US, China CO2 Emissions Compared

February 9th, 2011

This is an excellent motion graph comparing US, China to 2006. To get a good idea of the trend, it’s best to set the slider at the bottom to begin at 1960, since much of the data before then is too old and insignificant to be of much interest. Then hit the “Play” button to watch the trend unfold.

If there is a shortcoming, it’s that the data ends at 2006. In 2008, 2009 the western economies went through a major contraction, and China’s stimulus package helped Chinese factories to continue to operate at a high level of capacity while the OECD economies slowed. So what has happened to carbon emissions between 2006 and 2011, the time of writing for this article?

Fortunately for us, the folks managing the Datablog at The Guardian, have not only posted the information up till the end of 2009, but have also created a graphic.

A few interesting takeaways:

  • China’s CO2 emissions at the end of 2009 were higher than the US, Canada combined.
  • CO2 emissions are falling fast among the OECD countries, which have suffered slow to negative growth following September 2008
  • The main CO2 culprit is China and other developing nations, not the OECD nations
  • The big challenge for China’s leaders is how to maintain economic growth and social stability, while keeping CO2 emission within “acceptable parameters”
  • Does the Chinese government have a definition of acceptable CO2 parameters? Or is this a slider parameter which changes according to social, political conditions?
  • There are other factors at work, such as north China’s drought. Droughts put a strain on other resources, which means that CO2 emissions are likely to go up even faster.

This is all something to think about.

Internet Crackdowns As An Economic Performance Indicator

July 16th, 2010

In China, the Chinese government is obsessed with maintaining economic growth at a high level. This is because a large part of the Chinese government’s implicit mandate with the Chinese people is guaranteeing continuing growth, which leads to a better standard of living. If growth slows down, then the whole basis of government legitimacy is challenged. This is why leading economists such as Michael Pettis, a very astute observer of the Chinese economy, believe that the Chinese government will continue their outbound investments in the US, for example.

Now for many other political observers of China, there is the widespread belief that Internet censorship is a human rights and free speech issue only, and something which is unrelated to economics. For them, this is an argument about humanitarian values which should be shared across the world. In the past few days, there has been a new crackdown on Twitter clones and some outspoken blogs in China have been deleted, according to this story in the Washington Post.

But what if economic performance and Internet crackdowns are in fact related, because the government fears outspoken criticism if economic indicators are much lower than the goals they have committed to and seek?

If that is the case, then the internal economic numbers which the government is seeing are a better indicator of how the people feel and will behave in the short-term, and bad numbers would make the government want to crack down pre-emptively, heading off potential dissent before the news becomes widespread.

When you put this into the Chinese context of domestic politics, and see that the Chinese leadership will be handed over to a new president and premier in 2012, what is happening on the Internet makes perfect sense. The current leadership of President Hu Jintao and Premier Wen Jiabao are due for retirement then, and will hand over leadership to a new leadership team. With two years left in their term, it is safe to say that world markets look unstable, with another wall of debt about to hit the US and Europe in the next year, further dampening consumer spending in the west. How can they manage a smooth handover without things getting unstable?

In China, there are early signs that there is an excess of white collar workers in the cities, and a shortage of blue collar workers in the factories, which is why factory workers have the leverage to slow down work or even go on strike. The traditional Chinese view of education is that the more educated you are, the better, but this view is being challenged now, and this view will sharpen over the next decade. China’s urbanization will mean more white collar workers will be looking for work in the cities, and they will have a harder time finding jobs. At the same time, this under-employed workforce will be aging quickly. Already, there are signs that a new subclass, the “ant people” are emerging, living in separate gated communities. Will this turn into China’s version of Brazil’s notorious favelas? This is the exactly the kind of situation the Chinese government wants to avoid. The gap between the urban rich and poor will become more marked.

As growth slows, the greatest challenge to the government will become readjusting the hopes and dreams of the Chinese people to a new reality of more moderate growth. This is an unprecedented challenge.

Is this a formula for social instability? You bet!

