Understanding the way China is governed, and why.

It’s Not About the Pig

In the Hutong
Avoiding the Radar
1819 hrs

Standing in line at the gate at Narita, I was talking with another flier about China’s aggressive screening for H1N1 among arriving passengers, and the seemingly draconian quarantine measures. Why, he wondered, given that the virus seemed to be just like any other flu, was China treating this so seriously?

It’s a fair question, and I am not sure there is a single, simple answer. There are good medical reasons, for example to protect the people from a new virus about which not much is really known and that, once into China’s population, could mutate into something more devastating.

There are good political reasons. The nation’s health and sanitary bodies want to demonstrate that they can (and will) protect the country from pandemic. China wants to show the world that it can be as tough as any other country when it comes to quarantine laws.

And, after SARS and Avian flu, they are happy to grab the chance to point out, however subtly, that other countries harbor and incubate scary pathogens as well.

But I also think there is something deeply practical going on. Whatever the medical, political, or perceptual reasons behind this costly quarantine, of arguably greater importance is the activity itself. H1N1 may prove to be a mild pandemic, but the spectre of far more virulent pathogens lurks in its shadows.

What we are witnessing is a full-scale dress rehearsal for “the big one,” an effort to develop and test the people, equipment, procedures, and policies China would need to face and overcome a killer pandemic. Disasters need drills, as any first responder who cares about his job will tell you, and the more technical and logistically complex the response, the more practice needed.

In that sense, H1N1 is a Godsend: it is an excuse for China to push the alarm button and see what works, what doesn’t work, and what needs to be improved for the time when we have The Real Thing.

There are those who would suggest that when The Real Thing comes all travel and trade will be shut down anyway. Early in the crisis, that may be the case. But at some point, the total shutdown of commerce and travel will be impractical, if not disastrous. China – and to a similar extent, Japan – are looking for ways to run an effective quarantine process so that the doors can be reopened as soon as possible after an outbreak.

So the next time you have to sit on a plane and wait for someone to come aboard and take your temperature, recognize that you are taking place in a drill for what could be the largest scourge humanity has ever faced. Damned right they’re serious.

The Financial News Sidestep

In the Hutong

Timing intervals twixt interruptions

1211 hrs.

Last year, the Chinese government, in an effort to further formalize the status of foreign financial information providers (i.e., Bloomberg, Dow Jones, Thompson/Reuters, etc) operating in the PRC, assigned the group a regulator: Xinhua, The New China News Agency.

The SCIO Bomb

The foreign financial information providers (FFIPs, or “fips”), understandably upset that an ambitious local competitor was going to serve as their regulator, cried foul, and the United States, the European Union, and Canada all protested to the WTO. Thus forced to concede that having the local champion serve as regulator carried the faint smell of protectionism, China agreed in a settlement to have the State Council Information Office (SCIO) serve as regulator.

Interestingly, the settlement also accepted a fairly broad definition of financial information, going beyond just prices and data and including news and other information. But more on that in a minute.

Congratulating themselves on a fairly satisfying and sagely compromise, the FFIPs returned to business.

Until yesterday.

Before heading off for the three-day May Day weekend, the SCIO published the regulation that formalized the agreement. Then, it noted that the FFIPs, while allowed to sell their business and corporate information services in China, would not be permitted to conduct news gathering activities.

And You Thought the WTO Was the Last Word

Speculation reported in the Financial Times suggested that the restriction on news gathering might have been inserted as a fillip to Xinhua. That may be the case, but I think there is a larger issue at stake for the Chinese government.

PRC law and long-standing policy prohibits foreign ownership of domestic news outlets. Nothing in the terms and conditions surrounding China’s accession to the WTO is going to compel the government to change this. And the FFIPs know this.

And getting all of the countries involved in last year’s WTO settlement to agree that “financial information,” broadly defined, included news probably sounded to the FFIPs that they had made a huge step forward. As it turns out, that may have opened a door allowing the government to ignore the distinction between an financial information provider and a news organization and roup the FFIPs in with the news business.

“Hey, What’s That Camel’s Nose Doing in Here?”

Because what I believe has happened in this case is that someone suggested to the SCIO that any organization capable of both gathering news inside China and of distributing news inside China is, effectively, a domestic news outlet. As financial information now includes news under the terms of an international agreement, that meant that Xinhua and its allies in government and the Party could make a good case that now Thompson/Reuters, Dow Jones, and Bloomberg were operating as de-facto domestic news outlets.

Confronted with that rationale, the Chinese government only has two choices: a) ban the FFIPs from distributing in China, which wouldn’t work because the WTO case would reopen and Chinese financial institutions would suffer for the lack of critical timely information; or b), prohibit FFIPs from engaging in news gathering, a restriction that is much more difficult for international organizations to challenge and ensures international financial information flows to domestic institutions.

So SCIO chose the latter. And now the ball is back in the court of the FFIPs in terms of how they want to play this.

Get Me Rewrite!

There has already been some outrage online and in the news, but if I may make a suggestion to my friends in the Fourth Estate, this would be a very good time to keep cool heads about this.

First, as with any regulation in China, the time delay between promulgation and enforcement is often long enough to allow for some discussion. Rather than make a formal case and get governments publicly involved, it is time to start tapping your sources of information, having quiet, off-the-record discussions with the people you know in government – as many as possible – and learning why this happened.

Second, we need to recognize that this could get a lot worse. Given that the wall between what is “news” and what is “financial information” has been destroyed by international legal agreement, Xinhua’s next move could be to declare that any financial information developed in China is the same as news, thus prohibiting the FFIPs from distributing so much as quotes from the Shanghai Stock Exchange within China. We don’t want to go there, now, do we? And Xinhua would love to have a captive market in the PRC for its real-time financial information service.

Third, remember that the FFIPs have natural allies in China that have helped them before. It is time to call upon those allies again. But that is not enough – you have gone back to that well too often – it is time to get more allies, and that means going public. Stop positioning yourselves as news companies (at least in China) and start making a public effort to demonstrate that you offer a service that is essential to the future of the Chinese nation and to its role as an emerging financial power.

Dissecting the National People’s Congress: The PLA and Independent Innovation

In the Hutong

Looking for the burnout cream

1641 hrs

Even the most focused minds and incisive bladders must collapse under the weight of a 15,000 word address, and apart from our hyperlinked and multitasked MTV attention-spans, we in the West lack the tolerance for protracted oratory. We think, my Lord, if Lincoln could move a nation with 272 words in the Gettysburg address, what possible good could come of much more?

By now, China’s leaders know this, and I’ve developed a theory that they intentionally structure their speeches to hide the good stuff in the back half. So when I got the text of Wen Jiabao’s 2009 Report on the Work of the Government (i.e., The State of the Nation with Chinese Characteristics) I went straight to the back.

And I was not disappointed.

The Army’s Buried Lede

Hidden there, not far from the end, was an interesting little piece that grew in significance over the past week.

“In the coming year, we need to make our army more revolutionary, modern and standardized, focusing on enabling it to fully carry out its historic missions in the new stage and in the new century. We will strengthen ideological and political work in the army. We will effectively transform our military training based on mechanized warfare to military training for warfare under conditions of greater IT application, and continue to enhance the army’s ability to respond to multiple security threats and accomplish a diverse array of military tasks. We will modernize weapons, equipment and logistics support across the board. We will improve defense-related research, the weapons and equipment production system, the military personnel training system, and the army’s logistics support system that integrate civilian with military purposes and combine military efforts with civilian support.

