsourcing. Internally also, they’re really looking hard at how to organize what they do. We’ve moved quite a bit beyond the stage where localization meant having Chinese employees in management positions. What we’re looking at now is becoming the Chinese competitor. That’s a theme of the Honeywell corporation in China, for example.

By that they mean being as quick to market as a Chinese company they compete with. Moving the new product approval process to China, not to head office. Moving a general counsel and other corporate functions to China, so that they can have a quick response time. It also means understanding the cost structure that companies operate under here and matching it. No longer trying to hit only a small slice of the upper end of the market, but going for the middle of a market, where you can hope to hit the biggest business. Part of that will be about location, part of that will be about how you organize your distribution and logistics, part of it is about how you recruit, train and pay people.

What are some of the challenges you see to attracting top U.S. talent to China? Are quality-of-life issues, like air pollution, keeping away some American executives whom multinational companies would like to draw here?

Given the change in the Chinese economy globally, some exposure to this market and this economy is now not something that holds you back in terms of a career, it often advances you. There are a large number of so-called ‘fast track’ employees in big companies who want to have a few years in China on their resumes. So there are positive reasons to come here.

There are also negative reasons to come here. One of them is air pollution, another is traffic, a third is censorship. So if your boss says we have an opening in China, you add up the pros and the cons and you talk to your spouse. An expat assignment succeeds or fails based on if the trailing spouse is happy. The air pollution is a negative — and it’s particularly a negative factor for people who have small children — but the market and the city still remain quite attractive.

When I first came to Beijing, they were still burning coal for a lot of heating and cooking purposes, and you could sort of taste the air in the wintertime. Your collar would be black when you came in. That went away for a period of years, but the pollution has since gotten more sophisticated based on emissions from coal-fired generating plants, as the demand for power has grown. We’ve also had a dramatic increase in the number of automobiles. So the result is what you see outside.

It has become a political issue, and it is not an easy issue to solve. The word from the government is that they’re now focusing on this in a very serious way, but it’s going to take a period of years before it begins to improve substantially.

If one of the keys to sustaining economic growth is to create more domestic demand, what is the government’s strategy?

The key strategy that the premier talks about and other people talk about is urbanization. A lot of companies, particularly those in consumer goods areas, have focused on that. We’re about 50 percent urban now, and the expectation is that the shift will probably accelerate a little bit and then stabilize when China is about 70 or 80 percent urban in its population.

So if you’re a company like Procter & Gamble, you don’t necessarily want to have the No. 1 product in the 10 largest cities in China. You want to have a presence in every city with over 1 million in population, and there are well over 100 such cities in China. So people are investing very heavily to build out logistics, to build out their psychical presence, to spend on marketing, especially online and social media — in all ways to develop connections with these new urban consumers.

The problem with this is we have here a household registration system, the “hukou” system. There are about 250 million current residents of cities who are migrant workers, so called, which means they don’t have an urban household registration — they have a rural one someplace — and they’re here in many cases without their children or spouses. We’ve got roughly 250 million people in this second-class citizen status today, and over the next 20 or 30 years we’re talking about moving another 250 or 300 million people into urban areas. Are we going to do that and keep them second-class citizens? Does that work? Probably not. You can see the political problem that begins to pose.

A man sits on the side of the road in the village of Mutianyu, China. June 22, 2013. (Lillian Cunningham/The Washington Post)

Successful urbanization, or inclusive urbanization as some people are now calling it in the Chinese government, must mean that Chinese citizens will have the right to move anywhere within China, get a job, bring their family, buy a house, put their kid in public school, get the local retirement benefits and everything else. However, no one knows how that’s going to be financed or how that’s exactly going to happen. My members are out there investing lots of money based on the urbanization thesis, because we see the economic potential. That’s an expression of confidence that the Chinese government will figure out a way to do it.

If you don’t do it, what happens then? This source of economic growth from new urban residents and new middle-class consumers suddenly goes away. If you don’t have the urbanization push, what’s going to keep the economy growing? On the other hand, if you do have urbanization pushing, how do you deal with merging these two very separate benefits schemes and managing everybody’s discontents and problems? It’s a huge and very interesting social problem, as well as a question of economic development. They have their work cut out for them.

It’s very interesting to me that foreign companies are putting a lot of money into the market on the theory that the new leadership will be able to do it. Check back in five years time and you can figure out whether it was wasted money.

Do you see any reversal of U.S. corporations’ investment in China?

No, I don’t. People are making adjustments, but I don’t see that.

Outside the Forbidden City, Beijing, June 21, 2013. (Lillian Cunningham/The Washington Post)

Politically, what will China need to do to move ahead from where it is today to where it wants to go in the next several decades? 

I think the government has to be more transparent, more institutionalized, more accountable in some sense to the people of China. Not necessarily to foreigners, but to the people of China. How they do that, I have no idea.

Certainly the U.S. system right now cannot be a very attractive model. We have a very divided electorate, and consequently our government is divided, and it’s not working very well. The United States by the way is, of all the major countries in the world, the oldest. We are operating under an 18th-century constitution. You often hear Chinese people talk about 5,000 years of Chinese culture, but China politically is a very new, raw, fresh country that is still inventing its institutions.

Does it have to get more democratic? Is that part of the change?

Well, what’s democratic? The United States is democratic. Okay, so is Italy. They’re different, though. So is Japan. Different again. Even Singapore is democratic. I think it’s very hard to define what democratic means. I prefer to think about rule of law, accountability, efficiencies, things like that. I think they have to do better on all those fronts and then exactly how that operates we’ll have to see.

Lillian Cunningham reported from Beijing through her participation in the East West Center’s Jefferson Fellowship.

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