Networked Authoritarianism in Perspective

June 20th, 2010

A short time ago, Rebecca MacKinnon wrote an excellent commentary on the Chinese government’s white paper on the Internet. In the government-published white paper, there was effusive praise for the Internet as a tool for social change under terms set by the party.

The important thing to understand is that the party will set the agenda of what is acceptable for Internet development, and the Internet will develop along those terms in China regardless of what others may say. From the party’s perspective, this is non-negotiable. Those who challenge this basic requirement, as did Google earlier this year, will be forced out, or will have to conform to those regulations.

The Internet white paper was the party’s way of saying:

  • Now we understand the Internet and its social ramifications
  • We do not believe it should be banned from China.
  • We believe that it should be controlled and managed in a direction which is suitable for China’s development under the leadership of the party.
  • We will not tolerate any deviance or interference, foreign or domestic, from these guidelines.

In the west, the Internet developed as a grass-roots tool of programmers and hackers, since it was based on several different technology protocols. For this reason, many in the west continue to think of the Internet as the ultimate anti-authoritarian tool. Those who look at the Internet from a political perspective and have their own agenda often emphasize this aspect of the Internet.

Before the Internet came to China, there was no unofficial media. This was why one of the first applications which took off in China was Tencent’s QQ, which was an instant messaging tool based on ICQ. Following this, games took off, led by Shanda. More recently, online video and twitter clones such as Sina’s Weibo have taken off.

It has taken some time for the party to realize that the Internet also offers an alternate, unofficial media, and is dangerous from the party perspective because it has the potential to let people spread information, and even more importantly, organize very quickly. It is this ability to organize quickly which represents the greatest threat to party rule, which is why huge amounts of funding have been directed to the online security apparatus. It is very clear that the party places special emphasis on real-time filtering of the Internet to prevent social disturbances from spreading quickly, and this is a large part of many companies’ operational costs.

From the party’s perspective, social change is necessary, and in some cases desirable, especially when it is directed at non-Chinese companies such as Foxconn and Honda. These high-profile, limited-scale events give the government negotiating leverage in dealing with non-Chinese entities, and directing social and economic policy. However, if they become widespread in society as a whole and spread out of control, there is a real danger to party authority. This is why all of these events have been small in scope, and have quickly died down after the issues were resolved.

This is a very sophisticated Chinese strategy which has the west, including individuals, investors and governments, over the barrel. On the one hand, many in the west hope that China will change and become a more open society. In fact, the party in China also knows that Chinese society must change and become more open, but it wants to set the terms and the agenda. Should investors go to China, which offers better returns than most other parts of the world, including the west? Or should they obey their consciences, and stay out of China? Looking at things now, I would say that most are more interested in their investment portfolios than their consciences.

As for those who exercise their consciences, there is another challenge. Are they for change from within the system, or do they support change from outside the system? Change from within the system means that there must be dialogue with the ruling party. History has shown us that for long stretches of time this dialogue will not bear fruit, and will be open to widespread criticism in the west, which is always demanding fast results and change in China. Or will the China critics push forward a hard line, that there can be no compromise with the party, and a new substitute must be found?

This lack of a viable substitute is what has prevented change in China. It’s easy to criticize the party on multiple issues; it’s much harder to find a better solution.

So far, I have not found anyone in the west take a clear stand on this crucial issue, except for Google, which moved its search engine operations to Hong Kong earlier this year.

“Exactly what is the attitude of the west with regard to change in China?”

This lack of open, honest dialogue on the key issue of meaningful strategy with China is what prevents many western companies from moving forward with China.

Unless western companies, the public and their governments reach some kind of consensus on what they support, and what their position on change in China is, there will always be misunderstandings and disappointments for the west in China.

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.

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.

Why China Won’t Throw A Lifeline To The West

October 12th, 2008

Hu Jintao with George W. Bush.
Image via Wikipedia

With all the chaos on world’s markets, it is easy to overlook developments in China. The biggest piece of Chinese domestic news is the decision to give limited rights to land use to China’s farmers. This decision came out of the Third Plenary Session of the 17th Party Congress of the Chinese Communist Party (三中全会), which is now convening in Beijing.

The overall thrust of this meeting is to focus on the development of rural China, which has not fared so well as the east coast cities. If the cities continue to develop, and the countryside continues to stay poor, you have the recipe for social unrest on a large scale.

The salient points about China’s development are that China has about 1/3 the arable land of the developed economies for farming, and about 500M live in cities, while 800M continue to be rural Chinese. National development plans (many of which were formulated under Jiang Zemin, who came from Shanghai) called for the urbanization of China.

China’s first 30 years of reforms required the development of the eastern coast to attract foreign capital, and to make the companies and the westerners who came to China feel comfortable. Only when they had reached some level of comfort, and were attracted by the market potential would the capital follow. They became comfortable and the capital and trade followed.

And now the westerners living in Beijing, Shanghai and the west expect the Chinese with their nearly US2T in foreign reserves to bail out the western economies? Let me tell you why it won’t happen.