[Emphasis mine]

There are two points of interest in this brief but important paragraph that are worth noting which, when related, speak to the future of China’s technology industries.

Information Warfare by Any Other Name

First is China’s plan bring the PLA into the 21st century, easing the emphasis on mechanized forces that has guided global military thinking for the past 90 years, shifting instead to an approach with a greater emphasis on information technology. The details of what exactly this means is unclear. There are few aspects of modern warfare that are not suffused with chips and networks, and “greater IT application” can mean anything from computers in tanks, to the ability to disrupt the information infrastructure of other militaries and nations, to the emerging concept of “network-centric warfare.”

I’m betting that China will dive into all of the above.

Mind you, the change will not happen overnight. Even if it seeks to leapfrog the U.S. and other military powers, the PLA like most armies is led by men and women who think of war in terms of infantry assaults, tank battles, and missile attacks. These folks will not be anxious to surrender the more visible (and intimidating) proofs of military strength: after all, armies (and navies, and air forces, and space forces) will always need to bear a nation’s credible threat of physical destruction.

Premier Wen’s statements are, however, a clear message to the leaders of the PLA that while they will get upgraded toys in the near term, the PLA’s destiny is to become a force capable of winning battles without firing a shot.

Getting to the PLA of Tomorrow

The implications for China’s technology industry should be obvious in that first bolded sentence, but that’s not enough for Wen. Two sentences later he hints further at his vision for a new Chinese military industrial-complex, noting that defense related R&D, manufacturing, and “the integration of military and civilian purposes” are also at the core of China’s vision for its military.

Now, I emphasized that last bit because by itself this is an important policy statement, but in combination with the IT-led direction of China’s military, it points to more than just military procurement policy but the future of China’s technology industries.

Bear with me.

When it comes to modernizing the PLA, China has a choice of developing its own technology or buying from others. That choice is going to go away. In most cases, China will be largely left with having to develop its own.

First, the number of nations willing to sell military technology to China will decline, with countries ratcheting back sales either because they see China as a rival in the defense business (Russia, maybe France), they see China as a potential threat to themselves or an ally (United States, Japan, India), because Washington doesn’t want them to (Germany, Britain, and Israel), or because they don’t have anything to offer Beijing (most of everyone else.)

Second, the Central Military Commission (China’s combined equivalent of America’s Joint Chiefs of Staff and the National Security Council) will be unwilling to leave control over critical national defense systems in the hands of foreign nations or foreign companies. This is understandable: the United States, Russia, and a dozen other countries operate under the same principles.

Third, some intelligent and opportunistic policy makers in Beijing will realize that if the country invests in developing its own technologies, the entire exercise strengthens the country’s civilian commercial sector. And this is where Wen’s throwaway comment about “the integration of military and civilian purposes” gets interesting.

It is no secret that the United States’ much-vaunted technology industries were founded on innovations that came from projects funded by the Department of Defense. In effect, America’s aviation, aerospace, computer, electronics, software, wireless communications, and the Internet sectors owe much of their global success to the breakthroughs and profits brought by defense contracts.

By all indications, the Premier seems to be pointing China in a direction where it, too, will pursue defense spending with a twin agenda – a more secure China, and a technology industry heavily fertilized with profitable defense projects. And China would not only be wise to follow America’s lead, they would be within their rights – the WTO makes wide provision for protectionist practices in industries deemed vital to national security and defense.

The World is Theirs

There is a qualitative difference between dumping a lot of money onto Chinese tech researchers and imploring them to go forth and innovate, versus giving them a contract to fix a specific problem or develop a specific system. At the very least you get a product out the back end. If you are lucky, you get something that works for the military, and if you are really lucky, you wind up with a development that has huge civilian potential.

Just one example of many: Boeing’s entire commercial jet airliner business owes its existence to a set of technologies created to build the largely-forgotten B-47 bomber. That one project begat the prototype for the Boeing 707, which begat the hugely popular 727 and 737, and the rest is history.

It is easy to see how the path from a few high-tech defense projects to the creation of global tech powerhouses may not be a smooth one for China. But one only need look at companies like Huawei to appreciate that the more robust China’s defense industries become, the more of these sorts of international competitors will emerge from the murk of military work with competitive – and perhaps innovative – products.

Caveat Inventor

I have said elsewhere that China will try to forge its own path as it seeks to create an economy based on innovation. I expect that part of that model will involve the peaceful application of technologies created for the purpose of national defense.

But I also know that I would be naive if I believed that China would steadfastly insist on creating its own military innovations when it would be easier, faster, and cheaper to “borrow” those created elsewhere. The pressure for results and the urgency of the goal will cause many companies to take what could be politely called “R&D shortcuts.” This is to be expected – history has proven that an uptick in industrial espionage is a natural side-effect of the emergence of a new world power, particularly in the case of one still wrestling with the concept of intellectual property rights.

An pound of prevention is in order. Those companies with technology to protect would be doing themselves – and ultimately China – a great service by recognizing the potential for industrial espionage and taking aggressive measures. You get to keep your technology, and China enjoys the deeper benefits of doing the basic spadework that genuine independent innovation would require.

Seven Reasons for the Coke-Huiyuan Epic Fail

In The Hutong

Having a Coke and a smile

1911 hrs.

Just after the Ministry of Commerce announced that it had rejected Coca-Cola’s bid for Chinese juice-maker Huiyuan, I got a message from a very astute friend of mine who noted “that deal was dead the minute it made the headlines in the South China Morning Post.”

We are going to hear a lot of hindsight-laden “I knew it was going to be rejected” statements in the coming days. So let me start by stating for the record that this will at first sound like one of those posts, but the that what I really want to do is explore (with the full benefit of hindsight) why this deal may have been killed, in the fervent hope we can learn something at Coke’s expense.

It Sounded Like a Hard Sell at the Time

A momentary slide into the “I told you so” zone.

Not long after this deal was announced, I noted in this post that this was going to be a rough sell for Coke in Beijing. Apart from the threat of the deal falling afoul of China’s shiny, new, and not-yet-tested anti-monopoly law, I said that Beijing has over the years actually made its current policy on FDI rather clear. Looking at that policy, it was fairly clear that the deal would have a difficult time passing muster with the government. and that Beijing might relish an opportunity to say “no.”

Rather than suggesting the deal was DOA, however, I noted that Coke had best kick a communications program into gear to start building support for the deal, because doing so would be their only hope in getting past the barriers they faced.

“Whether this deal succeeds, then, has less to do with its considerable business merits or with the law itself. It has much more to do with how well Coke handles the government debates and public discussion on the deal’s merit.

Hopefully, Coke has learned from Carlyle’s experience, and has prepared a case that will convince the nation’s leaders to make an exception to policy and will gain the support of consumers and influential public voices in China.”

Coke, in short, needed to manage the public debate, because regardless of the reason given by the Ministry of Commerce for rejecting the deal, there was actually a lot more stacked against Coke in its bid for Huiyuan. I count at least seven.

Reason One: One Man’s Market Leadership…

The first reason is the one the government gave, that the deal would violate the spirit of section 23 of the Anti-Monopoly Law, which is appears to be designed to ensure that a single player does not become so dominant as to be able to dictate market terms. As the Ministry of Commerce noted, their concern was that the deal would hurt small local players, drive up the consumer price of juice, and limited consumer choices.