And where will they vent? On the Internet.

How will they potentially organize by spreading inflammatory remarks? On the Internet.

Seemingly this is a China problem, but as the world economy slows down, it will become a problem for other governments too. Free speech is taken for granted in good times, but in hard times, when social stability is at stake, it becomes another story.

How US Investment Banking Excesses Helped China’s State Sector

April 25th, 2010

When the banking crisis broke in September 2008, the global economy went into shock and nearly collapsed. The Chinese government was widely seen as being the most proactive in reacting to the crisis, injecting more than US$570 billion into the Chinese economy.

Because China’s four leading banks are all state-owned, all of this money quickly reached Chinese state-owned companies. This stood in stark contrast to the US, where the banks were bailed out, but the money did not make it to companies and individuals, largely because the banks sat on the cash received, mainly to cover their own capital losses, and in many cases, to pay out bonuses to management.

Only recently have the Obama administration and congress started tentative investigations into the investment banking practices which brought the world economy so close to the brink. Since the US economy is now largely based on FIRe (finance, insurance and real estate), and because the financial lobby is the most powerful and well-funded lobby in Washington DC, changes and reforms have been slow in coming. In spite of this, even in the early days of the investigation, there are signs that there was more to it than just investment bankers flogging poorly understood derivatives to unknowing corporate clients, there was deliberate fraud at the heart of it.

Today, the Chinese government and economy have come out of the crisis smelling like a rose. Certain indicators, such as auto sales in China, show China overtaking the US as global leader, and unlikely to relinquish it back to the US. Compared to the US and EU, China seems positively great, and the government has made all the right moves, investing in infrastructure and keeping Chinese consumers happy and spending. Optimists believe that now Chinese consumers and its middle class have stepped in and filled the gap left by the weakening of the US consumer.

Looking a little deeper though, while the Chinese government has succeeded in the short-term, their moves raise long-term questions. Here are some of the problems:

  • Most of the money found its way to Chinese state-owned enterprises (SOEs), many of which are in commodity imports and heavy manufacturing such as autos.
  • China’s economic development is following the US economic development of the 1950s; which is oil-based transport. Imports of coal and oil have dramatically increased in the past year in spite of government efforts to diversify to nuclear, wind and solar.
  • As the Chinese government funnels more money through its state-owned banks into SOEs, the party and the government ironically have less control over them. Recently, the Chinese government has used administrative measures, such as ordering 73 companies out of the real estate sector and, in some cases, dismissing executives on corruption charges, but these are not a long-term solution to a systemic problem.
  • More Chinese university graduates look for jobs in SOEs instead of the private sector, seeking job stability instead of looking for better job opportunities, or a chance to start their own business as in previous years.
  • For the most part, Chinese SOEs are over-staffed and inefficient. But because of the crisis, and the overall makeup of China’s economy, they seemed destined to take up a bigger part of China’s GDP.
  • China’s seemingly unquenchable demand for commodities and raw materials, is in large part, driven by a lack of faith in derivatives. This is directly related to Wall St. investment banking practices which ran wild and unchecked under the Bush administration.

The flip side is that China’s private sector is in its most precarious position since China’s reforms began in 1979. While it has always been difficult for small businesses without strong government connections to raise capital, the situation has become worse recently. Yasheng Huang, in his book Capitalism with Chinese Characteristics: Entrepreneurship and the State touched on many of these issues.

In the internet field, I have noticed, for example, that many of the entrepreneurs and innovators in the field are choosing to emigrate from China instead of starting their businesses in China. China has a thriving Internet sector, but the successes are those which already have venture capital funding, or have successfully gone public. For practical purposes, the early stage innovation part of the pipeline has gone dry.

It is hard to say if this is true for many sectors in China at this stage, but if there is one truth now, it’s that innovation and entrepreneurship are a vital part of every economy. In today’s China, innovation and entrepreneurship are too dependent on government connections for success. For this reason, these relationships are open to exploitation, corruption and abuse.

