Merry Xmas, Happy Hanukah & Happy New Year!

I hope all my loyal readers and all my new readers have a wonderful Holiday Season!

Upcoming stories include an outline of China's plan to require foreign workers to contribute to Chinese pension schemes while, at the same time, making sure that virtually no foreigners can either gain eligibility or actually collect Chinese pensions. More Contradictions Among the Masses (masses of rules & regs, not the masses of Laobaixing)!

Deja Hu

In a news story published November 22, 2011, by Xinhua, China’s state-owned news service (or, for those who prefer their labels in English, the New China News Agency), China’s President, Hu Jintao called on China’s writers and artists to redouble their efforts to produce great works. Nothing wrong with that; great art and great literature are both to be welcomed. As Xinhua wrote:

“Great times call for great writers and artists, and the people expect great literary and artistic works, President Hu Jintao said Tuesday while speaking to an audience of 3,300 who represent the country’s literary and art circles.

Xinhua continued:

In his speech, the president called on Chinese writers and artists to persist in the principles of “Serve the People and Serve Socialism,” “Let All Flowers Bloom Together” and “Let Hundreds of Schools Contend.”

The thoughts and sentiments are certainly welcome but, as Shakespeare wrote so long ago, “To sleep, perchance to Dream; Ay, there's the rub . . .” The words themselves evoke another time in Chinese history and another outcome altogether. Here’s the story:

In late 1956, seven years after the founding of the Peoples Republic of China, Mao Zedong began one of the more infamous of the many mass campaigns in modern Chinese history up to that point. In a very well-known speech titled, “On the Correct Handling of the Contradictions Among the Masses”, Mao said “our society cannot back down, it can only progress . . . criticism of the bureaucracy is pushing the government towards the better.” Although it would be followed by the Great Leap Forward and mass starvation (1958-61) and that, in turn, by the Cultural Revolution (1966-76), the Hundred Flowers Campaign is still remembered by many. Even though it’s core period lasted only for approximately six weeks, it remains a source of controversy and disagreement. The operative slogan of the day was, “Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting progress in the arts and sciences and a flourishing socialist culture in our land.” There was a consequent outpouring of ideas and criticism about the operations of the new Chinese state. Then it came to crashing halt. Those most outspoken were sent off to labor camps or prison. Their response to Mao’s exhortations to be open and let the criticism flow, was turned on them in a sort of political jujitsu. Historians disagree about whether Mao planned the whole campaign in order to entice his critics to come into the open, thereby leaving them vulnerable, or whether he began with the best of intentions only to later fear the resulting waves of criticism. Either way, a current-day reference to letting many flowers bloom and hundreds of schools of thought contend is likely to prod many here to hide under their covers in an effort to avoid the intellectual spotlight.

One hopes that this is not what Hu Jintao intended.

A Contradiction of Style And Custom

I climbed out of my figurative Hermit’s Cave today and attended an American Chamber of Commerce in China meeting on “US China Relations: The View from Washington”. The speakers were Michael E. Brown, Dean of the Elliott School of International Affairs and Professor of Political Science and International Affairs; and Doug Guthrie, Dean of the School of Business and Professor of Management and International Business, The George Washington University. While the talk was interesting, its not what this blog post is about. During the Q & A that inevitably follows such an event, the subject of Chinese investment in the U.S. was raised. It is, for a number of reasons, common knowledge in China, at least amongst Chinese, that the U.S. is inhospitable to Chinese direct investment in America. Of course, the American view is quite the opposite -- and the data bears this out. Nevertheless, think Huawei Technologies Co. Ltd. and it’s cold reception both by Congress and the Washington punditry. You can also look at CNOOC and its abortive run at acquiring UNOCAL in 2005. At the time, CNOOC CEO Fu Chengyu was originally very confident that they would succeed because they "were following a system that was set up by Western leading companies”. I’m not sure what that means -- because they hired Goldman Sachs? Because they thought the had the system wired? Who knows. One of the audience mentioned that there are actually an increasing number of Chinese direct investment transactions being consummated in the U.S. and it was mentioned that the failures often can be blamed on Chinese investors going about things in the wrong way. I’m not sure what the speaker meant by this and didn’t have a chance to ask, but I’ve certainly seen these missteps in action. That is the topic of the moment here at Beijing Eye.

There is a basic contradiction in both style and custom in how many U.S. business people approach the Chinese market and how their Chinese counterparts approach the U.S. market. Of course, the first thing western business people do is to try to figure out whether there is a strategic reason to come to China. As the answer is, many times, a resounding “Yes!”, they take the next steps. The “next steps”, for opening China as much as opening a new branch in Cleveland, is to find out what the laws and regulations are. That means, inevitably, that they must hire lawyers and accountants. Once armed with the legal and financial structure, they do their “due diligence”, meaning that gather facts and try to anticipate what business risks they’ll face. If it works at home this way, it should be doubly important in a place like China, wouldn’t you think? Its certainly the way we’re taught to do things in B-School!

On the other hand, Chinese business people coming to the U.S. take a different tack. It should be no surprise that they act as they would at home in Beijing, Shanghai, Houhot, or Chengdu. First off, they’ll try to find a fixer, someone whom they trust who can take them around to meet people. Then they meet people, most especially they long to meet the local mayor, the governor, or any suitable (and available) public official -- the higher, the better! Often, they jump into deals before doing any substantial due diligence and without giving too much thought to how to structure a deal. They’ll hire advisory firms with big names, not because they are the right advisors or because of past successes with similar deals, but largely due to the Face such an association brings them. Sort of like buying a BMW because it has a famous logo and a high price tag.

I’m not suggesting that success in China is all about who you have a relationship with, altho it’s extremely important (and Guanxi doesn’t come from a few dinners with a visiting CEO, either). You have to also structure things properly and due all the requisite due diligence. But if you ignore relationship building, power alliances, and related issues, you will suffer eventually. By the same token, in the U.S., if you rely on relationships with Big Names in government (or big names generally, for that matter) without having a business model and a business plan that are well thought out and carefully crafted, you’re inviting an eventual shipwreck. No amount of pictures of your CEO and Governor What’s-His-Name will help at all.

And so it goes (with apologies to Kurt Vonnegut).

After Taiwan, Sell Israel & Why Not Canada?