Market share figures are painful to discern in most markets, and in China, where data flows like concrete doesn’t, the numbers are much harder to pin down. As best as we can tell, Huiyuan as market leader holds a bit over a third and possibly as much as 42% of China’s estimated $10 billion market in juices and nectars. That’s a pretty dominant position in a fragmented market.

Coke, for its part, is number two with about 10% of the market. If we use those figures, Coke would have owned somewhere around half of an otherwise fragmented $10 billion market. Does this count as a “monopoly” in the classic economic sense? Probably not.

But without other strong players to act as a counter (if Coke was #2 with 9.7%, the next biggest player would have held much less than 10%), you can see that the government was concerned about allowing the creation of a company that would have the brand, manufacturing, and distribution muscle to dictate market terms.

Would that concern have been enough by itself to derail the deal? Maybe. But there were other factors involved as well.

Reason Two: Not Our Kind of FDI

China’s foreign direct investment policy since the country began its “reform and opening” process three decades ago has been to create laws and administrative regulations to channel the investment into the sectors and vehicles where China needed it most. The policy has not changed, but the means of the channeling – and the government’s general attitude toward FDI – have.

As Steve Dickinson of Harris & Moure noted in an article unrelated to the deal a week before it was announced, the policy may be implicit, but it is clear:

“• Foreigners are free to invest in China through WFOEs [wholly-foreign-owned enterprises] or JVs [joint ventures] in the areas of investment classified as permitted or encouraged in the current Catalog for Guiding Foreign Investment.

• Foreigners are permitted to purchase small established Chinese companies where the government is too busy to be concerned with management of the small company

• Foreigners are permitted to purchase large established Chinese companies suffering from financial problems, provided the foreign purchaser will restructure the company and assume the company’s obligations to workers and creditors.

• Foreigners are permitted to acquire a minority interest in large and successful Chinese companies, provided such investment will provide collateral benefits in the form of technology transfer or access to new markets.

• Foreigners are not permitted under any circumstances to purchase a majority interest in a large and successful established Chinese company.”

I can’t speak to the first issue, but it seems fairly clear that the Coke-Huiyuan deal failed to qualify under the other four.

This might have actually been the deal-killer, but since none of this is written down anyplace, it was easier to cite the Anti-Monopoly law.

But wait. There’s more.

Reason Three: Hands Off the Brands, Boys

An unwritten goal of China’s industrial policy is the creation of leading brands that will not only lead to a healthy, stable market at home, but also form the basis of a bevy of global Chinese brands. Even though candidates arise from time to time, China’s enterprises are still in the early stages of creating international markets.

Huiyuan, however, was a better-than-average candidate, with a leading position at home, smart marketing, and an brand that consumers associated with quality and purity. To have a potential champion gobbled up by a foreign company before it even had a chance to go abroad was probably too much for China’s leaders to stomach.

Which is probably the reasoning underlying China’s restriction on purchasing a majority interest in a “large and successful established” Chinese company.

Reason Four: What We Have Here is a Failure to Communicate

As my former colleague and frequent lunch companion Imagethief noted, public sentiment was probably not too terribly in favor of the deal to begin with, and things went from bad to worse as allegations came out that Coke’s people were trying to quash criticism of the deal.

A core rule of public relations is that you don’t try to stop journalists or others from trying to criticize your company because that effort then becomes a story, and you lose all credibility. Now, this rule is often ignored in China, in particular by Chinese companies, who use all kinds of creative and interesting tactics ranging from calling the government, to placing (or withholding) advertising dollars, to outright paying the reporter in order to try to keep negative stories about their company out of the press. Some foreign firms, sadly, have decided that the best thing to do in Rome is wear a toga, and so have picked up the practice.

Whether or not Coke actually did any of these things is not the point – the perception is that they did. That perception was built atop public sentiment that appeared to be skewing neutral to negative on an issue where what Coke needed was widespread support.

Coke failed to realize that it is now a truism that foreign companies cannot hope to successfully test the limits of government policy unless that effort appears to have widespread support – not just among China’s elites, but increasingly among the broader public as well.

Few companies will remember that, I’m sure, but the wiser heads among M&A advisors – investment banks, attorneys, and accountants – will realize they need to make room at the table for someone who understands how to win in the court of public opinion.

Reason Five: Morning After Syndrome

Speculation has been rampant of late that Coke may well have been looking for a way out of the Huiyuan deal long before it was dealt its regulatory death blow. Coke, for its part, denied the rumors, and we may never know the truth.

But less than two weeks after the announcement, the U.S. government decided not to rescue the beleaguered Lehman brothers, setting off a chain of events that immediately altered the priorities of companies around the world. Certainly if I were sitting at Coke headquarters in Atlanta, I’d be worried about whether I could afford to part with $2.4 billion in cash right as world credit markets were drying up and consumers were rethinking their spending habits.

Even if Coke lost a little of its ardor for the deal, that might have been enough for the company to give less than its full effort in trying to gain approval.

Or, indeed, it might have been enough for the company to become completely ambivalent about it. Given the challenges they faced, that might have been enough to weaken Coke’s chances.

Reason Six: Kindergarten Dynamics

There is a school of thought that Coke’s bid was sabotaged before it happened, not by either company or the Chinese government, but by the U.S. government when it blocked the acquisition of Unocal by CNOOC, or when it blocked the purchase of 3Com by a group led by Huawei. The belief is that this rejection was a tit-for-tat, China treating a U.S. company in a manner to which Chinese companies have become accustomed in America.

This is not unlikely. China is a big fan of reciprocal behavior in its international relations, even raising visa charges for citizens of countries that have raised the cost of a visa for Chinese travelers.

Certainly there must have been a bit of that sentiment in the smoky room in Beijing where this matter was decided. How much of a role it played we will never know.

Reason Seven: The Global FDI Problem

Last June the Council on Foreign Relations published a special report, Global FDI Policy: Correcting a Protectionist Drift, in which the authors quantify a decided chill in the past several years by a number of countries toward foreign direct investment. While the authors (a Carlyle executive and a distinguished academic) might well have turned the report into a China-spank, the report is remarkably data-focused and even handed.

What they quantified – before the world lurched into its current state – was a decided tendency by nearly all of the world’s major polities to restrict foreign direct investment. The biggest culprit in the report was the United States, but the authors note that there is evidence of this trend worldwide.

The problem is that unlike trade, there is no global policy protocol around cross-border direct investment and acquisitions, kind of like the situation we had with international trade prior to World War II. And frankly, this is no time for countries to be turning off the tap, especially (as the authors note) local affiliates of foreign firms on average deliver greater economic benefit to host countries than local firms.

The Coke-Huiyuan deal was taking place in an global FDI policy environment that is starting to sour, and may come to be emblematic of the need to raise the matter of FDI to a global intergovernmental level – once the banks are sorted out, of course.

The lesson here is that the problem of FDI policy to an extent transcends Coke, Huiyuan, China, and the United States, and that those issues probably played some role here.

Making it Better

The above list is by no means balanced in terms of the relative importance of the factors, and it is by no means complete. Taken together, though, they underscore that Coke had to climb a cliff on this deal, and they will not be the last who face such a political escarpment.

But as China extends its policy fence around those companies and industries it wants to keep in Chinese hands, there are some lessons to be drawn from the above.

1. We need to begin with a clearer idea for how China defines a “monopoly,” so that we either avoid deals that test that definition, or we recognize the risk and seek to mitigate it intelligently yet aggressively. That definition will change on a case-by-case basis, based on the industry, the intended target, the buyer, and who is asking the questions.

