CHINA RISING

Panel Summary
Evolving families, Dow deals, evolving laws, wariness, and things to watch for

By David Scharff

Having recently taught in China and researched the interfaces between Western psychotherapy and Chinese cultural practices, David led off. He sketched the way Chinese culture still takes its orientation from Confucian loyalty to family and the collective, in contrast to our Western individualism. However, with the widespread trauma of the Cultural Revolution from 1966-1976, the shift to the one-child policy and therefore radically new family structure, rapid economic development, and a new kind of Chinese individualism, even the Chinese do not have their feet on the ground about their identities or how they construct marriages.

Tony reported on his career at the Dow Chemical Company, where he retired as Executive VP and Vice-Chairman of the board of directors. His responsibilities included business development in Asia/Pacific resulting in frequent trips to China and Hong Kong. He reported on his efforts to negotiate a $3.5 billion joint venture (JV) with a Chinese state-owned enterprise as an example of the issues that arise when multinational companies pursue foreign direct investment in this country. Among them: a) agreeing on the value of each partner’s contributions to the JV, b) protecting intellectual and patent property, c) JV dividend policy, and repatriation of these funds d) governance policy including staffing the JV and resolving deadlocks at the supervisory board level. These issues, added to an endemic problem of bribes and political pay offs in the country’s business culture, make China a high risk and generally unprofitable investment environment for Western multinationals.

Looking forward, Tony concluded that the Chinese must liberalize their state directives governing foreign investment and open up their major markets to Western competition if they hope to attract sufficient foreign investment to sustain their GDP growth objectives.

Jack’s legal career brought him to China first in the 1970s, when China seemed almost medieval, and recently, in the full flush of economic boom. What he now sees is that China has rules, but not the rule of law. China, as in its Confucian past, is based on adherence to rulers — the emperor in the past and today the Party — while in the US the rule of law is supreme and the government is subject to law. This cultural and historic difference makes it difficult for US interests to understand the Chinese legal system.

That said, in the 40-year interval since Jack’s first visit to China, China has made surprising progress in developing finance, government regulation and planning, and, with controlled free enterprise, economic development. Jack plans to continue to represent Chinese companies dealing with the United States.

Art described the difficulties he encountered over many years doing business in China, a country, he pointed out that in the 15th Century led the world in technology transfer. He finds that the Chinese are still difficult to deal with and wariness is a good stance in regard to doing business there. They have a major developmental problem as they now need to shift from emphasizing capital improvements to growing a domestic consumer economy. Much of their business expertise comes from Taiwan-Chinese businessmen, as they still work to catch up with the rest of the world.

Bill, outlining a number of factors in flux that will be worth watching, has summarized his remarks below. The questions from the audience were lively.

We noted that we failed to draw on a great deal of untapped expertise that also resides in our class.

Panel notes: A Ticklish Chinese Souffle
By Bill Stork

Bill is a member of the Class Council and has worked as an academic for over twenty years in Hong Kong, where he was president of the Yale Club for seven years. Bill came to Hong Kong from Pasadena, and was president for three years of the Yale Club of Southern California. He was elected to the AYA’s Board of Governors and was subsequently twice elected Secretary of the Board.

In 1999, Yale asked Bill to Chair the Yale Assembly on “The Internationalization of Yale,” and then in 2001, he co-chaired Yale 300, Yale’s four-day Tercentennial event in Hong Kong for Yale alumni in Asia. In 2005 he produced, promoted, and co-chaired the Class of ’62 Mini-Reunion in Hong Kong. More recently, since the inception of the Yale Day of Service, Bill has served as its Regional Director for Asia.

A Fulbright scholar to India, an East-West Center Scholar to the East Asia Institute in Hawaii, and a Visiting Scholar to Cambridge University, Bill continues to serve as a fellow of Timothy Dwight College. He lives in Hong Kong with his lovely wife Jasmine and Wai-Wai the Wonder Dog.

 

Unlike those that have preceded me, I am not a practitioner in China, but rather an academic who has lived on the periphery, in Hong Kong, for over twenty years.

When first I heard that the panel’s topic was to be ‘China rising’ I had an immediate visual image of a soufflé rising. Not a cheese soufflé but a Chinese soufflé with a little red flag on it, and with Julia Child watching, arms folded: will it continue to rise or will it fall? Will the China bubble continue to rise, or burst?

Rather than answer that question directly, I would prefer to share some ‘indicators’ so that audience members can come to their own conclusions now and in the future.

