The China Vortex

“Interfering in another country’s internal affairs” is a routine mantra often used by Chinese government spokespersons, and is used most often when pointed at the US and US critics, especially with regard to human rights policies.

On the surface, this makes a lot of sense, especially with regards to generally ignorant US politicians, movie stars and others, who would have a hard time finding places like Tibet and Darfur on a map, but are moved by some of the images they see on television. For them, China and Chinese policies are a very convenient whipping boy, even though they have very little context and understanding of the real underlying issues.

This naturally puts the Chinese government on the defensive and more recently, some Chinese have become angry at the overseas criticism.

So who’s right and who’s wrong? Those who argue against interfering in another country’s internal affairs, or those who say it’s OK to do so?

The fact is that if a country is big and has a strong economy, whatever it does has an effect on other country’s economies, and on the global economy. Even though only American citizens’ can vote in their elections, the gross stupidity and ineptitude of American economic and trade policies in recent years do not end at America’s borders.

They go far beyond it.

And the Chinese government has started complaining about it. After all, they hold huge amounts of US dollar-denominated treasuries which are losing their value daily as the US dollar loses value, and their sovereign wealth funds are blocked from making investments in Europe and the US, mainly on political and not economic grounds.

So aren’t Chinese government officials interfering in US internal affairs? Yes, but the two countries’ economies are so tightly intertwined, the US policies are having an effect on the Chinese economy. When they are so tightly bound together by trade and economics, there is no borderline. It’s as silly as the right arm complaining about the left arm.

The fact is that the US and China are like two handicapped people: one is blind and the other is deaf. They need each other in order to survive.

The sooner politicians, officials and miserably deficient media on both sides recognize that, the better. If they don’t, ordinary people will continue to get caught in the middle and distracted by bad policies and ignorant offline and online media pundits getting them to chase red herrings while the real problems get worse.

Several days ago, a different kind of earthquake happened in China in the telecoms field. Unlike the Sichuan earthquake which took so many lives and caused so much damage, this shakeup was not unexpected. It’s ramifications will be large, if not huge, and it’s worth going into some depth to get a deeper understanding of how this change will affect the development of mobile usage of the Internet in China.

Before leaving the Sichuan earthquake as a subject, I would like to point you to this excellent slideshow by CIC Data (h/t to Tangos Chan) which shows how China’s grassroots social media has helped in the disaster rescue and recovery process.

China’s New Telecom Landscape

The main points of the new joint interagency government announcement by the MII (Ministry of Information Industry), NDRC (National Development and Reform Commission) and Ministry of Finance (MOF) are phrased as an opinion and encouragement. (Note: When you get two government ministries and one super-ministry “encouraging” you this way, you do what you are encouraged to do, even if you are China Mobile and have the largest single-country number of subscribers in the world. After all, this is China, not the US, where big corporations tell Congress and the executive through lobbyists and lawyers what they want and are willing to do, and then sell it to the American people through the media as “being in the best interests of the people”.)

The main points are:

• China Telecom is “encouraged” to acquire the CDMA business of China Unicom
• China Unicom and China Netcom are encouraged to merge
• The basic telecom service of China Satellite should be merged into China Telecom
• China Tietong (part of the railways infrastructure and the third fixed line operator after China Unicom and China Netcom) is to become a wholly-owned subsidiary of China Mobile

All six operators (China Mobile, China Telecom, China Unicom, China Netcom, China Satellite and China Tietong) have been asked to separately submit their implementation plans to the relevant ministries where they will be encouraged (again) to reconcile their different plans and agree on a schedule. Once this is completed, the Chinese government will then announce the granting of the three 3G licenses and which operators they will go to.

Following the reorganization, there will be three companies left, which meshes perfectly with the number of 3G licenses to be granted by the government. There will be one license granted for each of the new 3G technologies: TD-SCDMA (China’s natively-developed standard), CDMA2000 and WCDMA. Current opinion is that China Mobile will get the TD-SCDMA license, with China Unicom and China Telecom getting the other two foreign technology licenses.

