The China Vortex

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.

Technorati Tags: Beijing, China, China's Communist Party, Chinese, congress, countryside, exports, Hu Jintao, Jiang Zemin, marketing, markets, news, party, People's Republic of China, rural, shanghai, US, village, wealth, Wen Jiabao, world

Cory Doctorow, open-source advocate and publisher of the Boingboing blog, spoke in Beijing yesterday on Sept. 12. The Boingboing blog was one of the first blogs on the Internet, and now reportedly has more than 600K subscribers. The venue for the event was the Beijing Bookworm bookclub/bookstore in Sanlitun. Many members of Beijing’s English-blogging digerati were there including Jeremy Goldkorn of danwei.org who served as host, William Moss of ImageThief and Kaiser Kuo of Ogilvy China Digital Watch.

Cory opened his talk by reading a short story he had written. The story was set in 2027, where a VC was trying to talk a woman into letting him invest 600K in her company, which created customized mobile devices from junk, which she would then sell to customers. It was a perfect case of mass customization; this time, the VC had become commoditized, he was now part of a venture capital franchise and was looking for places to put his money. Trouble was, he had more cash to invest than what he knew to do with. The woman complained saying that she had tried to get money from Sand Hill Road in 1999, but she was blown off because her business did not, as the VCs put it then, scale. Now the tables were turned, and the woman was able to buy her raw materials for very cheap prices, and taking advantage of new technology design software and equipment, was able to design unique devices very quickly. At the end of the story, the poor VC was reduced to asking if he could work a shift on her assembly line so that he could have one of the devices.

After the reading of the story, Cory proceeded to talk about the issue of DRM (digital rights management) and copyright. He related the story of how Google had recently stopped selling videos from Google Video, disabling the ability of people who had paid for downloads to watch videos they had already paid money to buy. For this reason, many had turned to the Google search engine to find unauthorized downloads of those same videos which they did not have to pay money to buy, and which they could play anytime they wanted. This was a perfect example of how screwed up the whole copyright issue had become; it encouraged unlawful behavior by punishing those who acted lawfully, but now changes forced people to adopt and use products which were not “lawful”.

He then proceeded to talk about the DMCA (Digital Millenium Copyright Act) takedown request, which was used to remove content from Internet websites. He recounted the experience of one publisher, the Science Fiction Writers Society, of which Cory is a member, which asked that all references to Isaac Asimov be removed from a document publishing website. As a result, even high school reading lists had to be removed.

All this was done without any need for proof of ownership to be submitted to a court, or seeking of an injunction. His point was that the copyright laws are much more strict on the Internet, and do not need “proof”. In a twisted way, this has encouraged the proliferation of online piracy because the laws are unreasonable and unenforceable.

He then talked about how changes in technology had helped the publishing industry as a whole. Whereas before, major book hits needed to sell 50,000 copies, now many books became profitable by selling only 3,000 books. Technology has lowered the threshold of costs and profitability for small niche publishers, which are now able to reach a wider audience through the Internet, and later through mobile search and applications.

When the US was founded, for the first hundred years of its history, the US pirated all books written by English authors, and refused to honor British copyright laws. Cory added that the American founding fathers knew what they were doing; they were not prepared to have US dollars go into the pockets of the English treasury. It was only Mark Twain, an American author, became famous, did Americans become interested in copyright laws.

Now, Cory noted, China wants to become an accepted member of WTO and the international business community, and is seeking to honor international copyright laws. He warned that it is important for China to think through what its own interests are so that the country’s own best interests are not sacrificed to globalization.

Cory made it very clear that he believes that the current copyright laws are formulated to favor current copyright owners, at the expense of consumers. He noted that the current US copyright law, introduced some thirty years ago, has gone through eleven revisions, and that literally no one, including judges, lawyers and politicians understands it completely.

If there was a theme to his discussion, it is that the Internet has opened up a whole new world for those who are savvy enough to use it intelligently, and use it to reach niche audiences and interest groups all over the world, without being restricted by geography and language.

It’s great to know that we are all tied into our own interest groups through the power of the Internet. If we are willing to reach out, we can find people with similiar interests without any restrictions at all.

It’s all in our hands now.

Andrew Lih has posted a photo of the event on his blog and Frank Yu has posted photos of the event on Flickr. Search for “cory doctorow beijing”

Updated 9/15/07: Danwei has posted a video of Cory’s talk.