In 1998, when I ran the American Chamber of Commerce in China (no relation to the U.S. Chamber of Commerce in Washington), we had a dinner that had about ten or twelve speakers, a mix of Senators, Congressmen, and Cabinet Secretaries. Sen. Jay Rockefeller, one of the last to speak that night, started his remarks by quoting “Tip” O’Neill, the Speaker of the House from 1977-87. He said, “ It has come to that point in the evening where everything that needs to be said has been said, but not everyone has had a chance to say it.” A great line that I’ve borrowed before. So now its my turn to sound off about an Op-Ed piece published by the New York Times a few weeks ago.

The New York Times, my favorite newspaper, does a lot of things right. But it still makes some big blunders. In my humble opinion, the Editorial Pages are a weak spot. Too little quality control. Too little discipline (poorly thought out columns, based -- all too often -- on misinformation or even a certain lazy ignorance that still results in opinions that the Times willingly publishes). A case in point is the opinion piece published on November 10th, “To Save Our Economy, Ditch Taiwan”, by a guy named Paul Kane. That’s right, Kane advocates that the U.S. government sell Taiwan to the Peoples Republic of China in exchange for that portion of U.S. debt held by China, some US$1.15 trillion. In case you were wondering, that works out to about US$50 per person. Taiwanese aren’t cheap. A potential complication to this idiotic and shortsighted proposal is that Taiwan itself is the seventh largest sovereign U.S. debt holder. I guess Beijing would inherit that debt as part of the sale. Its not, literally, a sale, but its close enough.

Kane makes the case that military alliances are SOOOOO 1960’s that looking at the world in any way other than in terms of economics is just silly (I guess that’s why we’ve got Marines in Australia now, huh?). He says that the Chinese leadership would be startled by such a move by the U.S. Of all the assertions in his article, this is the only one that seems correct. Beijing would certainly be startled; then they would close the big red doors of Zhongnanhai so they could laugh in private. Then they would politely reject the deal. Why? Because they think Taiwan will “return home" on its own”, especially now that Chen Shui Bian is so discredited and the Guomendong government of Ma Yingjeou are shuttling back and forth from Taipei to Beijing. Why buy something at an inflated price when you can probably get it for free with a little patience? Whatever else one can say about the government of China (and there’s quite a bit), they are not stupid, not impatient, nor are they insensitive to Chinese public opinion. If they relinquished all of their U.S. Treasuries, the domestic criticism would be almost overwhelming. There’s nothing in this deal for the Chinese.

But that’s not at the crux of Kane’s fantasy. He proposes this as a fix-it solution for the U.S. In the unlikely prospect that this would be successful, it would wipe out almost 7% of U.S. Government debt. Quite obviously, that still leaves behind more than 90% of the debt burden. To suggest that the U.S. economy would see lasting benefit is, to say the least, mistaken. U.S economic security would not see any lasting benefit. Besides that, the image of the U.S. as a reliable and consistent ally would take a severe beating. Or not; more likely, it would just completely go away. Sort of like what would happen if the Obama turned over the entire State Dept. to Goldman Sachs. Most people would look at this idiocy as a shameful and selfish act of national desperation. After Taiwan, the U.S. could sell Israel to the Saudis, then Saudi Arabia itself to the Iranians. Would Putin be interested in Canada? Worth a shot, maybe. After all, what are friends for?

Would it help President Obama get re-elected? My guess is that it would backfire badly. Sort of like promising to appoint Ron Paul as Secretary of State, Rand Paul as Attorney General and Grover Norquist as Treasury Secretary.

It all sort of makes me wonder why Kane wrote his Op-Ed piece in the first place. He says, in his own defense, that it was meant as a satirical approach to the problems facing the United States. Kind of hard to believe, in that satire is generally identifiable as such, at least by the end of an article. He says it was meant to be provocative. He’s succeeded, of course. My guess is that he’d like to be seen as an authority on foreign and/or domestic policy (he tries, after all, to meld both with a simple -- or simple-minded -- “one size fits all” solution). If that was an aim, I think he’s damaged his own cause. Maybe his brain got a bit rattled as a Marine in Iraq. Or he’s spent too much time at Harvard. He may be eligible for the Larry Summers Award, given annually (by me) to the author of a public policy proposal most likely to have been designed with total disregard for the real world.

To be taken seriously, you have to do something (or write something) that’s worth taking seriously. “. . . Ditch Taiwan” is not deserving of anything except ridicule. Let’s hope no one takes it or its author seriously.

Chinese Road Rage

Road rage is all the rage in China these days. Of course, this is not a phenomena that is limited to China; virtually anywhere there are cars and traffic, road rage pops up. In China, it comes with rather quirky trappings.

The press, not just in China, was peppered in mid-September with stories about Li Tianyi, 15, the son of the acclaimed singer Li Shuangjiang, who accosted a couple in Beijing over a traffic-induced slight. The younger Li, hopped out of his unregistered souped-up BMW and with a friend (himself driving an Army-registered Audi) proceeded to beat the crap out of the male half of the couple. He warned bystanders not to call the police. Nevertheless, he was arrested and given a years jail time. His father apologized quite profusely and publicly.

Some time ago, Li Qiming, the son of a police chief in Hebei province hit and killed a young woman while driving on a university campus. He then attempted to bully his way past security guards shouting “My father is Li Gang.”

In a less reported incident, this time in Anhui province, a young male driver was attempting to parallel park on a commercial street. On the sidewalk next to the road was a sign advertising the the adjacent shop. The driver managed to flatten the sign. To his credit, at least he was trying to actual parallel park; many Chinese drivers just stop as near to the curb as they can, altho far from parallel, and block traffic until they finish their business. At any rate, in this case, the shop keeper took exception to the destruction of his sign and came out of his shop to give the driver a piece of his mind. Things, predictably, escalated. The driver objected to the shopkeeper's objections, entered the store and trashed the place, ripping the phone out of the wall, smashing anything within reach. The shopkeeper's wife and baby were collateral damage, although, fortunately, not fatally. By this time a crowd had gathered, surrounding the store. If the driver had fantasies of a blitzkrieg and quick escape, they were firmly dashed. Someone called the police, who arrived shortly after. They took the young driver into custody.

