This is China! blog

I recently finished reading Ubiquity: Why Catastrophes Happen, by Mark Buchanan, after which I thought of dragons. Ubiquity is about the sudden avalanches of events in the world that quickly cascade out of all proportion to reason. The book draws on the work of physicists who study the critical states of avalanches, forest fires, earthquakes, wars, stock market crises, scientific revolutions, epidemics, best selling books and just about any other aspect of nature (social or otherwise) in which mutually interactive elements in a system self-organize to create systems that are in disequilibrium. A “critical state” always seeks equilibrium through events that follow “power laws” in the distribution of their frequency and intensity. Events never know how big they actually will be until the proximate system reaches a threshold just below criticality, whereupon further interactions in the system create further stresses that will eventually be relieved through self-similar cascades of events.

Got all that?

Anyway, I thought about dragons after reading the book because Chinese culture reveres the wild beasts while in most of Western mythology we’ve killed the things off. Literary critical circles always had it that the West’s killing off its dragons represented the ascent of science and of the rational man in the world; while in the East dragons represented man’s relationship with nature in its most idyllic state, which, of course, is bullocks. China’s history of at least the last four hundred years has been one of deforestation, desertification, massive engineering projects that ignore environmental prerogatives, manic urbanization and rampant industrial pollution. So why is the Chinese dragon still alive and kicking?

And then I realized the dragon actually represents Chinese society itself, which has always been in a critical state of disequilibrium. Whether reading Chinese history or crossing the street, it’s plain to see the close-knit social networks that have been the foundation of stability and security for Chinese are also the driver of upheavals that are at the root of what has made Chinese society so enduring and dynamic.

The dragon, in other words, might have been sleeping; but history has not.

Tom Friedman recently wrote an Op-Ed piece in the New York Times in which he believed that James Chanos, the man who short-sold Enron and made a bundle, is wrong to bet against the bubbles that are developing in China. Friedman gives a litany of reasons why he believes China is a sure bet, including: a government that has the will and the resources to tackle any problem that comes society’s way; millions of gear-heads in colleges and universities; sea turtles educated abroad who are returning to China to lay their eggs; and the expansiveness of China geographically, allowing it to maintain its manufacturing base indefinitely.

I think I understand, though, why Chanos is willing to short-sell China – and attempt to make another bundle: the fundamentals on hand about China’s economy do not add up.

Malcolm Gladwell wrote an article in The New Yorker some years ago about how Enron was able to fool American regulators, customers, its own middle managers and employees that it was a sound, viable albeit hugely successful company, right up until the day before the whole thing collapsed (bringing down Arthur Anderson, the audit giant, as well).

Gladwell wrote:

“If things go wrong with a puzzle, identifying the culprit is easy: it’s the person who withheld information. Mysteries, though, are a lot murkier: sometimes the information we’ve been given is inadequate, and sometimes we aren’t very smart about making sense of what we’ve been given, and sometimes the question itself cannot be answered. Puzzles come to satisfying conclusions. Mysteries often don’t.”

Most economists and investors approach China as if it was a puzzle to be solved. Those of us who have lived and worked here long enough understand China is a mystery. Though auditors and regulators were flooded for years with information from and about Enron, they all got it wrong, because Enron was essentially opaque – a mystery. But because Enron had a lot of gear heads running and working in it, everyone thought it could do no wrong.

China’s leadership increasingly thinks the same of itself. Investors shouldn’t buy the propaganda.

Despite the hulabaloo about the internet (and publishing) censorship issues surrounding Google’s proffered gauntlet, China does provide many expats with a creative environment they would be hard-put to find in their home countries.

The New York Times had an uplifting China report that reminded me of one of the myriad reasons why I came to China and why I’ll be sticking around until the government kicks all us expats out: the energy of the Unknown. Essentially, China’ social and economic path is a great experiment never before tread on such a grand scale. Sure, the West, parts of Latin America and the Asian Tigers have all gone through their industrial revolutions. But never before have so many with such a long and wrenching history adopted such grand change within the lifetime of a single individual.

Such magnificent change is sure to throw off sparks: some of the sparks get in people’s eyes – especially those in post-”imperial” societies – and sets some on fire – the less fortunate citizens in the country that suffer from poverty or corruption or pollution. But for others, it is a time of life-altering events that may never be seen again in human history.

All this energy provides a creative frenzy that leaves one exhausted at the end of the day – praying for silence so one may be able to hear one’s own thoughts – and then up again the next day, knowing in your bones just how precious the Time is. All of us expats have one thing in common, at least: the freedom to leave China. That freedom gives us access to points of view and creative energies our compatriots in our home countries do not have.