Pride and arrogance. Let me comment initially on what I perceive as the main features of the “Chinese DNA” First, that China has experienced the longest continuous civilization has led to a pride, a pride that sometimes translates into ‘entitlement’ and the perception of a type of Chinese arrogance. Previous speakers have commented on this, and on the conflict that arises when that attitude encounters our own western ‘arrogance’ in discussions or negotiations, whether business or diplomatic. Often this is seen Chinese willingness to wait for ‘their’ solution, and unwillingness to compromise.

Getting rich. The second gene trait I note is an overweening Chinese desire to be individually rich. In the past the path to wealth was through education in preparation for exams, which, when passed, would gain for the individual the rank of scholar-official. This commonly assured wealth for the individual, and by extension, the family. However, now it is not education but party standing that provides that official iron rice bowl.

Let me share an example of how official status relates to wealth acquisition. I have a friend who does business in Fujian province, and for each of the exports there is a party official who ‘chops’ (puts on his official seal) and receives 20 RMB per chop on each page of each manifest. There is no examination of the cargo nor is the manifest even read. It is just chopped. A good income!

“Kill the monkey to warn the chickens.”

You may remember recently the horrific train accident in Wuhan. As part of China’s expansive growth there had been sustained support for infrastructure development, and the powerful position of the railroad chief was such that massive funds were diverted to the over-building of a high speed railway network. Yet it seems that he was more intent on collecting bribes than on construction supervision. His position was strong enough for him to impose a cover-up for over three weeks, but following the realization of the extensive links of corruption, the party, disgraced by his actions, arrested and executed him.

Recently in the news has been the case of Bo Xilai, cadre and princeling, tipped to become a member of the Politburo, who charismatically was building his reputation on a cult of personality (rather than the accepted cult of party correctness). He too was brought down by the billions he had received in bribes over the years.

Corruption is a major problem in China, and these two cases were prominently highlighted by the government to set an example. The Chinese have an expression for this, “kill the monkey to warn the chickens”.

Tips in advance. The U.S. and China are widely separated by language, culture, and distance – and there is great chance for misunderstanding. This leads to one other feature in China that needs awareness.

When I’m in the USA it is normal for me to give gratuities to a hotel bell captain or to a restaurant server. In China, however, the ‘lai see’ are gratuities to having a ‘relationship,’ whether business or family or friend. The gifting is done in the expectation of continuing to develop that relationship. In business, it is a ‘tip’ in advance, in expectation of future business. This builds guanxi, a bond, not unlike log-rolling or mutual back-scratching. However, in China, this ‘gifting’ is taken to another level! When there are photos in the press, notice the Rolexes on the wrist of party officials, worth more than their annual salary. Wine, becoming popular in China, has seen a big marked for Latour and Lafite, but merchants note that 80% are bought as gifts.

This pattern of lai see and guanxi has long been a practice in China, and even previous dynasties have been unsuccessful in dealing with this form of bribery and corruption. Yet, as we have seen from previous speakers, this is part of the ‘cost’ of doing business, one that must be reckoned with.

Income inequality. So returning to the quest for wealth, if one is not a party official, how does one gain it? The coastal areas of China are the major factory locations. Families in the mid-China village/rural interior send their young women, wives and sisters, there to work and to send the earnings home. Workers are allowed to return home once a year, usually at Chinese New Year. This also means that the fathers and children are left in the villages, with a commiserate impact on the social unit, on the education of the young and on health and hygiene.

The top 660 US officials are worth $7.5 billion; the top 70 Chinese officials are worth $90 billion.

Furthermore, the resulting realization of the disparity in income has become an issue. The GINI coefficient of income inequality shows an annual change in China since 1990s of over 1.5%. While one-
third of the population lives on less than US$2 per day, the privileged elite has become very rich. (The richest 70 members of the National People’s Congress made US$12 billion last year bringing their net worth to US$90 billion; by contrast, the top 660 US power brokers – the President, Congress, and members of the Supreme Court are worth a meager US$7.5 billion).

How else to gain wealth? Take shortcuts. You’ve heard about the tainted milk issue, but regularly there are other violations as producers take short-cuts in making their goods (or perhaps we should call them “bads”!). Recently hiking near a river in San Sihui, we noted that the soft drink and Pabst bottlers there were forced to close due to too many chemicals that were dumped in river upstream. Fake goods; fake foods.

Yet being “rich” means that you have to show off your wealth to others. Appearances are very important. This makes necessary a car purchase and property purchase which leads in turn to more congestion and the continuing threat of a property bubble. And no expense for #1 son is too great. Yes, “son.” The one-child policy and pre-birth screening for gender has rapidly led to a gender imbalance in China. Where will wives come from later for these spoiled ‘little emperors’? Will there be reconsideration of that ‘one-child’ policy?