2. The FDI policies that matter may not be written down, but they exist, they evolve, and they are ignored at one’s peril.

3. Healthy companies that may one day become global Chinese brands are not good targets. Sickly companies that could blossom under better management, with capital injections, and with a global owner are much safer. Of course, they bring their own problems, but China’s government wants value-add from foreign investors, not just a fat check.

4. Any acquisition of a local firm by a foreign company demands a communications effort directed at both the general public and the policy making elite that makes a logical, intelligent, and sensitive case for the purchase. The bigger the buy, the better you need to be at the communications.

5. Don’t ever let up or appear to hesitate.

6. International relations matter in business, and especially with M&A. Companies need to lobby their home governments to be as open with FDI as they are with trade, because the alternative is a deteriorating global FDI environment with companies caught in the middle.

A Final Note

As I said in my September post, I am no fan of mergers and acquisitions. I think they burn management attention and corporate capital, they are often used as a substitute for innovative strategy, and they rarely deliver the benefits promised. But I also recognize I am spitting in the wind – there is going to be a lot more of this activity in the coming years, particularly as Chinese companies step abroad.

The best we can do is work to reduce the friction of the process. As more about these events comes to light in the coming weeks, It is incumbent on those of us whose work touches M&A in China to learn whatever lessons we can. The next one will probably not be any easier.

Ten Reasons We Are Watching the National People’s Congress

In the Hutong
Rising Peacefully
1941 hrs.
Now that we are into the third month of the year, the time has come for the annual pageantry of pomp, politics, and propaganda colloquially known as “liang hui,” the twin meetings of China’s legislature, the National People’s Congress(NPC), and its advisory auxiliary, the Chinese People’s Political Consultative Conference (CPPCC).
The meetings are met with a fair amount of cynicism, particularly among those of us raised in democracies where, even if our legislators accomplish little more of value than the liang hui, at least they manage to do so without messing up the traffic with thrice-daily motorcades.
Yet while it is not unfair to categorize the NPC and CPPCC as “rubber-stamp” bodies, there are years when it is worth stopping to listen to some of the speeches and taking the time to absorb the coverage. And this year is one of those years.
Here is what we will be listening for in the Hutong:
1. Stability and Harmonious Society: I suspect we will get a healthy dose of this, but what will be worth listening for is specifics on welfare, employment, and social security programs for rural citizens, laid-off factory workers, and retired cadres.
2. Independent Innovation: This little chestnut was pretty hot a few years ago, but has faded into the background as the government faces the darkening horizons of the global economic crisis. While there are more urgent concerns, it will be interesting to see whether this has fallen off the radar, or if any new and significant measures are planned in this area. If the importance of independent innovation has receded, this will imply continued opportunities for foreign innovators, but continued problems defending IPR.
3. Infrastructure: Look for indications on how the central government is going to channel and manage all of the funds for infrastructure investments. I’ll be looking for mentions of specific high-profile projects, a new agency to manage them and their expenditures, and some indication that employment is a focus, not just spending a lot of cash.
4. Financial Sector Reform: In the wake of what has transpired on Wall Street over the past year, it would be hard to justify reshaping China’s financial sector to look like that of the U.S. Nonetheless, China’s banks, insurance companies, bourses, and brokerages face their own challenges after 30 years of rapid growth, and the global financial crisis is a signal that it is time to look for and address problems rather than wallow in schadenfreude.
5. State-Owned Enterprise Reform: Hard times justify hard measures, and it is likely the coming 18 months will see Beijing compelling the restructuring of several industries dominated by state-owned enterprises. The effort will be to strike a balance that will allow for competition while creating national champions through compelled mashups. The auto industry will almost certainly undergo a forced winnowing from 14 passenger car makers to 10 (which I’ll address in a post tomorrow), and we are betting on another round of consolidation in the airline business and the steel industry. The question will be what other sectors will come under the knife, and our ears are perked up for clues.
6. Drought Relief: The environment – specifically air and water pollution – will be a major theme, but a larger problem that looms is the issue of the drought in Northern China. Beyond the general challenges facing rural China, we expect some discussion of water supply, if not in one of the work reports, then in some of the side sessions.
7. Taiwan: For the first time in recent memory, Taiwan is likely to be a feel-good issue at the meetings. A quiet movement is underway in Taipei to build on the newly-established air and sea links between Taiwan and the mainland with what would amount to a free trade agreement. This is a touchy issue in Taiwan, so it will be interesting to see if – and how – Hu Jintao, Wen Jiabao, or any of the other leaders discuss this.
8. Defense: In the wake of Sino-US military discussions and China’s deployment of naval vessels on anti-piracy patrol off of Africa, we will of course be watching for acknowledgement of closer cooperation between the two nations in addressing mutual security issues. More important, however, is whether China’s economic stimulus will extend to spending in “dual-use” industries like aerospace and shipbuilding.
9. Media: I am not expecting 2009 to be a memorable year in reforming and opening China’s media sector: the political sensitivities at the nexus of the global financial crisis and the 60th Anniversary of the founding of the People’s Republic make it far too sensitive. What we will be listening for is any mention of the media sectors at all. I am hoping there will be none: no news is good news here.
10. Peaceful Rise: China made more progress in its strategy of pursuing a “peaceful rise” in its global stature in 2008 than it could have dreamed of a year ago. It will be interesting to hear whether that is sustainable, whether China will allow itself to mirror the US Congress’ protectionist “buy American” rhetoric, or instead will take the high road and position the PRC as the guardian of free trade.
For decades, the Liang Hui have had only needed to address domestic audiences, because they were dismissed by others as ceremonial and ultimately irrelevant. That has changed, and ever since former Premier Zhu Rongji began holding post-Congress press conferences for the global media, China has begun to use the occasion to send messages abroad.
This year the world will be watching the proceedings with greater interest than ever. The leaders must know that, and it will be fascinating to see if anything in the two-week session changes as a result.

The Yin, the Yang, and the Bang-Bang

Somewhere in East Wangjing

Watching people from Star Group prepare for a pitch

0931 hrs.

On the morning after the 40-story bonfire that turned Beijing’s nearly finished Mandarin Oriental Hotel and Television Cultural Center (TVCC) (known locally as “the boot” for its shape) into a smoking, twisted hulk, speculation and accusation continue about the cause. Many suggest that errant fireworks are to blame. As the building was owned by one of China’s most powerful state-owned entities, China Central Television, the investigation into the fire and the report on its causes will undoubtedly become a political football, so we may never know what truly happened.

Shooting Yourself in “the Boot”

If fireworks were a contributing factor, the Chinese government will face a dilemma. If it does nothing, it risks the continued (and growing, as the nation grows more prosperous) sequence of tragedies large and small that accompany the use of pyrotechnics and high explosives by the inexperienced and inebriated.

If, on the other hand, the government takes the logical step of restricting the manufacture, distribution, sale, and use of fireworks, it risks widespread popular discontent (fireworks are not only a cultural mainstay, they are arguably more of a national icon than the flag) and the decimation of a large seasonal industry.

In short, the entire issue places the two imperatives that guide Chinese policy making at odds with each other: the Confucian obligation for the ruler to act as parent to the nation on the one hand, and the growing importance of continued popular support as China’s polity evolves on the other.

Between the economic downturn that is putting an estimated 20 million people out of work and the political sensitivity of key historic milestones in 2009, sustaining popular support is going to be a particular challenge this year.

As such, I do not expect a major crackdown on fireworks. Instead, I think the government will take what will amount to token action to restrict fireworks that in scope and enforcement will amount to just enough to avert a major calamity.