The Chinese government for its part has been very ambivalent about the private sector. Both the president and premier have made occasional statements about the importance of helping and protecting private enterprise businesses, but disappointingly, few of these statements have turned into tangible policies and measures. Since the Chinese government has been pressing other governments to recognize China’s market as a market economy, why don’t other governments press the Chinese government for clearer policies for China’s own private sector? Some of these questions may be:

  • Do Chinese private companies have equal and open access to raising capital as SOEs?
  • Are their products and services distributed and marketed equally in the domestic market?
  • If they are subject to any kind of unfair competition, then what channels do they have to appeal to?
  • If the answer to any of the above questions is no, then what policy commitments is the Chinese government prepared to make to remedy the situation?

    • While the Chinese government and SOEs are powerful and cash-rich now, the real heroes of China’s reforms are China’s entrepreneurs and innovators, and the hard-working and industrious people. It’s time they got some recognition and fair treatment both inside and outside China.

China: Which Century Are You Building For?

February 21st, 2009

@GregoryLent on Twitter just pointed me to this article, A User’s Guide to 21st Century Economics, by Umair Haque which I recommend highly.

After reading this article, some questions which came to mind:

  • Chinese companies traditionally have not been good at adding value. How well can they adjust to the new 21st century economic situation?
  • Chinese companies have been spending much on acquiring steady supplies of raw commodities. How much are they thinking of what is needed for the 21st century? Will they continue to build a twentieth century economy modeled on the American model, which is going defunct rapidly, or will they build a new development model for the 21st century?
  • The 21st century development model is reliant on individual human talent and creativity, and making it possible for them to succeed. How is China going to attract the best minds in the world to China in the 21st century?

China: Last Man Standing?

February 17th, 2009

On this blog, I have been a frequent critic of the view that China is a threat to the rest of the world as a rising superpower. Most of the time, these critics have a clear agenda to sell with regard to fear of China, or are journalists who have very little understanding of China. If the latter group, their articles are really rehashes of “If China were a rising superpower like US/Britain etc. this is what China would be plotting to do.” For someone who has never been to China and does not understand the country and people, the argument makes sense. But for someone who has been in China for some time, it’s ridiculous.

The reason for this is very simple. Running a country of 1.3 billion people is a very tough job, and this is something these China newby articles invariably overlook. In simple terms, the daily challenges are huge and are much bigger than the rulers of the US and UK have to deal with. For the most part, Chinese are not nearly as docile as Americans and Britons, and are much more “creative” about the ways they express their unhappiness. The knife hiding behind the smile or 笑裏藏刀 is a useful phrase to be aware of in business and politics in China.

In recent days a new theme has popped up, and that is the government incentives from the Chinese government are beginning to show positive results in the Chinese economy. Some of the articles are:

The Chinese government has acted forcefully, much more so than western governments, in fighting the effects of this recession which has turned into a depression. Compared to the west, the Chinese government has been the model of efficiency.

Sources in Beijing have told me that the Chinese government has offered companies full salary subsidies for company positions. That is, they have offered to reimburse companies full salary for positions in companies, especially positions for new university graduates. I am not sure if this applies to SOEs or if it also extends to the private sector. I am not aware of the full details of how it is implemented, but it does have the ring of truth. This has created a favorable market for employers, as many companies routinely lay off 80-90% of students following the three-month probation period.

Coming back to the rising superpower theme, this serves as an excellent illustration of a major point of mine: to become a superpower, you really don’t need to have a plan for world domination. You only need to be the last man standing when everyone else has already collapsed.

It will be very interesting to find out how long China will stand? The Chinese government is running the distinct risk of using all its bullets too early, and not having any left if the depression continues over a prolonged period. If that happens, the only thing China can do is inflate its way out. Another article point out the risk of this approach:

If the depression is long and this scenario plays out, then China will become a very short-lived superpower, and will only be standing a very short time before it collapses on top of the heap with the other former superpowers.