Reaction

The immediate reaction on the HKSE, where China Mobile, China Unicom, China Netcom and China Telecom are listed was unfavorable to China Mobile, the giant in the mobile sector in China. Goldman Sachs issued a sell rating on China Mobile.

You can bet that the six companies will be burning the midnight oil to complete and submit their implementation plans so that they can get the 3G licenses as soon as possible, which should be sometime within the next 3-6 months. Most likely it will not happen before the Beijing Olympics, even though the network infrastructure is there, simply because there is a lot of training and testing to be done.

My Take

This change marks the end of the first stage of the rollout of mobile phone services in China. While China has the largest single-country number of mobile subscribers, most people use mobile overwhelmingly only for voice and SMS services. From a business standpoint, China’s telecom industry has been in a wait-and-see mode for the past two years.

This second generation, or next stage of mobile services will be about a renewed rollout and introduction of more data services, and the more important metric for the operators will be ARPU (average revenue per user) instead of number of subscribers. So please, let’s stop talking about number of subscribers, and let’s talk about ARPU instead from now on.

ARPU will be the real metric to measure the performance of the three operators. I say “It’s about time!”

This change opens crack and opportunities for investment and new players, and gives more choices to Chinese consumers. China Mobile, the industry leader in mobile services, has continued to expand the number of subscribers, having the world’s largest number of subscribers in one country, with more than 500M. China Unicom has been playing catchup because it started as a CDMA service provider (as opposed to China Mobile’s GSM) and although it also later entered the GSM field. The small independent mobile operators such as Tom.com, Linktone and KongZhong have all languished because China Mobile was seen as the dominant player which wanted to completely dominate the platform and application-level services. While it would be a real challenge for those companies to claw their way back to health, venture capital and private equity firms can now look more favorably at the next generation of mobile services, which will no longer be as dependent on a single mobile provider, since there are now three choices available, and they will differentiate on the basis of how they cooperate with service providers and services they offer to Chinese consumers.

In order for Chinese startups to survive and prosper, they will increasingly differentiate themselves on their business and execution skills instead of just technology. Good management will be key.

It goes without saying that Apple’s iPhone will be the most high-profile beneficiary of the change, since it will have two other mobile operators to talk to besides just China Mobile. Instead of just having a loyal base of hacked iPhone users in China, Apple will have a chance to test its vision of the mobile Internet with Chinese users.

The major handset makers such as Nokia, Sony-Ericsson and Samsung will also want to test their application services among Chinese users, and will have greater chance of reaching them.

There are many opportunities in search and display advertising, and subscription-based services. Most of these opportunities are not infrastructure-related, but service- and tool-related. I will talk about some of these opportunities in the future.

While this is a short-term setback for China Mobile, it will ultimately help the company because instead of becoming a lazy monopolist offering bad services, it will have to compete on service. This will make the company more competitive when China starts planning seriously for 4G.

I give the plan an enthusiastic “thumbs-up”!

This is a good example of central planning working to help competitiveness, and in favor of consumers.

It would be nice if, ahem, other countries with large consumer markets, took a closer look at this move and how it helps competitiveness.

Although Joseph Stiglitz’s book Making Globalization Work came out more than a year ago, I did not read the book until the past week. However, the book is so important that I must write about it for my readers.

For many people, globalization is a fairly black and white issue: either you are for it or against it. I have been a critic of globalization in its present form here, here and here. While a few who have commented on those articles believe that this meant I was against globalization, that is not in fact the case. I am just against globalization in its present form because all governments have so far acted in what they perceive to be their best national interests, when in fact they are acting in their own very narrow national and often, corporate, interests and have left most of their own citizens behind. This is especially true in the case of the US government which, as Stiglitz outlines in this book, has acted mostly as a proxy for large corporate interests, putting the interests of most Americans and everyone else behind those narrow interests, and without much regard for the consequences.