Rantings of a Pyrophobe

All of which is a pity. If there was ever any issue on which the government should behave in loco parentis, this is it.

For some perspective, this is what I wrote about the fireworks issue two years ago (and pardon me in advance for the rant):

Xinhua is reporting that fireworks in Beijing have killed one person and injured 270 over the Chinese New Year.

You see, this is where I start to have a serious problem with moral relativism. You say it is part of China’s culture to set off fireworks and has been for a thousand years. I say it’s wrong.

I say look at the pollution and litter caused by fireworks.

At the factory explosions that level entire city blocks.

At the fires that destroy homes and lives.

And, of course, the toll of dead and injured.

Fireworks are made of gunpowder. Gunpowder was created to kill people and break things. Fireworks are an accidental, incidental application of the material.

For a little perspective on what we’re talking about, police in Beijing confiscated 560 million illegal fireworks this year. At an average of, say, one gram of high explosive per, that’s about 1.3 million pounds of TNT. To put this into perspective, a fully-loaded B-52 Stratofortress bomber carries 51 500-lb Mk-82 Snake Eye bombs. That means that just the illegal fireworks confiscated in Beijing would fill 50 B-52 bombers. And that’s not even taking into consideration the 380,000 crates of fireworks sold legally, which at (I’m guessing) 10 lbs per crate, would fill another 150 heavy bombers.

Allowing millions of pounds of high explosives into the hands of people who have neither training nor the understanding of pyrotechnics to handle them safely seems to me a pretty straightforward example of a really bad idea.

In any culture.

None of this means that fireworks have to go away. It just means that the handling of fireworks above a certain (very small) size would need to be left in the hands of well-trained, licensed, and insured technicians.

I suspect we will get there eventually. The only question is how many people must suffer in the meantime.


Wire services are now reporting that the culprits were actually a “professional” fireworks company from Hunan province who were hired by CCTV to set off the pyrotechnics. See my point above about “well-trained, licensed” technicians.

As opposed, say, to those with a little guanxi and just enough competence to make them dangerous.

@rmack Agrees: Obama’s Outreach to China Should be Social

Jingmi Road, Outbound

Dodging pyrotechnics

1344 hrs.

Former CNN Beijing bureau-chief turned eChina scholar Rebecca MacKinnon published an open letter to U.S. President Barack Obama on the Huffington Post earlier this week, echoing my essay on Obama, China, and Public Diplomacy published in AdAgeChina last November (which I revised and posted here).

Longtime readers of this blog know that while Ms. MacKinnon and I frequently agree on principle, we usually disagree on our approaches to addressing some of China’s more vexing issues, in particular on the matter of Internet censorship.

But on this issue we agree: the new US administration needs to extend its diplomatic outreach to China beyond the nation’s leadership, its foreign affairs apparatus, and elites by reaching out to the Chinese people, and social media is a way to do it.

Beyond the VOA

I recently had an opportunity to listen to a panel of distinguished speakers at George Washington University School of Media and Public Affairs bemoan the decline of the foreign correspondent in news today. The keynote speaker was D. Jeffrey Hirschberg of the Broadcast Board of Governors (the U.S. government agency responsible for Voice of America and all government-funded non-military broadcasting.)

While the BBG’s component broadcasters have been trying to figure out how to use social media tools in its outreach, they have clearly been struggling for effectiveness. I realized halfway through the talk that their efforts to date were either halfhearted (which I think unlikely) or that the shift in thinking required to capture the potential of new media was simply too large for journalist-bureaucrats steeped in an old-media tradition. In fact, I was struck by the similarities between the words and frustrations of the government media leaders and those of their commercial counterparts.

So as much as it might seem to make sense on paper to leave the government’s international social media outreach to the VOA or Radio Free Asia, doing so misses the point. Turning a conversation over to an agency that is seen as the de-facto propaganda arm of the government undermines their credibility and thus their ability to conduct conversations, but more important it limits the scope and effectiveness of the online public diplomacy effort.

Socialize the Aparatchiks!

EVERY office and agency of the federal government needs to be using these tools, and for international outreach that means every section of the State, Commerce, and Defense departments, plus dozens of independent agencies like the BBG. If public diplomacy is to be conducted over social media, we need hundreds, thousands, even tens of thousands of participants on both sides.

In each of those offices, the best approach is to hand responsibility over to people who genuinely understand how to use those tools, and give them the organizational authority to make them effective.

Ten days into the new administration, the White House itself is already setting an example. Not only have they brought in a new, sharp, and young site administrator and completely overhauled the site, they’re also got a Twitter feed, and there is clearly more in the works. We do not as yet have a Blogger-in-Chief per se, but given his agenda, I think we can cut POTUS a little slack on that one.

That said, the site is as yet only available in English (the Spanish language site is a stub, really) and as such is not yet a tool for global outreach.

So the goal must not only be to make the government more accessible to the people, but to make the US government more accessible to the peoples of the world.

And we need to be doing this soon. Because if recent revelations that China is investing US$7 billion in an effort to expand and enhance its global media presence indicate anything, it is that influencing the people of the world – and America – is certainly on Beijing’s mind. Who will win the global contest for hearts and minds depends on more than just media, but America cannot assume it will win that contest without an effort.

Al-Jazeera should be enough to prove that.

A Final Thought

Over the last few days, there have been several comments online remarking how strange it is that Ms. MacKinnon is apparently not yet tenured at the University of Hong Kong, where she is on the faculty of the Journalism and Media Studies Center . Those voices, while well meaning, should keep in mind that at least in the United States, Ms. MacKinnon would normally need 5-6 years as an assistant professor before being able to apply for a tenured position. I would imagine standards are not much different in Hong Kong, and Ms. MacKinnonhas only been at HKU for two.

Nonetheless, the point is well-taken. Again, I disagree with Ms. MacKinnon’s opinions and recommendations far more often than I agree with them, but she plays in essential role in the debate about media in China. While university tenure might be a challenge for someone who has much practical experience but no degrees beyond a B.A., it would reflect badly on the quality of education in Hong Kong and on the independence of the SAR if she were to be denied tenure solely or primarily because her research and public positions cause discomfort in Zhongnanhai.

The Case for a New Public Diplomacy

Starbuck Pacific Place

A quieter, cozier coffee house

1457 hrs.

(Note: I wrote about Obama, China and Public Diplomacy in a Viewpoint piece on November 12 for AdAgeChina. The article is behind a subscription firewall, so I have expanded on, updated and revised it below for the benefit of Silicon Hutong readers.)

Now that Barack Obama has made his key foreign policy appointments, speculation and punditry is now turning to the shape that U.S. foreign policy will take after January 20th. When Barack and Hillary sit down to compare notes, I suspect that getting out of Iraq, staying out of Iran, fixing Afghanistan and North Korea, engineering a new Bretton Woods, and repairing ties across the Atlantic will probably top their lists.

Somewhat further down that list will be America’s relationship with China. Given a full slate of issues, I am sure the President-Elect will be tempted to maintain the status quo, even if that may cause him some ideological discomfort.

I hope he resists that temptation, but not for the reason others might give.

A Different Audience

Since Henry Kissinger’s first secret trip to Beijing in July 1971, the modern history of Sino-American relations has been conducted between U.S. diplomats and political leaders and a relatively small elite in the Chinese government. That same small elite, spread across the Party and the bureaucracy, has directed national policy, editorial bias, and public attitudes toward the United States.