That's when things began to get interesting, as the crowd departed from the usual passive pattern. This wasn’t just an afternoon’s entertainment. Apparently fearing that the driver would get off without punishment, the crowd took matters into their own hands. The estimated 2,000 people on the sidewalk and street surrounded the police car and refused to allow the cops to leave the scene with the young driver. They forced the cop and culprit out of the car and made them stand side-by-side next to the police car. Then, armed with the latest cell phones, they took pictures of the driver and the cop, as if to forever link the two. If the kid got off, they’d know who to blame. That was the idea, anyway.

The moral of the story, for me, is that the average people of China are getting more than fed up with the atmosphere of lawlessness, privilege and arrogance that is so much a part of some segments of Chinese society. Road Rage, Chinese style, is merely a symptom. It will be interesting to see if anything changes.

Welcome To Beijing, Mr. Ambassador

Ambassador Gary Locke, America’s first Chinese-American Governor and America’s Tenth Ambassador to China (and only Chinese-American to hold the post) was the guest of honor at a lunch today, hosted by the American Chamber of Commerce in China and the US-China Business Council. He’s had an interesting and rather unusual time of it so far, in ways that were also, probably, unexpected.

First, some background:

When I was a young boy -- maybe 10 or 11 years old -- I had a chance encounter with one of the many members of the Rockefeller family that lived in suburban New York. What I remember about that glimpse was that my father used it as a “teachable moment” about values. Strikingly, here was a member of one of America’s then richest families, driving down the road in a well-worn Ford station-wagon; one of those ubiquitous buggies with the big round taillights, mini fins canted up and out at a forty-five degree angle, and fake woodgrain on the side. A Woodie, as we used to call them but, of course, just painted steel that looked, from 30 feet away, like wood. Unassuming and rather modest for someone so unaccountably rich.

So: what does that have to do with welcoming a new American Ambassador to Beijing?

One of the most curious subtexts of Ambassador Gary Locke’s short time here in the Peoples’ Paradise is that he has come in for a bit of chatter from Baidu posters and the Sina Weibo masses for some incongruous, at least for many Chinese, Ambo-sightings. This has nothing to do with Amb. Locke’s speeches. It has everything to do with something more akin to his political body language.

The first sighting was a photo of the new ambassador on his departure from Seattle-Tacoma Int’l Airport, on his way to Beijing. He did something totally unremarkable for most Americans. He bought a Starbucks coffee -- it was Seattle, after all -- while his backpack was slung over his shoulder. My reaction was: well, you have to put your pack over your shoulder so you can use your hands to manage your coffee. The Chinese reaction was completely different: “He bought his own coffee? Why? What’s with that? And he carried his own bag?”

More recently, he’s apparently been scouted tooling around Beijing on a bicycle, shocking the locals even more.

All of this is quintessentially American. At least that part of the American character that most Americans are proud of. Its like a Rockefeller tooling around suburban New York in an everyman’s aging Ford station wagon. And why not? For many Chinese that I’ve heard from, this is a very refreshing thing. A “Senior Official” (and Beijing is overflowing with them) who sees himself as a normal human being (albeit with a pretty interesting and high ranking job)? Bravo!

For many other Chinese, its a sign of America’s inescapable and inevitable decline. High ranking officials, they believe, should let no opportunity escape to remind everyone that they are: powerful; not like you and I; special; held to a different standard; and so on. If you can, and don’t, there must be something wrong. But there’s nothing wrong with Amb. Locke. I’m sure his State Department armored limo is in great condition. He’s just self aware enough to know who he is. Who he really is. In the U.S., no matter the reality, people with either power or money or both want to be seen as being “just everyday folks” or, as the Chinese would say “laobaixing (老百姓)”. Its an eloquent statement, and a welcome one.

So, Mr. Ambassador: Welcome to Beijing!

And Thank You!

What's Next, Redux.

It's Not Fun Being Right

I posted this article a while ago; February 1st 2009, to be exact. While I may have missed a few of the details, overall I think I was pretty much spot-on. The social fabric of Europe is getting frayed, as is that of the U.S. (think of the Tea Party movement as a sign of things to come) and, of course, the "Arab Spring" wasn't a phrase that would have meant too much two and a half years ago. There's much more of this on the way, I'm afraid.

What's Next? (February 1, 2009)

As the global economic order collapses, most of the attention has been, for obvious reasons, on economics. After all, this is, first and foremost, an economic problem. We've all, those paying attention, become steeped in the vocabulary of economics and the financial world: credit-default swaps, hedge funds, yield curves, Treasury bond pricing, currency valuation, trade imbalances, savings rates (or lack thereof). For me, it has always been useful to try to look at problems from a completely different perspective. Sometimes its an empty and fruitless exercise -- interesting, perhaps -- but ultimately, providing no new insight. At other times, a whole new light can be shone on something and we see it in a new way.

The economic collapse we're witnessing is so complex and so multi-faceted & nuanced, that it gives us all kinds of different angles to watch from. One very popular Scenic Viewing Spot, a great Photo Op, you might say, is to look at the current situation and compare it to the Great Depression of 1929-1939 (or so). Certainly, there's a lot we can learn from the mistakes of the past that will help policy makers deal with the dilemmas of today. Its not the same, of course; it never is. But there are enough similarities, and the mistakes of the 1930's were so glaringly obvious, that the same mistakes won't be repeated. In China, in the U.S., in Europe, the media (and policy makers meeting rooms, you can bet) are filled with analysis and studies of lessons to be learned. There's been at least one thing that's been largely missing from the discussion, altho I'd bet that, at least in Zhongnanhai, the Powers That Be have been paying close attention. The media, to be sure (at least from my reading) hasn't woken up to the problem yet. What is it? Its the issue of what's next. What happens in the aftermath of an economic collapse of this magnitude? Again, a look back to the Great Depression is useful. It doesn't mean that the same things will happen; they never do. But similar things could happen, even if in different ways and in different places. Here's what I mean: the biggest & most consequential result of the 1929-1933 economic collapse was not economic, altho that was bad enough. It was political. Europe saw a turn from liberal democracy towards fascism, resulting in the rise to power of the National Socialists (who weren't really socialist at all) in Germany and the National Fascists in Italy. In Asia, Japan turned to the militarism that was latent in Japanese culture and politics. And, of course, the consequence of this broad political shift was World War Two. I'm not suggesting that the current problems will lead to another big war. Not at all. What I'm suggesting is that a broad shift downward in the economic prospects of hundreds of millions of people, if not billions, is likely to have political repercussions.