Technorati Tags: Beijing, boingboing, bookworm, business, China, copyright, cory, digital, dmca, doctorow, global, google, language, management, open-source, rights, sanlitun, software, US, video, world, wto

Rebecca McKinnon has a very interesting post at her blog “Thomas Friedman gets the middle finger in the Middle Kingdom”, which was part of her coverage of the World Economic Forum at Dalian.

During a panel, Thomas Friedman, author of The World is Flat, accused China of being a “free-loader” while the US carried the heavy load of being a “global guardian”. I really love the term “global guardian”; what does it mean? Does it mean that the US is protecting the globe
from an attack by Mars? Or Jupiter? Or is it some unknown Deathstar which we don’t know about? Does it mean that Beijing is keeping this a secret from the rest of the world so that it won’t have to publicly acknowledge this enormous debt to Washington DC?

Who defines the role of “global guardian” and the role it involves? It takes a lot of hubris even to bring the phrase up. How would you react if your spouse calmly announced that he was the “global guardian of our world against evildoers who want to destroy our way of life”? I think you get the drift…

Then in the post,

Friedman also argued that it’s in China’s interest to work more directly with the U.S. on geopolitical issues because if the U.S. fails, then China will have to pick up the pieces. “If there is too little American power China will be forced to respond to that,” he said.

Now I get it, Beijing is supposed to change Washington DC’s diapers when it makes a mess! So now Beijing is going to be the “global diaper changer” when the “global guardian” has… well, nevermind.

Unfortunately for Friedman, Sha Zukang, told the audience that the Chinese government is not anxious to assume this new role.

Sha rejected the whole idea of “soft power,” calling it a “condescending approach” and “notion created by Western developed countries.” When it comes to world leadership, he said the world’s leaders should not be “self-proclaimed” - he said they should be elected. China, he said, would not self-proclaim itself a world leader, because China’s policy is always to treat other countries as “equals.”

Translation: “Let’s take responsibility for changing our own diapers, instead of expecting someone else to do it for us.”

Another very interesting viewpoint put forward by Clay Chandler of Fortune magazine is that now that China is a world power (I really love the way the words “world” and “global” are thrown around), Chinese politicians are still giving boring speeches. Of course, American politicians never give boring speeches; I’m sure that any intelligent reader of this article can recite all the speeches of George W. Bush and the Senate and House heads by heart. Yes, I too, am deeply disheartened that Beijing has not announced plans to stage a pre-emptive attack against Mars so that the “global guardian” can at least take a small rest and enjoy a cup at Starbucks.

Seriously though, Friedman’s criticism of Chinese policy is, at its very least, an acknowledgement that the US has not been able to carry all its burden by itself and needs help. In this light, it should be interpreted more as a plea for help and assistance for the global guardian than as a rebuke of current Chinese policy.

In the article, Rebecca recalls:

A couple years ago a Chinese academic who advises the Chinese government on foreign policy issues told me that the best way for China to build global power, good will, and international credibility over the long run is to mind its own business, avoid criticizing the U.S. whenever possible, sit back and let the U.S. destroy its own power and credibility by itself.

There is a strong argument to be made that it isn’t so much that China has risen quickly out of seemingly nowhere, but that China’s growth appears accelerated because of rapid American decline. Put it this way, if China is riding an up escalator, and the US is riding a down escalator, at some point they will pass each other at an intersection point.

The only question is “When?”

Now the question becomes whether it is a good thing to accelerate decline. Wall Street routinely rewards companies which make dramatic management changes when they are in decline. The thinking is that it is better to make dramatic, even wild, changes in the face of falling sales and market share. Share prices go up even before the results of those changes become apparent, based on the hope that the new management can make the changes necessary. Wall Street is hoping for a happy ending, even though most of the time it doesn’t work. Doing something, even if it is madly wrong, is better than doing nothing when confronted with a bad situation, according to Wall Street. Then, when the company has hit bottom, it can either be acquired or claw its way back to recovery.

My question is whether this same rule should be applied to countries and governments? If the US is in a state of systemic decline, is it better to accelerate the decline, so that the country can eventually climb out of the mess it is in? The problem with this approach is that when a company screws up, a few hundred thousand people lose their jobs.

The problem with a country, especially one as big and powerful as the US, is that no one knows what the bottom looks like.

For this reason, the slow erosion and decline of American power will continue.

Technorati Tags: Beijing, business, China, dalian, economic, forum, friedman, geopolitics, global, guardian, mckinnon, rebecca, sha, thomas, US, usa, world, zukang