So what has to happen for China to capitalize?

McFarlan: China needs overseas acquisitions to secure its raw materials base. There are also huge domestic markets growing inside. To put this in context, in the 1950s, Japan was synonymous with low quality; now, it’s synonymous with high quality. China is scrambling to come up that curve.

Today, one of the biggest retailers in Japan is Gome.People don’t know that some of the brands being sold there are Chinese, so Gome essentially protects the brands of these Chinese electronics companies. But you see a lot more Chinese companies beginning to come onto the market, just as the Japanese did. You see the branding activity, and that’s all part of them getting extra value as they go up the chain.

Seems like it’s happening rather quietly, though.

McFarlan: It is. And then the brands grow. You may not notice it over six months, but if you look back over five- or 10-year periods, you see that the tide is running cleanly. The question I keep my students focusing on is: How are Chinese businesses going to be able to manage the limitations to growth?

It’s not an accident that the words “harmonious society” is what China’s president is hammering on, because the inequalities have grown up in visible kinds of ways. Different ships are being lifted at different rates in the tide. That’s why the Olympics are important for them: It’s a symbolic thing, where they can take pride in the fact that they can do all these things.

This is a project in full sway. We’re up to six Mandarin-speaking professors on our faculty—up from zero five years ago. That’s been a deliberate focused effort to bring those skills to our faculty to do the education and research we need to do. China is 20 percent of the world’s population, and we think they’re going to be a huge force, and very likely our dominant trading partner—and competitor—40 years from now. So whatever we can do to understand and find peaceful ways to collaborate is going to be very helpful.

This is also a land where relationships are very important. The Chinese remember more about you and how you behave than any other group I can think of. People will remember when I was there in 1979 and was entertained in the Great People’s Hall, yet I can hardly remember who entertained me. During hard times, when you cut and run, they don’t forget it. So the notion of trying to keep a steady course becomes increasingly important.

What do you expect the Olympics will do for China in the eyes of the rest of the world?

McFarlan: It’s a huge psychological issue for them; it’s their national coming-out party. It’s a validation that after 30 years, China is back.

For most of the last 3,000 years, the most dominant civilization—until 1500—was China. In medicine, prosperity, health, trade—they dominated the west. As technology began to rear its head, they missed the ball. China had the largest navy, but they came to believe the rest of the world was uninteresting. The emperor proceeded to basically destroy the navy and the shipyards and put more money into building the Great Wall.

In terms of the actual size of the economy, the United States has been the largest economy since 1892. We knocked off China. The whole 20th century was basically consumed with the fall of the last dynasty.

This led to all kinds of carving out, with cities like Shanghai being [divided up into different regions controlled by other countries]. The country was paralyzed in the 1930s as the warlords went back and forth, and the Japanese took control of large parts of the north and Manchuria.

That led into World War II and the emergence of Mao Zedong in 1948. From 1948 to 1978, China went through a series of failed experiments, including the Great Leap Forward and the Cultural Revolution. In 1978, Deng Xiaoping emerged with his notion that if capitalism and entrepreneurialism generate wealth, then they’ll do that and open it up.

After 30 years, China has run into a scenario where the limits of growth have begun to impinge on them. Depending on how you count it, 16 or 19 of the world’s 20 most polluted cities are in China. They’ve got air pollution, which is the easiest thing to see. They have water pollution in the lakes and oceans. The desert is steadily moving in from the west. Dealing with those infrastructure problems is going to be an extraordinary challenge.