You only win when you can walk away after the battle. Otherwise it is just a pyhrric victory.

(Trouble is, pyhrric victory is a western term which does not an equivalent in Chinese.)

UPDATE Feb. 20, 2009: Knowledge@Wharton has an article about the possible ramifications of the surge in lending by Chinese banks.

Can We Just Take Globalization Out Back And Shoot It In The Back of the Head?

January 30th, 2009

My apologies for not having written for so long. I have been “otherwise pre-occupied” and have also been watching the first weeks of the Obama presidency and the accelerating unwinding of the financial markets.

The situation looks increasingly bleak. I hope you are prepared.

Readers know that I have been a critic of globalization in its present form. In this article, I will lay out for you how badly Americans have been fleeced by their own politicians, losing their own jobs, factories and any hope of a better future for themselves and their children. And all this has happened in a country with a supposedly free media, and where people can exercise greater free will than in China, where I am writing from now.

I’m going to keep this simple, but there are some numbers involved. Keep in mind that I’m not an accountant, but I do understand business. To make my illustration, I’m going to create a simplified fictional scenario.

OK, let’s suppose that there is a factory in Pennsylvania which employs 500 people to make widgets. This factory has been making widgets since 1955 and employs 500 people, who make an average income of $2,000 a month. This means that the monthly payroll is US$1 million a month, or US$12 million annually. Of course the factory owners and employees all pay taxes which go to the city, state and federal government.

Now, the owner goes to China and finds that he can go to China, and instead of paying his workers an average of US$2,000 every month, he can get Chinese workers at an average salary of US$200 a month. Their productivity is just as good as the American workers, but they cost only 1/10 the wages. His monthly payroll expenses fall from US$1 million a month to US$100,000 a month, and his annual China payroll becomes only $1.2 million. This means that he can afford to lower the price of his widgets, thus selling more widgets.

Moreover, in order to attract the investment, the local Chinese government is willing to give him cheap land and a tax holiday for several years. This means that his upfront investment costs are lowered drastically to only US$500,000 for land and factory. The business owner would be a fool to turn down such an opportunity, right?

So he goes back to Pennsylvania and begins transferring production to China, gradually laying off his Pennsylvania workers along the way. Now this is where things start getting wacky. As he lays off his workers, they go to the state government to collect unemployment, which for the sake of simplicity, we will say, runs about $400 per worker per week for six months. This cost is carried by the state government. Eventually all are laid off, and the state pays out a total of $5.2 million (400 * 26 * 500) for all the laid-off workers.

Now, our factory widget owner is happy, because thanks to globalization and WTO, not only has he lowered his costs drastically, but he can export all over the world duty-free, since WTO has regulations against import tariffs and barriers. He has more markets, and more market access. His investors are happy because they are making more because of lower costs and higher profit margins.

But what has happened in the US? More and more unskilled, then skilled, workers are losing their jobs. The state governments need to pay unemployment, and they need to tax the employers who remain in the state for corporate taxes to sustain the system. Meanwhile the tax base of factories which remain in the state shrinks while the number of unemployed grows. At the same time, there is a very large group of politicians who rail against taxes, so the states cannot raise taxes even though their tax base is shrinking and the number of unemployed is growing. Meanwhile, the number of people accessing free state services continues to grow.

Basically, this is what has been happening in the US over the past 15 years with globalization. If you think about it, it is amazing the US economy, with all the deficit spending over the past eight years, has not collapsed sooner! And mind you, we have not even talked about subprime mortgages and derivatives yet!

Now before WTO and globalization, there would have been import tariffs. If Chinese costs were so low (which they are), the US would at least have been able to impose some tariffs to bring costs closer to what they would cost in the US and thereby mitigating some of the difference, and bringing money into the US Treasury. China’s growth would have been slower, and probably healthier for China and the rest of the world.

Now there is talk in the US of a “Buy America” campaign. Too late folks! If the US raised tariffs now, it would trigger a protectionist trade war, one which the US is very poorly prepared to win, since it now has to look to China to bail it out of its current mess. In times like these, cash is king, and China has the cash.