When President-elect Obama is sworn into office, he and his foreign policy team will face a China that is different in subtle but fundamental ways from the China that each of the four past U.S. presidents faced upon entering office.

First, while the government and party remain in control, the means by which decisions are reached is evolving. China is increasingly governed through a process by which consensus is reached among groups and policy makers, or as I like to say “one party, many factions.”

Second, this change has opened a window for groups outside of the government to exert more regular influence on policy making. While China’s leaders and bureaucrats still operate in a system where they are free to ignore public opinion when they forge policy, they are (for a variety of reasons) seeking more input from business leaders, academics, foreign experts, and even the public itself.

Third, this is all taking place in an environment where the role of the web is growing in China, and the permissible scope of discourse is wider than most non-Chinese appreciate.

That all of the above has implications for the way companies do business in China should by now be axiomatic. What has not been explored is its importance to diplomacy. Because what this means is that the cauldron in which perceptions, attitudes, and policies are formed now includes a growing helping of public discourse.

Obama’s China Challenge

This has critical implications for the approach the Obama administration needs to undertake in order strengthen U.S. ties with China, especially as many of the new administration’s actions to address the daunting challenges it faces will be seen as running counter to Chinese interests. The Bush-Paulson Strategic Economic Dialogue was not without value, but it has shown its limitations in the wake of recent events. If Obama is to keep his hard choices from backfiring with China, he must make his case to both the Chinese government and the Chinese people.

And to be sure, Obama will need China. To see how much he will need to forge a true trans-Pacific partnership requires only a quick glance at the list of issues he faces. At the very least, China will be essential in forging a global energy and environmental regime, bringing security to Central Asia, ensuring that Russia remains integrated in the global system, midwifing North Korea’s return to that system (and perhaps its peaceful re-unification with South Korea), and, of course, resolving the current global financial crisis and forming new system to both nurture and regulate international finance.

Speaking to the Chinese People

Conventional diplomacy will form a part of the Obama administration’s effort to enlist that support, as it should. But in the current environment in China and the world, it will not be enough. Once in office, the President-elect and his team will need to undertake an unparalleled effort of public diplomacy to engage China’s wider policy environment. This effort must shun the neo-propagandist tools and tactics of the Cold War, creating instead strategies, approaches, and messages more appropriate to a world rendered naked by the Internet.

That effort needs to be built on a foundation that includes, as a minimum, four fundamental steps that should be implemented by July 2009:

First, the administration must begin the effort to create (simplified) Chinese-language versions of nearly every public-facing U.S. website on an agency-by-agency basis. Some, like the Department of Defense, will and should be limited in their international friendliness. But others, like the Departments of State, Commerce, Treasury, Agriculture, and Transportation have immediate value and applicability in delivering US messages abroad, as does the White House site itself. This effort alone will open channels of communication that have been heretofore closed for no good reason. Meiguo.gov, maybe?

Next, the administration needs to learn how to listen to China’s public voices. While this begins with engaging businesspeople, academics, editors, and other influential types, it has to delve far beyond the elites and find ways to listen to the people of China. Polling won’t work. Far better to find a way to listen to what they are saying to each other, and China’s blogs and online forums are an excellent place to begin. In lieu (or in advance of) creating an office in government to do that, independent contractors could be brought to begin delivering this information quickly and efficiently to every section of government.

Third, as the administration builds the capability to conduct its public diplomacy, it would do well to draw from the toolkit it created to win the election. Banished should be the United States Information Agency (USIA,) the Voice of America, and the feeble attempts to date by the U.S. government to use the Internet as a diplomatic tool. Any government can conduct propaganda. Given our tarnished credibility, America needs to win hearts and minds through engagement, not pronouncement.

This means learning how to make appropriate use of all of the online tools available to the administration that are popular among China’s people. Trying to use tactics that worked in the U.S. would miss the point. Public diplomats must learn how to use the channels frequented by China’s netizens in a way that will seem appropriate to those netizens and to China’s leaders. That means treading lightly.

Finally, the administration must realize that to be effective, American public diplomacy must incorporate a substantial P2P element. Obama’s efforts to enlist the help of all Americans in the changes he advocates would be well directed to an effort to rebuild our frayed reputation. In the long run, it will be the relationships between individual Americans and Chinese that will form the basis for grass-roots support for America in the homes and on the streets of China.

Walk First, then Run

The one impression I do not want to leave is that the administration should rush into this effort with great fanfare, with oversized expectations for near-term wins, or with the desire to create a massive new diplomatic bureaucracy. The art of diplomacy was not created overnight, and the Cold War public diplomacy I refer to above was itself a constantly evolving effort. It will be no different with the new public diplomacy with its new tools, new approaches, and new audiences.

What must happen quickly, though, is to recognize the challenge the U.S. faces in the reconstruction of a badly-damaged global reputation, to understand the value of the Internet and its myriad media in repairing America’s image, to focus on China as perhaps the single most important focus of that campaign (aside, perhaps, from our erstwhile Atlantic allies), and to begin the effort at once on a modest scale.

I have no doubt that this idea will cause discomfort in some of the offices at the new U.S. Embassy on Nu Ren Jie and in the corridors and break rooms of State Department in Foggy Bottom. All the more reason to begin soon, while the new President still basks in the glow of his historic victory.

The Huiyuan Test

Starbucks Houshayu village

Socialist networking

1037 hrs.

Picture 2.png

As the rest of the world (and China’s banks) obsess on the unfolding saga of Fannie Mae and Freddie Mac, here in China Coca-Cola’s announced intention to purchase Chinese beverage maker Huiyuan Juice Company is about to force the government to make a very hard choice.

An excellent acquisition…

You don’t need a Ph.D. to see the business value of the combination. Huiyuan, a company that produces a quality product with a better-than-average reputation, lacks the marketing and distribution to turn itself into the leading brand in China in its sector, or to expand beyond the mainland. Coca-Cola desperately wants an acquisition that will allow it to expand its hold in the non-fizzy soft drink category. Coke’s distribution network and marketing prowess are a perfect fit for Huiyuan.

I am not a big fan of mergers or acquisitions, but at the ground level in China, this one makes huge sense for both brands.

The only possible fly in the ointment is a fairly large one: how will the Chinese government react to Coke’s offer?

…at an “interesting” time.

Steve Dickinson at the law firm of Harris and Moure, pllc posted an extended analysis of China’s new Anti-Monopoly Law a few weeks ago on China Law Blog. In that context, he took the time to lay out what he sees as the government’s policy and regulatory approach to foreign direct investment:

“• Foreigners are free to invest in China through WFOEs [wholly-foreign-owned enterprises] or JVs [joint ventures] in the areas of investment classified as permitted or encouraged in the current Catalog for Guiding Foreign Investment.

• Foreigners are permitted to purchase small established Chinese companies where the government is too busy to be concerned with management of the small company

• Foreigners are permitted to purchase large established Chinese companies suffering from financial problems, provided the foreign purchaser will restructure the company and assume the company’s obligations to workers and creditors.

• Foreigners are permitted to acquire a minority interest in large and successful Chinese companies, provided such investment will provide collateral benefits in the form of technology transfer or access to new markets.

• Foreigners are not permitted under any circumstances to purchase a majority interest in a large and successful established Chinese company.”

In addition, the government may look at the transaction in the light of the new anti-monopoly law. While I doubt Coke would pass a pedestrian definition as a monopolist in China’s highly fragmented beverage market (even after the Huiyuan purchase), any acquisition by a foreign market leader would invite scrutiny.