Already we have seen the Icelandic government collapse. Russians are restive, as are people in other pockets, both in Europe and in China. The U.S. has seen a peaceful, albeit dramatic, political change. With apologies to Elizabeth Kubler-Ross, I'd like to suggest that her Five Stages of Grief (Denial, Anger, Bargaining, Psychological Depression, and Acceptance) have a sociological and political application. First off, though, some caveats. These stages are not predictive, meaning they aren't inevitable. They may come in a rather random order. While, for individuals, there is a sequence, the edges are rather fuzzy (one can be alternate, for instance, between denial and anger). lastly, people don't necessarily go thru all the stages. Kubler-Ross maintained that people always experienced at least two stages, altho which two could vary. This is, in my opinion, even more true with large groups of people. Certainly, some of these stages of grief are already apparent. Who would today suggest that as recently as last summer, denial was not common? Americans were characterized as a "nation of whiners" by former Senator Phil Gramm. John McCain famously said the American economy was "fundamentally sound". If that isn't denial, the meaning is lost on me.

While some are still in denial, you can see evidence of bargaining, particularly in the halls of government. Then again, that's their job. In the U.S., at least, anger has been apparent, but it hasn't been a broad motivating factor. In other regions, it has been more visible. In China, it has sprouted up but has not been a broadly motivating factor for most of the population. For most of the world, the situation is in its early stages. There is economic pain, to be sure, but it is still characterized by early stage shock and denial. What is to be feared is the anger that may come as people realize their prospects & wealth may have been forever altered. If the world's government leaders, with their central bankers & finance ministers, are successful in limiting the disintegration that is potentially right around the corner, the dragon of political and social disruption will go back in its lair to hibernate for another eon. That's a big "if".

Earthquake!

As you may have heard by now, there was another big earthquake in China, this time just west of the area hit by the Sichuan Earthquake that did so much damage. This time, it was Qinghai. This story gets posted on this blog for a number of reasons. I've been going to Qinghai regularly as a board member of the Surmang & Amara Foundations. The Surmang Clinic is in Yushu Prefecture, the very area at the epicenter of this latest major quake. Our Beijing office is in touch with the clinic in Surmang and with representatives in Yushu City, also known by its Tibetan name. Jyekundo. Needless to say, help is urgently needed. If you are interested in doing something NOW, in real time, click on the Surmang Foundation link to the left of this screen or click on the embedded link. If you can contribute, do it. People are suffering & you can help!

A Skirmish in the War of Words

Ripped off from my FaceBook posting earlier today:

Heh, heh! Whether to rise or not to rise, that is the question. Is it better to resist the evil Americans and persist in acting only in China's self-interest or "diaotou" (turn around) and do what is the normal state-of-affairs for global economic leaders? The proof of whether the RMB is or isn't undervalued is twofold: 1) whether or not the RMB would rise in value if allowed to float, with value set by supply & demand; and, 2) Purchasing Power Parity: Does RMB 682 go farther in Beijing, Shanghai or Guangzhou than US$100 will go in major American cities? In both cases, I'd suggest, the RMB is way under-valued. But this isn't just an economics debate. If it were, we'd all be bored silly (unless we were currency traders, importers or exporters, central bankers, or economists). This is, in a very big way, a political debate. And a debate about the (unfortunate, IMHO) rising nationalism of many Chinese (a recurring event) and the accompanying over-confidence that is evident in Chinese attitudes toward events of the last decade, That this influences foreign policy and expectations for the near future shouldn't be a big surprise.

Why Chinese University Grads Can't Get Jobs

There's an interesting series of short opinion pieces in today's New York Times on why Chinese University grads have such a high level of unemployment (and, one presumes, underemployment). The unfortunate fact is that universities here don't provide the skills to its students that most employers want. The article, Room For Debate: Educated and Fearing the Future in China is here.

And here's my comment. This has been submitted to the Times, but one of the privileges of having your own blog is that I decided what what to publish. And so, here it is:

As a former dean at one of Beijing University's business schools (it has two, believe it or not) and a former professor of business at another top university in China, I can tell you that, by and large, only one of your commentators actually gets what's going on in China with university graduates. Huang Yasheng has hit the bull's eye with his comments. The Chinese educational system and, in particular, its top universities are culturally and politically incapable of delivering an education that prizes innovation, critical thinking, intellectual independence and strength of character, let alone the personal confidence to weave all of those characteristics (all closely related) together in any set of functional skills. I often tell people (including officials in China's educational hierarchy) that the Chinese educational system most closely resembles a game of "Whack-a-Mole"; any attempt by students to stick their heads up out of the obscurity of the masses is likely to get them whacked over the head, intellectually speaking. The sad fact is that the system repeatedly asks for those very characteristics that it actively discourages in its students. And given China's history of punishing cultural and intellectual outliers, this is not likely to change anytime soon.

BLOCKED!!!!

Lafayette, IN -- As most you know by now, the always perspicacious Chinese government has, since last spring, blocked Facebook, Twitter, and a few other sites. Most important -- for this blog, anyway -- is that Blogspot is blocked and that means I can't possibly update this thing. I'm working on a solution and hope to solve the problem without starting a new blog location.

So: have patience. Check back every once in a while. Sooner or later we'll get things up and running again.

Fantasy Island

While the whole world has been watching the Global Economic Meltdown and the Rise of the Obama-ites with fascination, other stories have been buried in page 38 (or where ever). What you've all missed out here in Asia is the amazing saga of Chen Shuibian. In previous episodes, Chen was elected president of Taiwan (otherwise known as the Republic of China -- a clear case of the tail wagging the dog if there ever was one) with only 39% of the vote in 2000. Then there was a near-assassination "attempt" during his re-election bid in 2004 (altho many think the attempt was self-inflicted). These are old stories, as are the numerous flamboyant maneuvers of the Chen reign. By late 2006, corruption charges were were so thick in the atmosphere around Chen that Taiwanese TV was filled on a daily basis with film & live TV of a Peoples' Revolution -- masses of citizens in the streets of Taipei and other cities, demanding Chen's recall. In the end, the votes weren't there and Chen finished his term, albeit with much diminished power and reputation. He left office in the Spring of 2008, replaced by Ma Yingjeou of the Guomindang (Nationalist) Party. Since then, things have gotten really bizarre.