  • Successive Chinese regimes have always lost power when they coddled the urban elite and ignored the needs of the countryside. This was how Mao rallied the Communists, surrounded the cities (the strategy was called “using the villages to surround the cities” or “乡村包围城市”), then threw out Chiang Kai-shek in 1949. Hu Jintao and Wen Jiabao know this, and know that they need to swivel around and develop the countryside so that the wealth gap can be narrowed.
  • The Chinese government will focus on developing a new size of town, which in Chinese is called the 城镇 or village town. This will be mainly a distribution, education and trading center for farmers and their families in the immediate vicinity. Population will be 250-500K.
  • For the next 15-30 years, the cities will stagnate in growth. People will not lose their homes the way they do in the US since China does not have foreclosure laws, but their salaries will not go up. Many of the wishes new university grads entering the workforce hoped they had will just become dreams. Somehow they will have to learn to live in this new drastically changed environment.
  • The Chinese government is already talking about the development of rural infrastructure including rural insurance, microlending, etc.
  • Many young Chinese who would have scoffed at the idea of working in the countryside will now go there, simply because job opportunities in the east coast cities will be limited. This, in turn, will help to clean out the party apparatus in the countryside, which has been seen as generally corrupt.
  • Western companies will not benefit too much from this next stage of development because they do not, for the most part, understand how to sell to the bottom 2/3 of the Chinese pyramid. Most only know how to sell to the top 1/3 in the cities. Companies which will prosper are those who sell to the “local local economy”, or bottom 2/3, as Jack Perkowski calls it, as opposed to the “local foreign economy”. The local foreign economy is city-based on China’s east coast; the local local economy is mainly rural and inland.
  • The companies which will survive and prosper are the swift pivoters who can quickly learn how to sell to the “local local economy”. This means that they made some money in export manufacturing, but now switch to sell domestically to Chinese consumers in the new inland towns and cities. Not many companies can do this, but those that do will do well. Most will be entirely new businesses, and local Chinese brands will have an advantage.
  • This next stage of development will require a lot of money. Those foreign exchange reserves of US2T will be needed by China. Now, if you ruled China and you had the choice of 1) lending the money to the west, which has just acted about as irresponsibly as anyone can imagine or 2) investing the money in China to narrow the wealth gap between rich and poor, city and countryside and keeping your regime in power for more than a half century, what would you do? I think that it’s a pretty easy choice.

China may now have the world’s largest foreign exchange reserves, but that is not what makes a country a superpower. The recent tainted milk scandal has shown that it is still lacking controls in many key areas, and it is far short of being a developed nation. Instead, China is a developing nation with rich reserves it needs for its own development.

In order to become a developed nation with a developed economy, it needs to spend that money on building its own infrastructure and narrowing the wealth gap between the developed cities on China’s east coast and the inland countryside. Any Chinese regime which acts otherwise would be making a very risky decision, and would be putting the future of its own rule in jeopardy.

China can manage without export markets, but it cannot survive if its own countryside is in turmoil.

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When Bureaucracy Gets Politicized

September 25th, 2008

There has been a lot of concern about the tainted milk scandal in China, and with each passing day, the scope of the scandal gets bigger. How did this happen, why was it covered up, and what needs to be done about it?

My answer is simple: this is the kind of thing which happens when the bureaucracy becomes politicized, and government appointments are made for political instead of professional reasons.

For more than 2,000 years, when China was ruled by an imperial bureaucracy, China had a complex system of imperial exams to insure that anyone who passed could enter the government bureaucracy. This bureaucracy was largely apolitical, except for the most senior appointments in the imperial court or on the provincial level. Most were just professional officials, and would serve their masters, whoever they were.

With the overthrow of the Qing dynasty, and with the foundation of new China in 1949, the party organization affected all levels of the bureaucracy. Endless political movements until 1978 politicized the whole society, not just the bureaucracy. Appointments were made for political reasons instead of professional capabilities. Sometimes, professional qualifications were completely ignored.

The tainted milk scandal is an example of what happens when political considerations override business, health and even ethical concerns. This is what happens when government officials are judged by how much investment they attract and how many jobs they create. Then there is a natural tendency to cover up any information which draws a conflicting picture. What should be a health and ethical issue instead becomes a political issue.

The problem now in China is that there is a severe shortage of people who are apolitical professionals, not politicians. How do they fit in, even survive, in a completely politicized bureaucracy? Does the government have the energy and will to depoliticize the bureaucracy, and create a professional bureaucracy which will fulfill the needs of modern Chinese society?

That is the question for the next stage of Chinese reforms.

Understanding The Chinese Perspective

November 1st, 2007

Caijing Oct. 29 issue

Today I picked up a copy of the October 29 issue of the Chinese language biweekly, Caijing. Caijing is roughly equivalent to The Economist in US and European financial circles, and I like to think of it as the magazine for the thinking Chinese business person.

Most western journalists, especially American journalists, when it comes to covering China, start from the point “So what does it have to do with me?” With this as a starting point, it is all too easy to fall into the “You can make billions in China” or “The Chinese are going to take everything away from us” schools of thought, both of which are very far away from the truth.

The simple truth is that the west, and Americans, are not that important. I would say that more than 90% of the things which happen in China have no US/western angle; the Chinese make their decisions mostly based only on internal social and political considerations.

Just like in the US.

Caijing’s influence extends far beyond anything The Economist aspires to; it offers many insights into various topics which most other publications do not dare touch. In many cases, I believe that is floats trial balloons for policy issues. For this reason, I make it a point to pick up a copy when I have time; it offers all kinds of insights and debates many policy issues in its columns. (It may come as a surprise to many who don’t read Chinese that there are increasingly vigorous debates on many policy issues in China. There are, and you would be surprised by how open many of the subjects are.)

The October 29 issue is really excellent; it has opinions and summaries of the 17th Party Congress, which just ended in October. The party congress, held once every five years, sets the policy agenda for the next period. For this reason, it is something which is closely watched by most Chinese, and those who seek a deeper understanding of how the Chinese and the Chinese government see their changing roles.

Because many western observers of China come with their own agenda, I found this issue’s articles particularly interesting. I plan to write on some of the issues raised in the articles shortly, so if you are interested too, remember to come back.