So since this deal involves the purchase of a large, healthy Chinese company by a major foreign player, we are almost assured that the matter is being discussed at high levels of the Chinese government.

Communications will decide

On the surface, all of the above seems to spell trouble for the deal. At the very least there is likely to be a formal review, and there is the possibility that the government might attempt to block the transaction, or force a revision of the terms.

(Ostensibly, the government should have no direct say in this matter, as it appears that what is being purchased are shares listed in Hong Kong. Yet while Hong Kong is a special administrative region of China and thus possesses considerable autonomy, if the Chinese government is concerned about the precedent the transaction will set, they will almost certainly step in.)

All of this depends on how closely the government wants to adhere to its explicit and implicit policy regarding foreign direct investment. And to a great extent, that depends on how carefully Coke and Huiyuan have laid the groundwork with the government in advance of announcing the deal.

Because if there is anyone in the beverage industry in China who decides that such an acquisition would damage them, or if there is someone who just wants to play the spoiler as a means of keeping Huiyuan from turning into a killer competitor, a campaign to derail this deal may be in the offing. Such opposition stopped Carlyle’s effort to purchase a major stake in construction equipment maker Xugong. Given the current policy climate, a similar campaign could have a devastating effect on the Coke/Huiyuan deal.

Whether this deal succeeds, then, has less to do with its considerable business merits or with the law itself. It has much more to do with how well Coke handles the government debates and public discussion on the deal’s merit.

Hopefully, Coke has learned from Carlyle’s experience, and has prepared a case that will convince the nation’s leaders to make an exception to policy and will gain the support of consumers and influential public voices in China.

FDI is not just for foreigners anymore

What makes this interesting, of course, has nothing to do with Coke or Huiyuan, but the future of foreign direct investment in China and the role Chinese business will play on the world stage.

Whatever action the Chinese government takes – or does not take – in this case will serve to further define what is seen as acceptable foreign investment, and what is unwelcome. To accept the deal would be an acknowledgement that China remains open to investment, but that it does not regard every single Chinese company of a certain size as a “national champion.”

To block the deal – or to force its significant revision, will send a message that China will not have its brands acquired just as they are building equity. It will put the nation on record as saying that from now on, it will be China doing the buying, thank you, except when somebody else can help us clean up an inconvenient mess.

In other words, if China blocks Coke, it will be a statement that China wants to approach foreign direct investment in a manner not terribly different than the way governments in developed worlds do.

China’s policy makers would not shrink from making such a statement – on the contrary, it would have incredible emotional appeal.

But for the sake of Coke and Huiyuan, let us hope that they can wait a while to do so.

Congress Watching: The National People’s Congress Website

In the Hutong
Fasting before the physical
1938 hrs.

For those of you keeping an eye on the National People’s Congress sessions and want a break from all of that hard journalistic coverage, the official website of the NPC is here.

Not much there as of this writing, but the public proceedings should be available. Check out the NPC’s main site as well.

And for those of us in Beijing, get ready for two weeks of traffic jams.

The Plural of Anecdote

In the Hutong
Waiting for a Skype Call
2004 hrs.

Listening to a podcast of a lecture on UChannel not long ago I was pleased to hear a respected researcher suggest to his audience that “the plural of anecdote is data.”

Since then I have had some interesting discussions with people who collect data for a living, and it is clear that the more orthodox of the researchers are not happy with that definition.

With many things in China, however, we are faced with a lack of data in the form of scientific evidence or peer-reviewed research. Even when we do have access to those things, they are of questionable reliability, out of date, or incomplete. Let’s face it, this is a lousy environment for private data collection, and if government statistics are any indication, public data is not much better.

While all of us would love to be able to make our day-to-day decisions based on hard data that was collected using methodologies that would pass muster with our b-school statistics professors, that kind of data in most cases simply does not exist.

We must then, I’m afraid, fall back on a far less scientific means of operation, which is to rely on the collected anecdotes we have that are relevant, being as careful and thoughtful about the credence we give them as we would when critiquing an expensive bit of research.

In a market like China, where data is hard to come by and the pace of change is so fast that it outruns research at any rate, in most cases we need to rely on what Lily Tomlin once called our “collective hunch” about the world as it is.

Does that excuse us from being as informed as possible and collecting as much data as we can? Of course not.

But I have seen too many opportunities squandered in this market by people who “need to see more data.” Some days, it’s a good day to rely on a series of reliable anecdotes as your data, provided they capture what you and your team know in your guts to be the real situation on the ground.

China and International Pressure: Keeping the Laundry Indoors

In the Hutong
Enjoying a postprandial food coma
1816 hrs.

A source of constant entertainment for those of us living in China is the growing stream of armchair diplomats who believe that the Beijing Olympics is somehow a lever to bend China to the will of the West.

While one has no problem with a little punditry now and then – even with wonks who challenge one’s own beliefs – one would hope that said pundits would think through their positions with care. This applies in particular to those who speak from the more visible pulpits of The New York Times, The Washington Post, The Times of London, The Independent, CNN, and similar outlets.

A current example is Roger Cohen, speaking in the Gray Lady about the goings-on in Myanmar. He calls upon China to press for an end to the Junta’s rule in Myanmar. Citing the example of Mia Farrow’s criticism of China’s “complicity” in Darfur atrocities, and suggesting that said criticism yielded modest movement, he calls upon someone (it is not clear whom) to “shame China into shepherding Burmese reform, beginning with the release of Aung San Suu Kyi.”

Wordcraft, not Statecraft

This brings up several interesting issues.

First, as mentioned, he is vague about who should do the shaming. The State Department? George Bush? Ms. Farrow? The University of California class of 2012? A polemic is fine as far as it goes, but if one is to call for action, shouldn’t one be specific about who is to do the acting?

Second, he calls upon China to press for a rapid end to the Junta’s rule. Wonderful idea. Unfortunately, Mr. Cohen is also vague about the lever China would use. With the case of North Korea (which he cites as an example of China’s power in the region), the dual levers of food and fuel to an isolated economy were powerful. What, exactly, would China use as a lever with Myanmar? Trade and economic sanctions with pariah nations have a pathetic record of producing change – they tend only to increase repression.

At the other end of the spectrum, armed force on the part of the PLA would make China’s leaders queasy, and the rest of the world would hardly welcome the emergence of the PLA as an expeditionary force. (Chinese tanks in Rangoon, anyone?.) Statecraft – particularly when the ends include regime change – is a very tricky and – as the current U.S. administration has discovered – often bloody business. But again, why ruin a good polemic with details?

Third, Mr. Cohen notes he is neither in favor of a boycott of the Olympics, nor of a breakdown in Chinese-American relations. Once again, though, he fails to suggest what lever the U.S. or self-appointed citizen-diplomats like Ms Farrow might use to convince China to do whatever vague something he is urging. If you want to threaten to boycott the Olympics, you had bloody well better be prepared to do just that – and endure the damage to Sino-American relations – before you sit down at the table. And if not that, what?

Finally, Mr. Cohen is quite keen on dumping the junta, but he is again without the support of detail when it comes to what should replace it – and how.

Statecraft, not Wordcraft

The problem, of course, is that Mr. Cohen is one of those people who feel the only way to deal with China is with the most accessible blunt instruments of statecraft. In this he exposes his lack of understanding of how to work with the leaders of the world’s largest countries.