Now, is this the fault of the Chinese? I would say no. The Chinese just took maximum advantage of a system which was given to them, and the Chinese government wanted to maximize exports to the US so that it could earn foreign exchange to fund China’s economic development.

Different American politicians and pundits have pedaled globalization to Americans as the panacea to all their ills. But what has happened in reality? Americans have lost their jobs, lost their homes because of the growing subprime and now prime mortgage crisis, and they do not have the skills which are needed for this new period we are entering. The companies are optimized for a world which no longer exists. Americans have lost their own future, and the futures of their children and maybe grandchildren. And most are completely unprepared for this new kind of globalization, which looks like it may very well bring the US standard of living to something more closely resembling the Chinese standard of living.

For your information, until very recently, the Chinese were dirt poor. They remember what it’s like, and even though they do not want to live that way again, they can roll back expenses to the minimum if it needed. Give you an example: there is now a movement among Chinese university students to spend 100 yuan (about US$15) a week. How many Americans can do that?

These are the times we are in for.

Saying that Americans were fleeced by charlatans and politicians on both sides of the aisle does not even begin to describe the situation. Just about the only thing they have left is their own internal organs. Already there are young women who are selling their eggs to make a living. And it will just get worse and worse.

Now does China export jobs? No, China exports Chinese. The country has too many people, and the government is encouraging them to go to Africa where many Chinese companies are investing in hard assets, otherwise known as commodities. Anyone who has lived in China can tell you that Chinese are great believers in hard assets.

So what can President Obama do? It doesn’t look like he can do very much. Collapsing sales and profits reports keep on coming down the pike, and have acquired a momentum all their own. It would be nice if we could take globalization out back and shoot it in the back of the head, but it’s too late. The cat’s out of the bag, and it’s not going back in.

That’s why I’m in China.

Now, why is it the US with its free press, tell the people what was really happening? Or were they just distracted by left-wing/right-wing pseudopolitics and red/blue arguments so much that they did not notice what was happening to them?

If you want another angle on this bleak picture, I’d recommend that you read Clusterfuck Nation.

The Brave New World of Deglobalization

January 4th, 2009

In previous articles, I have voiced some of my criticisms and predictions re globalization here, here, here, and here. Unfortunately, it is becoming clearer by the day that globalization was largely a fraud where Americans could endlessly consume and Chinese factories could endlessly manufacture without any adherence to economic fundamentals and creating a false and bloated version of prosperity and rising living standards. The brilliant minds of Wall Street came up with “risk management strategies” (irony alert) so that derivatives could endlessly build a never-ending Ponzi scheme which would go on forever and ever.

We are now entering a very painful period of unwinding of what economist Niall Ferguson called “Chimerica”. Now, China and America are entering a dangerous period of deglobalization, where they have come to the realization that after the bubble pops and the deleveraging begins, their interests are really quite different. Instead of China and America being two sides of the same economic coin, they need to play or pander to their own constituencies. The blame game will begin.

And their native constituencies are confused, hurt and angry. But they are not nearly as angry now as they will be in the near future when they have figured out what has happened to their wealth. When that happens, there will be hell to pay, and there will be blood in the streets.

The reason for this is because the leveraging which occurred is simply too big and too complicated. Taking all the bad leveraging out of the system and replacing it with cash and credit liquidity is like trying to rebuild the engines of an aircraft in flight. It cannot be done. This means that there can only be a crash.

The bright side is that crashes can be managed. You can go into a death spiral which is impossible to pull out of, but a smart pilot will look for a stretch of land and try to glide in for a crash landing. So far, the political leadership worldwide is pursuing policies which more closely follow the former path of the death spiral. This is because everyone is acting in what they perceive in their own interests, instead of keeping their heads and thinking through what needs to be done. It is a deadly panic move.