By Spring of 2006, Chen's approval ratings were somewhere between 8% and 20%, making even George W. Bush look wildly popular. His son-in-law, Chao Chienming (趙建銘) was arrested for insider trading & embezzlement. In November 2006, Chen's wife Wu Shuchen was indicted along with three others on corruption charges; Chen himself was immune from indictments while serving as president. Soon after leaving office last year, Chen was accused of money laundering. In a show of great chivalry, he quickly blamed his wheel-chair bound wife. Whatta Guy! His daughter-in-law was, allegedly (and likely), the recipient of US $31 million into a Swiss bank account, altho the money just round-tripped to another account in the Cayman Islands. Numerous other Chen-era officials have been arrested for various corruption issues. Frankly, I've lost count of them all. Throughout, Chen has alternated statements blaming others for all the illicit money movements (in effect, admitting that they took place, but at the same time blaming others for the wrong-doing) and then, simultaneously, claiming that he was being politically persecuted by his successor, Ma Yingjeou. He was finally arrested on November 2008 and again blamed Ma for his troubles. Chen then announced a hunger strike and was subsequently hospitalized but, like the Tiananmen hunger strikers of 1989, he was actually sneaking food when no one was looking. By early December 2008, he was released pending trial, but was re-incarcerated on December 30th after the prosecutors appealed his release. He remains in jail as the judicial proceedings continue.

While he has now embarked on another (alleged) hunger strike, the absurdities mount. Just this week, he renewed his accusations that all his troubles were the result of Ma Yingjeou's persecutions against him and furthermore that Ma (who is known for his rather modest lifestyle, strong marriage & high integrity) is not only gay but has had a homosexual relationship with an unnamed guy of African descent. Oh, horrors! You've just got to wonder whether if Chen is trying to push Ma & Obama into a closer relationship! I'm sure both Ma & Obama are completely uninterested in whatever Chen may be fantasizing.

If you haven't been watching this whole thing, you should! Its wildly entertaining. And better than any soap opera I've ever heard of. There's also lots of opportunities for spin-off shows, with Chen's son & ex-model daughter-in-law happily running a branch of the family money laundering business (allegedly, allegedly, of course). I've been unable to figure out how much the Chen Family has stolen from the people of Taiwan (or otherwise illicitly diverted for personal use) or took as bribes (or campaign contributions into their personal accounts) and so on and so on. It seems to have been well over a billion NT$ (US$28.8 million), and that's not counting the US$31 million that passed thru Switzerland. I know, I know! By Wall Street & Bernie Madoff standards, this is really Chump Change. But when it comes sociopathy & high drama, this has much more going for it.

And it ain't over yet!

Popcorn, anybody?

What Will China Do?

There's been a lot of speculation, in the press & elsewhere, about what the governments of every major country will do to respond to the current global economic crisis. Not only are specifics eagerly sought and eagerly speculated upon, but there is also (it seems to me) a lot of noise under the surface regarding two other aspects of the current situation. The first is about whether governments really understand what's going on. The answer to this one is two-fold, and they are both pretty straight-forward. No one knows what will happen over the next year and a half and governments are no different. Is this a severe recession with Global Characteristics? Certainly, it is. Is that all it is, or will things take a turn for the worse and will we irretrievably move away from "the world as we have come to know it"? And here is where things get tremendously speculative because, unless you can find Merlin the Wizard, or some soothsayer in a cave in Tibet, everyone is just guessing. For some its an educated guess. For others, its a wild stab in the dark. But no one I know can tell the future. And I've been to some of those caves in Tibet; they aren't talking about the global economy there. While there's a lot of guessing going on (although we might be better off calling it "scenario building"), the uncertainty remains high and the predictions are unreliable at best.

The second subject of background noise regards whether or not governments know what to do and (if they do) whether they have the will do what needs to be done. Here is where it gets a bit dicier. Certainly, there's a lot of policy debates in process. And a number of major decisions have been made. But: it ain't over yet! Like a very long and slow-paced movie, the story takes a long time to develop. Even if governments aren't quite sure what will happen next, they are certainly trying to figure out what to do to right the ship. They really have no choice. But it also seems to me that policy makers are feeling their way and searching for the right solutions for the major challenges before them. As we've seen in Washington, London, Berlin, Paris, Ottawa, and elsewhere, politics intrudes. That's the nature of a democracy.

The second & closely related question has to do with political will. Presuming the effective steps are known, do the governments of the world's major nations have the political will necessary to do what needs to be done? In my opinion, this is the major question. There is no doubt at all that, given the scope of this crisis, some -- and in all likelihood, a great many -- of the things that will be required will be difficult and sometimes unpopular.

Of one thing there is no doubt in my mind: when it comes to China, the Chinese government has the political will to take the steps it will need to take to build momentum towards economic recovery. Whatever it takes. No doubt in my mind.

None at all.

Nero Returns!

You know the image: Nero, the Roman Emperor, who is famously remembered as focusing on his lyre as Rome burned to a crisp. Whether History (at least as we popularly remember it) does him justice, the myth is being re-enacted today in Washington. It all makes it it very difficult for all of us American expats who have so self-righteously preached to the Chinese for years that they should look to the U.S. model for China's future.

While I still hold on with one hand to the mantra of free and open markets, the banner has gotten a bit tattered of late. Open markets have their limits, and if you don't understand that, you've been asleep for the last few years. The Chinese have not missed that point, altho I'm not too convinced we always see the same limitations. Nevertheless, the main points have not been missed. The Chinese government is, of course, no stranger to the skills of managing economic growth. If anything, they're too good at it. Too much growth, after all, can be a bit hazardous, too. Maybe not as hazardous as too little, but the risks are unmistakable.