One need neither kowtow nor threaten to get China to work with the U.S. or the international community on issues of mutual interest. One need merely make a clear, cogent case to China’s leaders that their bests interests are served by finding a mutually acceptable way of inciting change, and do so in a way that addresses the domestic political realities of all involved.

Want China to bring about regime change in Burma? Explain to the nation’s leaders exactly how China will benefit by the change (domestically and internationally), how it will benefit by being seen as the catalyst, and how whatever will replace the junta will be better for China than the current situation. Sound easy? I can assure you, it is not.

Oh, and by the way – make sure before you do all of this that you have thought through the long-term implications of a China prepared to use its growing muscle in defense of its own interests.

Once astride the tiger, the Chinese saying goes, dismounting is difficult.

Why China Might be Playing the Blame Game

China Law Blog referred me over to a superb post by Will at ImageThief that explains that China’s entire PR strategy around the recent food and drug export tainting scandals has been abysmal – or worse.

Will points out that AQSIQ and other government organs blaming Panamanian traders, the USDA, foreign reporters, former drug chief Zheng Xiaoyu, and each other – basically doing everything but take responsibility.

To outside eyes, that’s bad, if not pathetic. Here is the government of one of the most powerful nations on earth abjectly refusing to take responsibility for something that, conceivably, it could have had a hand in preventing.

Whenever I see inexplicable situations in China, rather than lash out or go postal, I stop imbibing caffeine and sit back for a moment to reflect on some of the reasons this could be happening.

I think the spate of denials and blamestorming that is going on are probably driven by some deeper issues.

  • First, it is entirely possible that Zheng Xiaoyou’s recent death sentence for his dereliction of duty is having the perverse effect of scaring the living hell out of everybody in the food and drug inspection business, and thus causing them to play the blame game out of sheer fear for their own lives, facing the possibility that they may be next, rather than having them come clean with any issues they are already finding.
  • Second, there is the very real possibility that out in the provinces there is some horribly deep rot in the inspection system. As good as things might be on top, it is entirely possible to imagine that a number of individual government inspectors have been turned, that the concerned bureaus know or suspect that, and they’re worried it will wind up on their plates.
  • Third, let’s remember for a moment the enforcement challenges China faces on everything from traffic laws to intellectual property protection. It is quite easy to see how local political pressure to go easy on hometown enterprises could make real enforcement impossible, even for the most intrepid and honest inspector. Even in this case, the blame for failing to enforce would land on the enforcer.

Independently, any one of these would be sufficient to explain the knee-jerk posterior-covering going on. If the problem is a combination of these factors, serious action is required.

What has to happen to stop all of this is an enlightened approach at the highest levels of the Chinese government. Somebody very senior has to say “I’m not out for somebody’s head – I’m out to solve this problem. People will be evaluated in this process by the vigor with which they help us find and implement workable solutions.”

That’s a de facto amnesty, but the serious pain this situation is set to cause to some critical export sectors in China justifies it.

Once we’ve made it through this crisis, though, China needs to dig deep into its inspection systems to find out how to avoid this in the future. 99% safe is not anywhere near enough when lives are at stake.

The Permeable Membrane: Why Beijing Fears the Media

The Silicon Hutong Suite
Meguro-ku, Tokyo
Amazed at how the Christmas Fairy appears to have upchucked on Japan
1132 hrs.

Proving once again the value of a subscription to The Wall Street Journal, Geoff Fowler and Jason Dean have written a superb AWSJ front-pager on why China’s leaders are growing increasingly uncomfortable with the rapidly improving quality of investigative journalism in China. Cut free of the government teat, newspapers are actually having to attract readers by the quality of their copy, and many publications have built powerful reputations and loyal readership by unleashing their smartest journalists to do exposes on nefarious business practices and government corruption. The government was happy to have reporters playing this role – it served to support broader policy objectives, and it kept China’s ace reporters out of more sensitive issues.

It used to be that foreigners were the only reporters who were really good at this sort of thing, leading to the regime of regulations and enforcement that today still dog the heels of accredited international journalists. A small but growing group of locals have gotten good enough at it, though, that they are finding themselves operating under a similarly restrictive regime.

There are two points that this brings up that Geoff and Jason didn’t get a chance to cover, and are worth bringing up. I could go into them more deeply, but in short, the membrane is no more.

There was once an impermeable membrane between the foreign media and local media – what was written in the foreign press reached only foreigners in China and overseas audiences, and what was written in China stayed in China. No more. Foreign news became broadly available in China via the Internet and via local papers repeating stories discovered on the Internet, but also via a small group of internally developed publications that inform the leaders of China’s government organs and SOEs.

International wire services and specialty sites like ChinaTechNews have recently built large local staffs in China who scour the local press for stories of interest, do some checking and analysis, and pass those stories onto global audiences. So what is written by Chinese media not only moves locals, it moves international markets and perception of China.

In short, the lines between foreign and local media, at least in terms of editorial coverage, are disappearing. For that reason, we can expect in the coming months to see growing government discussion about – and regulation of – the way journalists operate in China.

What this means is that the government will find it more and more difficult to play local and foreign media outlets against each other. When the locals and the foreigners make common cause on to limit the severity of the new regulatory regime, that will be a signal that media as an industry in China is turning a very critical corner.

News from the BSA: Underneath the Bluster, China Feels Insecure

Perspective: What China thinks about China,” by Robert Holleyman, CNET News.com, October 5, 2006

Robert Holleyman, president and CEO of the Business Software Alliance, appears to be trying to give his Global IPR Stormtroopers a kinder, gentler face by doing a survey about how Chinese people feel about China. The survey chose to go deep with a group of influential respondents rather than a wide survey of the nation’s sentiment (a wise approach – YOU try doing a statistically significant sampling of China’s heterogeneous population.)

I give Holleyman an “A” for effort – I know what surveys like this cost (anywhere from $500 to $1,000 per respondent, if done well) and it could not have been easy for Holleyman to talk his members out of that kind of wampum when all they want the BSA to do is work for stronger IPR regulation and vigorous rights enforcement.

But based on what the BSA is telling us, I have to give him a “B-” for insight and a “D” for actionable intelligence.

What did the BSA find?

• Chinese elites feel that the rest of the world misunderstands China. This is only a story to people who do not deal with China regularly, and I think most of us would fess up to being limited in our understanding of the Middle Kingdom – even those of us who live and work here. What would have been a far more interesting issue to probe is the extent to which these elites understand (or misunderstand) the rest of the world.

• China sees India as more of a competitor than the U.S. This needs to be probed – do they feel this way because they see the U.S. and Japan as being so far out ahead – or because they see the U.S. and Japan as declining in their global economic and political power? Or because they have a different perception of competition for inputs and markets?

• Chinese have a “sober appreciation” of the challenges that face them. That’s good. The bigger question is “what are they doing about those challenges, and what do they see are the barriers keeping them from addressing them?”

All interesting, none of it earth-shattering, and none of it likely to get the BSA pegged as a thought leader.

Now, I haven’t seen the report, only Holleyman’s op-ed on CNET. I checked the BSA website, and apparently the report is not public. That’s a shame, because I have to believe there is more to all of this than what the BSA has chosen to tell us. But I also suspect the juicy bits are being held back for the members. I also suspect that one of the real motivations for this survey was to have a pretext to engage opinion leaders in China on a topic that was less confrontational than the BSA’s normal desk-banging focus on getting China to enforce its IPR laws.

All pretty disappointing. Whatever BSA garnered for its members in this process, it has done little to advance the public debate about China’s rise and shed light on issues critical to those of us doing business here.