Stiglitz is very candid about how these interests, for the most part, are in fact contrary to the interests of other countries and the vast majority of US citizens. This is very admirable as Stiglitz played a major role in the US government, serving as chairman of the president’s Council of Economic Advisors in the Clinton administration and then in the World Bank, where he served as chief economist until January 2000. He is remarkably candid in his observations:

For much of the world, globalization as it has been managed seems like a pact with the devil. A few people in the country become wealthier; GDP statistics, for what they are worth, look better, but ways of life and basic values are threatened. For some parts of the world, the gains are even more tenuous, the costs more palpable. Closer integration into the world economy has brought greater volatility and insecurity, and more inequality. It has even threatened fundamental values.

This is not how it has to be. We can make globalization work, not just for the rich and powerful but for all people, including those in the poorest countries. The task will be long and arduous. We have already waited for too long. The time to begin is now.

These two paragraphs work for the citizens of all countries, not just the US and China.

Stiglitz comprehensively covers the problems with globalization chapter by chapter:

• Another World is Possible
• The Promise of Development
• Making Trade Fair
• Patents, Profits and People
• Lifting the Resource Curse
• Saving the Planet
• The Multinational Corporation
• The Burden of Debt
• Reforming the Global Reserve System
• Democratizing Globalization

Step by step, he looks at the current situation and its inequities, and proposes remedies so that globalization will work not just for the rich, but for the poor as well. His remedies are well thought-out and balanced, and also very well presented.

My question is: What are the chances of their adoption? I would say that I am not sanguine about the chances. There are too many variables at work, and so far, politicians have not shown the capability of national leaderships to rise above narrow interests. Even when it comes to narrow interests, they do not do the right things.

For example, let’s look at global warming, a problem which is literally becoming more serious every year. This will quickly lead to a series of cascading events which will rapidly spiral out of control, threatening the very existence of humanity as we know it. While there are very well-meaning people who want to do more to clean up the environment, they lack the basic understanding of economics to understand what needs to be done.

Essentially, we are keeping the costs of energy production artificially low by not figuring in the costs of environmental damage and healthcare upfront. This is the reason carbon emissions in China are running out of control.

Governments’ policies in pursuit of cheap energy are literally destroying future generations all over the world, since they will have to shoulder the costs of cleanup.

If there are future generations.

What is the real cost of economic development if future generations have to pay in shorter lifespans, lower quality of life, and a much more hostile environment where the people who are left are crowded into the relatively habitable parts of the planet?

Making Globalization Work shows that the future does not have to look like Mad Max. But are we smart enough to avoid it?

If you are interested in the future, then you must read this book.

When I talk about the west in the title, I’m referring to the western part of China.

A great deal of thought and ink and pixels have been devoted to how the recent violence in the western part of China has affected the country’s image in the runup to the Beijing 2008 Olympics. I’m not going to talk about that because I have nothing new to add to that conversation.

Instead, I’m going to talk about how those events are likely to affect Chinese government fiscal and monetary policy.

These recent events have shown that the income gap between Han Chinese and Tibetans is growing, and that there are significant numbers of Tibetan youth who do not see a bright future for themselves. They are perfect fodder for unrest. Beijing has tried to mollify things by moving significant numbers of Han Chinese into Tibetan areas to start small businesses but, for the most part, Tibetans are still deeply religious, and many prefer a nomadic lifestyle to living in cities where they cannot find work.

This is the trouble with an urbanization policy: it works fine if people are employed. If they are not employed, there are all kinds of social problems.

The biggest problem is that there is no Tibetan merchant class as there is among Han Chinese.

The central focal point of Chinese social policy is low unemployment at all costs, even if the businesses are not profitable. It is better to have people working in a loss-making enterprise than for them not to have a job at all and wandering the streets.

Part of the rationale for the violence was to scare Han Chinese out of the Tibetan regions. Many Han Chinese families may prefer to move back to their places of origin; the Chinese government may offer economic incentives for them to stay.

Faced with this situation, the Chinese government is unlikely to let the yuan rise significantly more this year. If asked to choose between which is more dangerous, social unrest in China, or increasing pressure from the European Union and the US over letting the yuan appreciate, I’m sure that the residents of Zhongnanhai would say that the former is the threat they fear the most, not the latter.

For them, it’s much more important to keep people working at their jobs in China.