Many of my Chinese friends are looking on in bafflement today as the debate rages on in Washington about the details of the pending stimulus package. They aren't alone. Many expats are also a little baffled, but for different reasons. What they don't see the value of is the political give & take of a democracy. Here in China, the debates are usually behind closed doors and mostly pretty short-lived. And, once over, the debates are . . . well . . . over. Already, the effects of the Chinese government response to the economic chasm we're all teetering on the edge of is being felt. Whether China will avert the worst is unknown; no doubt, this will be a tough economic year. But no one here thinks the government is not concerned or that, if early efforts are inadequate, further action won't be taken. They will do whatever it takes. And they will learn their lessons well. Probably, they already have.

Meanwhile, back in Washington, the Democrats have watered down the fiscal package in order to attract Republican support. In the U.S. House of Representatives, it didn't work -- not one Republican supported the original House stimulus plan. In the Senate, support was minimal. In each case, the final bills became more skewed towards tax breaks. I like tax breaks! Everybody does; nobody likes to pay taxes. But anybody who thinks people worried about losing their jobs (and already having lost much of their retirement savings) will buy a new car because the taxes are now lower is an idiot. Likewise with real estate purchases. If you're worried about your family's economic viability, your first thought is NOT about buying a new house. Unless you're independently wealthy or just scammed the taxpayer out of billions in undeserved bonuses, in which case tax savings is, maybe, a pressing concern. And, if you think about it, in order to pay income taxes, you've got to have an income. The unemployed don't pay income taxes.

I read a note posted by an old acquaintance last week. He is convinced that this whole thing will be over by the end of 2009, no matter what the U.S. government does. In one sense, he's right: the U.S. will get thru 2009. And then it'll be 2010. Time marches on, no matter what. Its what happens in the meantime that's the issue. If the U.S. is to avoid running the American economic locomotive into a brick wall, Congress will have to be both decisive and effective. There is no guarantee that the U.S. and World economies will be better in a year. More likely, if nothing is done, they'll be considerably worse. The Chinese can see that very clearly, as they can also see the inevitable linkages between the two economies. What is much harder to explain to them is why some Americans, who they think should know better, seem to be working so assiduously for broad American failure and for their own narrow self-serving interests. Even Chinese friends here who dislike the "powers that be" here readily point out that, in this crisis, the Chinese government is doing the right things. Why don't all American politicians want to do what clearly needs to be done?

I have no answer.

Meeting the Challenge of Slower Growth

The Chinese Central Government has floated the story, reported widely, that unemployment among China's roving migrant population has reached some twenty million workers. Reuters points out that, with additional workers just coming into the workforce, that will push the total up to about 25 million unemployed out of a total of approximately 130 million migrant workers. I believe that this actually understates the problem. Here's why: first of all, these totals are only for migrant workers, rural workers who leave their homes in search of jobs in other areas (usually urban areas, both large and small, and also usually coastal). In fact, the story was made public thru Chen Xiwen, director of the Office of the Central Rural Work Leading Group. But, again, these numbers are only for rural workers. Urban workers will also be losing their jobs as the growth rate slows, and many already have. And none of the unemployment projections around the country account for underemployment, a factor little discussed in China by labor economists. Also reported widely in the west have been the difficulties of recent university graduates in finding employment. This isn't a new problem, nor is it confined to China, of course. But everything in China, when it comes to population and labor issues is just plain bigger.

The central government (and, consequently, local and provincial governments around the country) are concerned about a probable increase in public protests. This concern is not new. China's government is nothing if not vigilant when it comes to public order and the threat of social chaos.

Western observers of China, particularly casual ones, frequently misunderstand these public outpourings. The Chinese "Laobaixing" ("Old Hundred Names", the common Chinese term for the masses of Chinese, both urban & rural) retain a strong trust in both the Central Government as well as with the Chinese Communist Party. On the other hand, distrust of local officials, particularly on the county, village & municipal level is not uncommon. When public demonstrations break out, unlike in the West, it is generally not to impress the press. It may be a spontaneous outpouring of angry emotion, a group reaction to events, a plea for attention from higher authorities, or an effort to pressure others. Despite the well known exceptions reported outside China, such as the unrest in many areas of ethnic Tibet (the Tibetan A. R. itself along with parts of Sichuan, Qinghai, and Gansu provinces) and Xinjiang in the last year, the anger and frustration are not directed at the central government.

Look for China's central government to be quite proactive in meeting the social repercussions of a slowing economic growth rate. Unlike Washington, Beijing is not hampered in taking quick and forceful action thru fiscal stimulus. The powers that be are quite sensitive to conditions in the countryside not likely to be taken by surprise. And the word has gone out from Beijing: pay attention to what the masses are saying and use a softer hand. That's good news.

What's Next?

As the global economic order collapses, most of the attention has been, for obvious reasons, on economics. After all, this is, first and foremost, an economic problem. We've all, those paying attention, become steeped in the vocabulary of economics and the financial world: credit-default swaps, hedge funds, yield curves, Treasury bond pricing, currency valuation, trade imbalances, savings rates (or lack thereof). For me, it has always been useful to try to look at problems from a completely different perspective. Sometimes its an empty and fruitless exercise -- interesting, perhaps -- but ultimately, providing no new insight. At other times, a whole new light can be shone on something and we see it in a new way.

The economic collapse we're witnessing is so complex and so multi-faceted & nuanced, that it gives us all kinds of different angles to watch from. One very popular Scenic Viewing Spot, a great Photo Op, you might say, is to look at the current situation and compare it to the Great Depression of 1929-1939 (or so). Certainly, there's a lot we can learn from the mistakes of the past that will help policy makers deal with the dilemmas of today. Its not the same, of course; it never is. But there are enough similarities, and the mistakes of the 1930's were so glaringly obvious, that the same mistakes won't be repeated. In China, in the U.S., in Europe, the media (and policy makers meeting rooms, you can bet) are filled with analysis and studies of lessons to be learned. There's been at least one thing that's been largely missing from the discussion, altho I'd bet that, at least in Zhongnanhai, the Powers That Be have been paying close attention. The media, to be sure (at least from my reading) hasn't woken up to the problem yet. What is it? Its the issue of what's next. What happens in the aftermath of an economic collapse of this magnitude? Again, a look back to the Great Depression is useful. It doesn't mean that the same things will happen; they never do. But similar things could happen, even if in different ways and in different places. Here's what I mean: the biggest & most consequential result of the 1929-1933 economic collapse was not economic, altho that was bad enough. It was political. Europe saw a turn from liberal democracy towards fascism, resulting in the rise to power of the National Socialists (who weren't really socialist at all) in Germany and the National Fascists in Italy. In Asia, Japan turned to the militarism that was latent in Japanese culture and politics. And, of course, the consequence of this broad political shift was World War Two. I'm not suggesting that the current problems will lead to another big war. Not at all. What I'm suggesting is that a broad shift downward in the economic prospects of hundreds of millions of people, if not billions, is likely to have political repercussions.