The problem is that we are now entering a phase where the crisis has spread from subprime mortgages, to derivatives, and then on to currencies. In the beginning the patient suffered from a lack of credit liquidity (constipation), so the central banks are going to provide liquidity (the enema). This did not work, and the patient has become bloated. There is the very real chance that this will eventually cause runaway inflation (dysentery) and the patient will then die of dehydration. When this happens, the currency becomes worthless and society falls apart until a new dictator imposes his will on the society, as Hitler did at the end of the Weimar Republic in Germany. In China’s case, runaway inflation led to the Kuomintang and Chiang Kai-shek’s loss of support in the cities, and directly contributed to the establishment of the People’s Republic.

Sounds really really really bad, doesn’t it? That’s because it is.

But there are survival and prosperity strategies. I will talk about them in 2009. But you will have to be really really tough.

The Elephant In The Room

December 17th, 2008

One of the big problems with the present economic crisis is that we really do not know how big the problem is. We know that our problems have been caused by the creation, then over-leveraging of debt. But we don’t know how much debt was created, then sliced into derivatives multiple times which were then sold on to financial institutions all over the world.

But no one knows how much debt, then derivatives, were created by this whole process. That is the big elephant in the room which no one wants to talk about.

That makes it a good reason for me to talk about it.

We now know that a great deal of what passed for growth in the US over the past 20 years, starting with the Reagan administration, was financed by the creation of debt. Debt, by itself, is not a bad thing. In fact, it is needed for healthy growth. Companies, and countries, frequently reach stages in their growth when they need to borrow in order to reach another level of growth. When they get return from this new level of growth, they pay back and retire the debt. That is the way debt is supposed to be used.

Now, the problem which started in the US is that there was no intention to retire the debt. This was why the US Republican party pushed “deregulation” to get votes. Without deregulation, and a necessary amount of fraud, this debt mountain would not have grown as fast as they needed it to grow. Instead, the debt was sliced to ever finer parts, and sold into the global economy. Wall Street, especially its investment banks, became a mechanism for the creation, processing and sale of ever newer varieties of debt into the global economy. As long as there was growth, the system worked fine. And this is where the problem comes in: any system which can only survive when there is “growth” and cannot withstand changes and reverses in market conditions is effectively a Ponzi scheme. “Growth” becomes a means to its own ends, and becomes a necessity. When the “growth” conditions end, the system collapses.

Which is what we are going through now.

What we are going through right now is the great unwinding or deleveraging of what has happened over the past 25 years. In simple terms, the investment bank firms, and now hedge funds, and so much of the US financial industry became addicted to leveraging. Now they cannot leverage anymore, and their business model no longer works.

This raises a very interesting question which I have not seen others ask yet. That is “If debt financing and leveraging did not happen in the US, then how big would the US and global economy be?” In dollar numbers, it would be much smaller, and financial services and outsourcing would be much less important features of the US economy. There would be more manufacturing, and China would not have grown as quickly because it would not have had such a huge US export market to sell its products to. Without such fast economic growth, it is likely that the Chinese government would have had to look at social and political reforms sooner rather than later. Faster growth would have been replaced by slower more solid and more balanced growth.

China has made this problem bigger because it insisted on keeping the yuan at a lower exchange rate in order to protect its main export market, the US, addicted to Chinese exports. As I have said earlier on this blog, China and the US are two sides of the same coin. But right now, the two sides do not enjoy the same interests. The Ponzi scheme which served both sides so well no longer exists. This means that there will be recrimination and anger as each side seeks to pin the blame on the other side.

If we are ruthlessly honest about unwinding the overleveraging, I suspect that much of the world’s growth (60-75% + compounding) since the late 70s would not exist. Obviously, that is an outcome none of the world’s governments would have an interest in.

The main problem in economics is: “What is productivity, and how do we measure it?” I do not pretend to have an answer to that very challenging question, but I suspect that most of the improvements in production over the past 30 years come from improvements in information technology. These improvements in productivity mean that it is possible to create more with less people.