The artists profiled in the NYT article know this, as well as many expats who are in China to make a life – not just a living. I know it, too. In my bones.

It has been a frustrating past year in China without direct access to Google  Photos and Youtube, with broken search-result links, disruptions in service, and the corruption of Google Docs, making the application suite all but unusable at times. And then they went and hacked Google customer  accounts.

I hadn’t expected to see the powers that be succumbing so soon to hubris on such a bald-facedly international scale. Perhaps with their victory a year ago in cowing Microsoft into submission, they calculated they could poke Google in the eye without Google so much as blinking. Recall that in the Fall of 2008 Microsoft came very close to remotely shutting down every version in China of its operating system that was illegally installed; that likely meant more than eighty percent of all the computers in China.

Now, China is dealing with a company with (professed) scruples: Google doesn’t like any of its customer accounts, it says, hacked. And indications are strong that the force and sophistication of the hack point at China’s national security apparatus. Like so many other aspects of its tentative entry into the larger world, China has clodded onstage like a hick with great muddy boots and passed gas into the microphone. No ballerina, is China, when it comes to delicate maneuvering in global affairs.

But then, the powers that be have never had to finesse their way domestically. They like it that way. Google’s response to the hack, it’s threat to pull out of the market, that it does indeed pull out of the Chinese-language market -all fit well in the central authority’s world view, which does not include sharing China with powerful, globe-straddling multi-nationals. This is guojinmintui - literally, “the state advances as the private sector recedes” – with international characteristics: the leadership is feeling out how much of the world it can co-opt before it completely closes in upon itself: culturally, with trade, on the internet. Satisfied with itself.

Google: Croesus and Solon.

During the global economic downturn I noticed a strong return of China  government officials representing economic development zones (EDZs) actively courting foreign direct investment. The couple years before that, though, and the same officials felt themselves in the cat-bird position, able to pick and choose investments as suited their mood.

Steve Dickson of the law firm Harris & Moure and one of the co-authors of the China Law Blog wrote an excellent column in the January 2010 edition of China Economic Review on the extent to which China will be able to unilaterally flex its newly found economic muscles in the world’s circus as the global ring master. He discusses how in 2009 China has been systematically snubbing its own laws (for instance, anti-monopoly and technology licensing) and is no longer courting foreign direct investment. Just as disconcerting is “the position that Chinese workers are available to do any job and that foreign workers have nothing to contribute to China. Of course, those of us laowai who have lived and worked in China for several years see a yawning chasm in that assessment. As Steve rightly observes, attempting to strong-arm the world to a nation’s own will has not worked according to plan as the US (in the ’70s and 2000′s), and Japan (in the ’80s) would have liked. Google’s response to having been hacked recently – presumably under government auspices – is a case in point: Google is sick and tired and not going to take it anymore.

Nevertheless, new foreign-invested entrants into China will find the investment membrane a bit thicker than in the past to penetrate; and current foreign ventures may find local authorities a bit more complacent than before, as their promotions are less stringently attached to the RMB-value of the investment projects they bring in.

Come the next economic downturn, though, Chinese policy will change 180-degrees – about face!, as they say in the Army – without a single administrator blushing.

Further reading: WSJ, NYT

I swear every day I take a drive around Suzhou or Shanghai I see at least one new construction project is starting up. If anything’s clear, China’s simply going to need more steel to keep up the pace of building. Typically, though, the biggest buyer has the upper hand in negotiations. Not so in the latest round of iron ore negotiations, in which Australian mining companies found Chinese buyers too annoying to deal with. The Australians said they’ll go on to set benchmark prices for this year’s iron ore with the Japanese, who are shrewd in their own right, and polite, to boot. Meanwhile, Chinese steel producers – of which there are many – need to organize their own thinking about a benchmark price to present to the Australians; and they need to separate politics from international business – difficult to do without a loss of face given the arrest of Rio Tinto employees in Shanghai last summer on spying charges (steel production costs are national secrets).

This particular case makes the point that international companies should not necessarily take at face value what Chinese companies insist on – as opposed to propose. And that Chinese companies have been frozen out of negotiations that have far-reaching global implications indicates the Chinese have not yet fathomed international norms of engagement: the belief that the same sort of bullying tactics that work domestically should be effective internationally has been proven wrong – and will be shown to be wrong again and again as the Chinese try to get international detente right.

The world, it seems, will continue to rule China for some time to come.