Already we have seen the Icelandic government collapse. Russians are restive, as are people in other pockets, both in Europe and in China. The U.S. has seen a peaceful, albeit dramatic, political change. With apologies to Elizabeth Kubler-Ross, I'd like to suggest that her Five Stages of Grief (Denial, Anger, Bargaining, Psychological Depression, and Acceptance) have a sociological and political application. First off, though, some caveats. These stages are not predictive, meaning they aren't inevitable. They may come in a rather random order. While, for individuals, there is a sequence, the edges are rather fuzzy (one can be alternate, for instance, between denial and anger). lastly, people don't necessarily go thru all the stages. Kubler-Ross maintained that people always experienced at least two stages, altho which two could vary. This is, in my opinion, even more true with large groups of people. Certainly, some of these stages of grief are already apparent. Who would today suggest that as recently as last summer, denial was not common? Americans were characterized as a "nation of whiners" by former Senator Phil Gramm. John McCain famously said the American economy was "fundamentally sound". If that isn't denial, the meaning is lost on me.

While some are still in denial, you can see evidence of bargaining, particularly in the halls of government. Then again, that's their job. In the U.S., at least, anger has been apparent, but it hasn't been a broad motivating factor. In other regions, it has been more visible. In China, it has sprouted up but has not been a broadly motivating factor for most of the population. For most of the world, the situation is in its early stages. There is economic pain, to be sure, but it is still characterized by early stage shock and denial. What is to be feared is the anger that may come as people realize their prospects & wealth may have been forever altered. If the world's government leaders, with their central bankers & finance ministers, are successful in limiting the disintegration that is potentially right around the corner, the dragon of political and social disruption will go back in its lair to hibernate for another eon. That's a big "if".

Creeping Socialism?

Its a real dilemma. Some of the biggest & best known names in American banking are, well . . . ready for foreclosure. They've failed. You can still call up your broker (assuming he or she is still employed) and buy stock in either Bank of America (where I started my career) or Citigroup, but the obvious question would be, "Why bother?" In the last year, B of A has lost 84.36% of its value and Citigroup has lost even more: its down by 87.30%. In the last 30 days alone, they're down by 53.29% and 48.44% respectively. Bank of America's market capitalization is a measly $39.9 billion dollars. Citigroup's an even more pitiful $16.9 billion. These were, once upon a time, the largest and most powerful banks in the world. To put that in further perspective, Citigroups' losses for 2008's fourth quarter totaled $8.29 billion. Another two quarters of equally stellar results and there's no equity left at all. Bank of America isn't much farther behind.

If there are any two banks in the U.S. that are really "too big to fail", its these two. But what are you gonna do? No investor, outside the Alzheimer's Investment Club would willingly put their money into these banks' common shares. Enter the U.S. Treasury and its "tag team" partner, the U.S. Federal Reserve System. Investors of Last Resort. When no one else will pony up, there are always these two. I can't see that there is any real choice on this one. The problem is, though, government bureaucrats make really bad bankers. Not that the bankers themselves have done so well. Those of us in China can attest to the fact (yes, a fact) that government owned and controlled banks are subject to political pressure and can all too easily make lending & investment decisions supported by political reasons alone. If you remember "Crony Capitalism" in Southeast Asia (remember the Asian Financial Crisis?) and the mess that Chinese banks have only slowly & recently emerged from, you know what to expect. Of course it won't be exactly the same, but its not a strategic plan that will warm the hearts of anyone who wants a healthy banking sector in the U.S.

The experience of the big four Chinese banks may, ironically, provide a model. Industrial & Commercial Bank of China (ICBC), Bank of China, China Construction Bank, and the Agricultural Bank of China were, for much of their history, part of the Peoples' Bank of China, China's central bank. As such, they were firmly under the control of the central government of China. And, as such, they made most of their loans based on government policy and had little (if any) independence. Predictably, operating results were nothing to brag about. Non-performing loans (NPL's) were difficult to isolate from the rest of the loan portfolio, but ranged anywhere from 20% to close to 50%, depending on who you asked and how you defined "non-performing". That's not sustainable. Today, after years of hard work cleaning up bad loans, selling them off to state-mandated "bad banks' (using one of Washington's latest buzz words) and revamping the management standards of each of the four, the portfolios are much more manageable. Indeed, all four have gone public and, in the process, have become much more disciplined.

My point is not that B of A & Citi should model themselves after the big four Chinese banks. But the Chinese banks do provide a lesson: there is an afterlife for state-owned banks. And while government ownership is not a formula for banking success, the Chinese banks recent history shows clearly that poorly managed banks can be cleaned up and learn to be disciplined financial firms. They can also go public and, in doing so, "go private" -- private in the sense of not being owned by the government. Current Citi & B of A shareholders & bondholders placed their bets long ago on bank management that was doing little more than rolling dice. They lost. If taxpayers are going to have to foot the bill, taxpayers deserve to reap the rewards. Calling it Socialism or Nationalization is not a useful excersize. Let's call it what it is: financial & economic necessity. The sooner the U.S. gets on with it, the sooner the problems can be solved and the sooner the banks can be returned to where they belong: in the private sector.