The real problem now is there are too many people, and most of them are not very productive in terms of adding value to an economy.

My guess is that as the unwinding continues, people will get angrier as their standards of living fall. When this happens, governments will have to choose which is worst, deflation (caused by unwinding) or inflation. Inflation has the advantage in that it can hide the real fall in living standards by gradually debasing and eroding the value the currency, but making the general populace think that they are making more money. The downside is that inflation is notoriously difficult to control. In a worst case scenario, it turns a country into an Argentinian or Brazilian basket case, where inflation becomes a routine tool for controlling the masses. More darkly, it drives the entrepreneurial class to other countries where they can make a better living for themselves and for their children.

When it does go out of control, it becomes the most powerful and deadly destroyer of wealth there is.

And that is the current situation where we are…

In my next article, I will talk about the businesses which will do well during The Great Unwinding.

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Understanding Trial Spots

October 21st, 2008

If there is one thing which most western companies coming into China miss out on is the idea of “trial spots”, or as they are called in Chinese 试点。

So what is it? Basically, it’s a city, place, province or region which is used to try out something experimental which has not been tried before. When China first opened up, Shenzhen was a trial spot for opening up the economy to foreign manufacturing investment. When the experiment succeeded, it was pushed out to the other parts of China. Shanghai and Beijing were opened as tier one cities to foreign companies and employers, mostly in the service sector. When these experiments worked, the opening up gradually started. In most cases, the trial spots were selected by the central, provincial or municipal governments.

Now, there is another little secret. Large SOEs (state-owned enterprises) also often have their own trial spots. Most of the time, these are used to put some of the rising senior-level managers in to try new management practices. They are usually given a city, and a long leash, and are encouraged to try new ways of management. Often these managers are people who have made it to a certain level in a state-owned enterprise, but will not or cannot rise higher because they are somewhat non-conformist, and shall we say, less interested in politics. (Remember that in SOEs, the party also has a say in the selection of candidates for senior positions.)

Frequently, the Chinese way of handling these non-conformists is to give them a “trial spot” where they can experiment in a city or provincial division on their own. If something goes wrong with their experiment, then the damage is limited to their immediate market. If, on the other hand, the experiment was successful and includes practices which can be used on a larger scale, then that person may be promoted to a higher position with greater responsibility. This is how the current leadership of China has been groomed, just to cite an example.

The interesting thing is that many western companies, even consultants, are completely unaware of these practices. They look at their choice of investment areas in western terms, which usually means that which is clear, and out there, in the open.

They don’t study the people.

Instead, they should ask where the different “trial spots” are, and the backgrounds of the people they are dealing with. The right questions to ask for SOEs are:

  • “How did this person get to this position?”
  • “What is he trying to do?”
  • “How is he different?”
  • “What do his employees think of him?”
  • “What are his goals and his definition of success?”

If it sounds like questions an intelligence agency would ask when examining the new leadership of a country, then it does because it is just like that. I call this “due diligence with Chinese characteristics”.

And how do you get this information? I find the best way is walk in and ask (In Chinese, of course. Speak English and you only get the official line.)

For the most part, you will never find these people in Beijing or Shanghai unless they have been very successful. These are two highly conformist politically-charged cities, and the only way they make it to these cities is if they are in very senior positions, and their views have been vindicated.

Generally speaking, Chinese, even including the party, are more tolerant of non-conformists. Just don’t look for them in Beijing and Shanghai. Deng Xiaoping, the architect of China’s reforms, was for many years considered a non-conformist and was punished repeatedly for his views. Eventually, his policies became the mainstream.

So, how will the recent economic problems affect things? Basically, we are going through the collapse of an old world order, and nothing new to replace it has come up yet. The Chinese government, the party and Chinese SOEs will be looking for answers on what comes next to restore order, growth and stability. After all, this is what Chinese social stability depends on.

For Chinese government and party officials, it will be a good time to be something of a maverick. But these mavericks will only survive and prosper if they can come up with the right answers to some very tough questions.