Other short-cut sources for wealth include embezzlement, with near daily reports of arrests on the Chinese mainland. But how few of these are getting reported, considering the size of the total population. (A friend who works in Macau, where gambling is legal, reports arrivals of mainlanders with suitcases of yuan banknotes. Gambling is an approved way of improving one’s wealth and is also an interesting approach to money laundering!)

In addition to the income gap and the gender imbalance there are other social disparities. The most troubling of these are with the ethnic minorities and their focus on preservation of their culture and their religion. Most notable is Tibet, yet there are other groups as well, such as the Muslim Uighurs, that threaten central hegemony.

Trends to watch. How does this all play out on a large scale?

First, domestic tranquility is paramount.
We have touched on the socioeconomics of the wealth gap.
We note the geographical divisions between the affluent coastal areas and the central rural areas.
We noted the political personality-based cadres in a one-party system, and
We can add the government’s concern with the threat of a ‘Jasmine Revolution.’

Second, there are brief but recurrent calls for reform, most notably from Premier Wen Jibao. But there are powerful political cliques, and some analysts have even seen the Bo Xilai case as a warning to PLA. (It is often not realized, but the army is controlled by the party, not by the national government, though this is a reform often cited as needful).

Third, we will continue to see a strong assertion of traditional territorial claims, though there was some back-down with dealings with ASEAN when Hilary Clinton cautioned China over rights to the South China Sea, where there are disputed islands (also in the Sea of Japan and claims vs. India, Burma, Russia, Vietnam, etc.).

Fourth, China will continue to work to push Taiwan towards the Hong Kong model of “one country, two systems,” and likewise will continue to treat Hong Kong in such an acceptable manner.

Essentially, stability is paramount: no challenges, either foreign or domestic.

We can see the path where China is heading by just looking at changes over the last three years. In 2009, China’s economy was smaller than Japan’s. Now, with China’s GDP still growing, though more slowly, it will not be long before China will surpass USA to become the world’s largest economy. Will it continue to rise, or will the bubble burst?

Will the yuan become a universal currency?

Let me close with nine areas/themes to watch as the party leadership struggles to maintain stability. Here are some indicators for you to watch for:

  1. China faces the need to rebalance the economy, and to replace the model that has worked so well for the past 30 years. This will require more innovation, greater consumer spending, and less reliance on exports.
  2. The government will need to address the following problems, some outlined earlier:
    — Water shortage, and other environmental problems
    — Corruption – dealing with this is a critical government priority
    — Income inequality. If the economic growth from 1990 to 2008 had been achieved with no change in GINI index, 110 million people would be lifted out of poverty. There is a need for consumption led growth.
    — Food safety
    — The inability of urban youth to find affordable housing
    — Local governments (and their banks) are piling up bad loan debt
    — Health-care reform.
  3. Rail and other infrastructure need to be a continuing focus. The earlier stimulus package worked, but perhaps there was too much stimulation from the previous infrastructure binge?
  4. China will need to determine how to choose an effective model for the economy, and to carefully deal with struggle between the private sector and state-owned enterprises. SOEs continue to hold impressive political power, so watch for the future direction of state capitalism vs local entrepreneurs.
  5. Energy and the battle for resources – coal, oil, rare- earth metals.
  6. Consumerism: how to restrain or retrain the Chinese big spenders.
  7. The Internet….party control of ‘free speech’ (dissent) is a real quandary for Beijing. The explosive growth of weibo, China’s Twitter-equivalent, was in part what overcame the attempted cover-up in the Wuhan railway disaster.
  8. The rise of the renminbi and its future convertibility; will the yuan become a universal currency? Will China take on a more global economic role, such as offering support for Eurozone (and other international) problems?
  9. China’s role in world affairs, and the rapid extension of China’s global influence, especially in Africa. How will it attempt to maintain dominance in ASEAN; how will territorial disputes in the Sea of Japan and in the South China Sea work out?
  10. Watch the progress of the Bo Xilai case: will he be summarily sentenced, or will there be a transparent legal case presented reflecting a growing desire to replace the cult of personality with the rule of law?
  11. This is the year for the change of leadership in China, with seven of the nine positions in the Politburo due to change. Will the balance between the two major cliques, the Shanghai group and that of the inland-SOE faction be maintained? This will tell us much about future direction.

We, the panel, will continue to watch, as Julia Child did hers, this rising Chinese soufflé.

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