Riptide

A story we've been returning to with some regularity, the U.S. Treasury bond market & U.S.-China economic relations, and especially currency valuation, returned to the headlines this week. And, for the first time, it was one of the top headlines both in the U.S. and in China. The proximate cause was Tim Geithner's statement to the Senate Finance Committee that President Obama thinks China has been “manipulating” its currency. Personally, I'm not sure what this means. Certainly, China has been managing the value of the RMB. Is that manipulating its value? At any rate, what's really at issue is the desire of many in the developed world for the RMB to be freely tradeable and for its relative value to be set by the market. The assumption in the West (and great swatches of the East as well, no doubt) is that the RMB will rise against the US Dollar, the Japanese Yen, the Euro, the Pound (if, indeed, the Pound could go much lower). This is desirable, from a US policy perspective, because it would make exports to China cheaper. Cheaper goods from the US means more sales to China, or so the reasoning goes. But it also means less Foreign Direct Investment (FDI) coming into China, as well as (in relative terms) cheaper investments in the US by China. In other words, The RMB, having hypothetically gone up in value against the Dollar, will buy more New York real estate, more government bonds, etc. It also means a few other things, of great concern to the Chinese: US Dollar holdings by the China Investment Corporation (China's Sovereign Wealth Fund) will go down. They've already gone down a bunch and further declines will bring more criticism from within China and, paradoxically, make further Chinese investment in the U.S. less politically attractive. In addition, current Chinese holdings of U.S. Treasuries will be cheaper in RMB terms or, stated differently but with the same essential financial meaning, interest rates will need to go up, as we've predicted, only more so. Already, since 2008 Year End, Treasury yields have risen. They bumped up a bit more this Friday after Geithner's remarks were made public. And Chinese newspapers led with the story meaning, at the very least, that China took notice.

There's nothing really new in this issue. China's friends as well as her critics in the U.S. have been warning for years -- and by that I mean at least since 1998 -- that the issue of currency values and the U.S. trade deficit with China would be an issue someday. Every year, it has seemed, those who have been doing the warning have looked like a combination of Chicken Little (of "The Sky is falling! The Sky is falling!" fame) and the Boy Who Cried Wolf. You can only warn so many times without the danger arriving before you're ignored and even perceived as a bit of a naive idiot. As the Chinese would say, if the weren't being polite, "Er Bai Wu" -- the Village Idiot! If, as the Chinese may fear, the era of the gentlemanly "Go Along to Get Along" policies of the Bush Administration are over, things will get interesting pretty quickly.

The irony for both parties is that they need each other in innumerable ways. Both China & the U.S. have serious economic problems and need to work together as allies to effectively deal with those problems. This requires both candor & practicality. The problems are real. To be genuinely and effectively dealt with, both sides will have to put sensitivities aside and grapple with the real-world issues. The Bush Administration made the "Global War on Terror" the measure of all things. This was not to the benefit of either China or the U.S. A more nuanced & honest relationship would be better for both.

The Tide Turns

As the world watched the Obama inauguration with a great sigh of relief, one group of observers, hidden away behind the vermilion walls of Beijing's "Zhongnanhai" seemed a bit nervous. We expect a bit of anxiety from the shrunken and increasingly disdained Republican minority in Congress as well as from those Investment Bankers that are still employed. With the Republicans, the worry is understandable; the voters have spoken and the verdict was a harsh one. Now that Henry P. is out of Washington, along with his lap dog Neel Kashkari, the American public can hope that there will be at least a little bit of accountability in the Big Bank Bailout. In all likelihood, the days of "no questions asked" cash gifts to both troubled & untroubled banks will end. To many knowledgeable observers, its not the bailout that is at issue anymore, but the lack of accountability for what amounts to windfall gifts.

But back to the official Chinese reaction: much has been made of the Chinese censorship of the translation of Obama's inaugural address. From my perspective, this is not very surprising and nothing new. Censorship is alive & well in the Peoples' Republic. But underlying the surface facts, as usual, is another reality that is more telling. Official China, indeed, does seem to be a bit nervous. The question is, "Why?" To some extent, its perfectly understandable. As the Chinese themselves have pointed out, U.S.-China relationships have been remarkably unruffled over the last eight years since the Hainan Plane Incident in 2001. The only real threat coming from Washington wasn't from the Bush Administration at all, but from Congress and was centered around trade relations and, in particular, the relative value of the Chinese Renminbi against the U.S. Dollar. Since that time, the Peoples Bank of China has allowed the RMB to appreciate by almost 22% (from July 2005 through October 2008, its apex). That is not an inconsiderable movement, in the world of currency values. This doesn't mean that the pressure for change won't return, but at least defenders of PBOC currency policy will have a more defensible position.

So what is it that makes some people here nervous? The answer lies, at least partially, in who Obama is & how he thinks. As the first African-American President, Obama has achieved something that is almost inconceivable to Chinese leaders. China, of course, is approx. 92% ethnically Han. The likelihood of a Chinese head of state being Mongolian or Zhuang or Manchu (as they were during the Qing Dynasty) is extremely remote. And even the Manchu Qing largely pretended to be Han while they reigned. Even less likely are those minorities better known to the outside world: Tibetans & Uighurs. The even remote possibility that this could happen in China causes anxiety for some Chinese. The second reason has to do with who Obama is, not what he is. And who he isn't. Obama is not a party hack. He has had only three years as a member of the U.S. Senate. He is best known as having been a community organizer as a young man; community organizers are not your basic insiders. Obama also symbolizes to many the hopes & aspirations of the common man, not often these days something the rich and powerful in China are sympathetic to. In his initial appointments, he chose people of proven ability, but also of independent mind who speak their minds without fear. Obama also, I believe, looks to the Chinese -- with their often simplistic understanding of the U.S. -- as a sort of American Cory Aquino, a manifestation of "People Power". And in Obama's case, sporting a success fueled by outsiders (women, African-Americans, Hispanics, Jews, etc.), by small financial contributions (not big corporate ones), and popularly elected, no less. Obama's campaign famously used state-of-the-art eTools -- Instant Messaging, Facebook, even the more prosaic email & Internet web sites that have become ubiquitous political resources in the worlds' democracies for years. For some of China's Han leaders, Obama's rise to leadership is as worrisome as an imaginary charismatic Tibetan or Uighur leader who might rise to power in China on a wave of public popularity among the Laobaixing, the Chinese masses.

It is Common Wisdom among close (and even casual) observers of U.S.-China relations that, whatever may be said during Presidential campaigns about China, after a switch in power things continue pretty much as they have been since Jimmie Carter normalized relations 30 years ago. I don't expect that to change and China's leaders shouldn't either -- even if the rhetoric heats up by a few degrees. But the tide of history has surely turned in U.S. politics. The whole world has, rightly, taken notice. If this moment is an indicator of the flow of world history, as I believe it is, then China's leaders are right to be a bit anxious.