Further reading: FT

Steely-eyed

For years I’ve been going to the local post office in China to send off express letters; or, I’ve called a local private carrier to come to the office to pick up and deliver parcels of the same paperclip weights. Local providers, for the most part, have been quick and efficient handling my letter-sized packets. All that changed in October of last year with the Chinese government’s implementation of a law barring private companies – domestic and foreign – from competing with the State in the express letter market. Though it seems like a government plot against foreign companies, I see the move as more of guojinmintui; literally, “the state advances as the private sector recedes”.

The China supply chain and logistics magazine Chaina, based in Shanghai, this month carried my first column on China’s supply chain and logistics scene. This month, I talk about the impact the new law is having on Chinese private businesses and the large international parcel delivery services like UPS, FedEx and DHL. You’ll find the magazine here, with the article on page 16 of the online (and print) publication.

John Autheurs at the Financial Times does a brilliant job of putting into context just why he thinks the Chinese central authority will not be revaluing the RMB anytime soon. When the Chinese released their peg to the dollar in mid-2008 the Dollar, Korean Won and Brazilian Real all increased in value until, essentially, the start of the global economic downturn. Since then, the dollar has indeed devalued, but not so much that Chinese exporters have gained the same currency advantage they had when the dollar-peg had been released.

And, though Chinese manufacturing picked up ahead of American manufacturing in the fourth quarter of last year, American manufacturing has shown itself moving up the output curve to levels not seen since 2006. Factor in a stronger RMB relative to the Dollar of a year and a half ago, and its easy to see the Chinese have little incentive to remove the bit of advantage that keeps their exporters competitive.

Construction activity seems to have picked up in my neighborhood, with the start of three new apartment high-rise projects within a ten-minute walking distance. China’s domestic marketplace is picking up steam. Both Asian and Western economists are crowing the dawn of a new day has arrived in the world economy, with China having saved us all. China’s own Manufacturing PMI roseto 56.1 in December, up from 55.7 a month earlier – the second fastest rise yet recorded by a survey by HSBC and Markit Economics, started  in 2004.

Events, though, are moving ahead of the sort of re-structuring of trade, banking and financial institutions that set the stage for the cascade of economic failures of the last two years. As Martin Wolf recently wrote at the very end of last year:

“Finally, the financial system remains damaged. Not only does it still own vast quantities of the “toxic assets” its “talented” employees created, but the world is not addressing the structuralcauses of the crisis. In some ways, the oligopolistic banking system that has emerged from the crisis is riskier than the one that went into it.”

America’s Main Street needs to keep its head down and continue repairing its balance sheet by paying off all the debt it accumulated in the last decade. Companies invested in China need to rebuild their war chests as a high priority, too.

Remember: the eye of a hurricane has two walls.

Local Nanjing TV news recently  aired a report about an ambulance driver who, while transporting a patient to hospital the beginning of the new year, hit and killed a pregnant woman crossing the street. The driver was drunk.

During a recent Suzhou taxi ride I heard on the radio a ditty on a commercial that loosely translated, went, “Don’t drink then drive; don’t drink while driving!” (it sounded better in Chinese). I remarked to the taxi driver that was an unusual campaign. Though a necessary one, we both commiserated. 2009 in China was terrible for high-profile drunk driving accidents:during the Summer a drunk driver killed five people, injured four and damaged six cars when he was behind the wheel. in Nanjing. An SUV killed a 16-year-old girl a couple months later in Hangzhou. In Suzhou a drunk driver ploughed into a group of people, killing several, including a pregnant woman. And at the beginning of December this year, just kilometer from my home in Suzhou, a drunk driver broke through the safety barrier of a bridge and plunged into a canal running into Jingji Lake.

In 2008, China’s alcohol-related traffic accidents led to 18,371 deaths, 76,230 injuries, and a property loss of 250 million yuan (36.7 million U.S. dollars), according to Xinhua. There were 11,773 drunk driving deaths in 2008 in the United States in the same year. Americans own about 500 cars per 1000 people in the United States. Mainland Chinese own 20 cars per 1000 people. One would think that with America’s higher density of cars the USA would suffer more alcohol-related fatalities than China. The impression is quickly dispelled, though, when one gets driven around a Chinese city (the countryside is even more dangerous – or, at least, it feels that way).

China’s rapid urbanization and development of its middle class will still mean double-digit growth rates for the alcoholic beverage industry. Chinese are getting richer, and are able and willing like never before to indulge in more than just a tipple. However, with police and judiciary crackdowns more prevalent in cities along the east coast, suppliers and distributors will have to seek continued profits in China’s less sophisticated interior: restrictions on alcohol consumption and DWIs are just not as stringent as on the eastern seaboard.

Clearly, four thousand years of history has not prepared China for a middle class car culture.