ChinaVortex Interview with Handel Jones, Author of Chinamerica: The Uneasy Relationship That Will Change the World

August 10th, 2010

I recently conducted a phone interview with Handel Jones, the author of Chinamerica: The Uneasy Partnership That Will Change the World which is published by McGrawHill.

You have worked as a consultant for many years in China and the west. What motivated you to write this book?

Many Americans don’t know much about how China works, except for those who are in the business sector. Now that China has become economically powerful, it is important for more people to understand how the Chinese government and people see themselves, and their role in the world.

In your book, you mention that China needs and respects a powerful US, but if the US becomes weaker, then the relationship would become unstable and even dangerous. Why?
China has looked up to the US for a long time as a world leader, and setting the rhetoric aside, continues to have a deep respect for many things which the US has done. For example, in the area of graduate university education, Chinese continue to choose the US as their most popular destination.

In your book, you express some frustrations at recent US government policies. What are they?
Domestically, with the change in administration, we were expecting more support in the business sector. However, for small businesses, there has been more regulation and more taxation. This has hurt the overall competitiveness of US businesses. This is in comparison to the Chinese government’s policies, which have been to support Chinese businesses and exports, especially state-owned enterprises.

What is your feeling about the competitiveness of US businesses?
I believe that US management practices, generally speaking, are the best in the world. It also has the best business managers in the world. This is why the US has world leaders and brands such as HP, Apple, Boeing, just to name a few. However, there is little understanding on the government policy level as to how to leverage these American strengths as most US politicians are too absorbed with domestic issues so that they can win the next election.

How is this different from the Chinese government’s worldview and their policies?
When China’s reforms started thirty years ago, China worked from a very weak base. Just about the only thing it had a was a large pool of unskilled labor and some smart leaders. They leveraged this base to obtain key technologies and become a manufacturer and exporter, while giving away as little as possible. To this day, it is virtually impossible for any non-Chinese company to gain access to the Chinese market without being forced to give access to key technologies, which often find their way to Chinese competitors. This is a source of frustration to virtually all non-Chinese companies.

Many US and western policymakers say that China needs to revalue the yuan upwards. What do you think?
Instead of putting pressure on China to revalue the yuan, it’s more important to put pressure on China to open up its markets to foreign-made goods, so that they are treated the same as goods made domestically in China. Non-Chinese manufacturers should not be pressured to hand over their technology to gain access to the Chinese market.

What does the US need to do to become competitive again?
Over the past few decades, US government policy has become more short-sighted, and Wall St. has reacted by creating debt instruments which were speculative in nature, instead of being investment-oriented. However, the US still has strengths in areas such as medical research, energy technology, and other leading areas. China and the US need to work together in developing these new fields of research and manufacture.

How do you see leverage between China and the US changing over the next decade?
If the US government does not wake up and change its policies to support the US business sector and investment, it will continue to lose leverage to China. This is not good for either country. This is why I wrote the book; I want Americans and the west to wake up to this real challenge, and understand the importance of our changing our own policies so that our relationship with China will become more complementary instead of potentially antagonistic. China is looking to the US for enlightened leadership, and it is time that the US government delivered, not only for its own good, but for world stability.

What hidden threats do you see to China’s leadership?
Chinese state-owned enterprises may become too powerful and greedy, leaving too little for others. This may lead to the abuse of power, which would lead to instability. So far, the Chinese government has done well at keeping these abuses in check.

In conclusion, how would you say China has performed over the past thirty years?
The Chinese government has been very smart in the way it has utilized resources to gain benefit for China. It has shown that it is not a pushover like Japan was in the late 80s. It thinks in big terms, and has a clear strategy for what it wants to do, but it is willing to be flexible in what tactics it uses to achieve those goals. I plan to write more about this in my next book on Chinese strategems.

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.

Interfering In Another Country’s Internal Affairs

June 19th, 2008

“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.

China’s Telecom Shakeup And What It Means

May 28th, 2008

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.

Book Review: Making Globalization Work

March 26th, 2008

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.

Trouble in the West and Yuan Appreciation

March 24th, 2008

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.