Understanding the way China is governed, and why.

An Economist and a Gentleman

China Names Economist as Central Bank Adviser,” by Rick Carew. The Wall Street Journal, Beijing, August 14, 2006 (Subscription Required)

I had the rare and humbling honor of sharing a podium with Professor Fan Gang, head of the National Economic Research Institute, at a Singapore confab for Strategic Intelligence about six years ago. He is every bit (and more) the worldly and sophisticated an economist as Steve Green at Standard Chartered gives him credit for being, but he is also extremely engaging, easy to talk to, and as comfortable in a salon full of western businessmen as he is in a hall filled with party cadres.

It is this combination of intellect and social ambidexterity that makes him such a positive addition to the monetary policy committee at the People’s Bank of China. I can only hope this is a stepping stone to a more official position.

If nothing else, China could use his talents to mange the fairly hawkish rhetoric coming out of U.S. Treasury Secretary Henry Paulson’s office. After Snow had backed down a bit, Paulson’s debut in office has been marked by increase demands to adjust the yuan. I think Fan Gang is the kind of economist that can help PBOC and Treasury build a clearer mutual understanding based on the economics rather than the rhetoric, both because he fundamentally agrees with some adjustment, but also because he can clearly and intelligently articulate (in terms U.S. economists would get) why it can’t go any faster.

Oh, Gee. Are You Guys MAD?

My takeaway from the outrage coming out of the Holy See around China’s appointment of two new bishops is simple: welcome to the table, gentlemen.

A common Chinese negotiating tactic when complex discussions reach an intense stage is some form of demonstration of how little they need you (whether that’s true or not). China clearly intends this as an attempt to demonstrate to the Vatican who has the power in this arrangement.

The reflexive reaction on the part of many western negotiators would be anger. “Bad faith,” we would call this, a demonstration that the other side isn’t really serious.

In reality, it’s something quite different, possibly an effort to hide a weak position. The challenge for the Vatican – and anyone in this position – is to step back, re-assess what the move is saying about the Chinese negotiating position, and then to consider your alternatives.

Which I hope they do – all indicators suggest that not only has progress been made, but that both parties have already planned what some of the next steps are.

China Quietly Adds a Layer to the Great Firewall

In the Hutong, deep, deep inside the Bunker

The Washington Post site is blocked.

The guys at BeijingLUG are reporting some bizarre internet behavior – and verifying that some interesting blocking – never before seen – is happening at the international gateways. Dumb stuff – even Zinio.com, where one downloads electronic editions of major magazines available ONLY with a U.S. credit card, is likewise blocked.

It’s getting really ugly here again. That’s no news.

The question is – why now?

Why, all of a sudden, after a long, long liberalization, have the leadership of China decided that they need to crack down again?

The ostensible reason given is always stabilization.

Stupid twice.

China’s continued stability depends on a constant inflow of foreign cash and jobs. Here’s the problem. Businessmen in this country need access to their information. If they can’t get it, they will be increasingly inclined to take their business – and their regional headquarters, and their employment – elsewhere.

And when the economy’s growth drops off, and the property bubble bursts, and foreigners stop hiring scads of local workers because they’re shipping out to India or whereever, THEN where is this place going to be?

Games in for a Rough Ride in China

In The Hutong,

The Chinese government’s recently issued list of 50 banned video and computer games is going to grow, and I wouldn’t rule out the possibility of more aggressive moves against this genre of entertainment.

The problem with games goes beyond this current banning, which primarily content and anti-piracy focused. (I mean, come on – anybody who has played Command & Conquer: Generals can understand why the content nannies in the Beijing government might have a tiny problem with it.)

The real problem is that there is a growing sentiment in the market among parents, teachers, policymakers, and journalists that games are little more than an addictive, anti-social form of time wastage, like gambling without the cash, and that they have no redeeming social value. This sort of perception makes it difficult to build any kind of opposition to these sorts of administrative action, and they make the lives of game manufacturers uncomfortable.

The industry can either say “hey – parents, teachers, and policymakers: bite my game controller,” and deal with the results of that kind of approach, or they can take a more proactive approach to improve the image of gaming among those groups.

Guaranteed, if the industry DOESN’T do anything, these problems will grow. Soon.

You read it here first.

Jiang, Taiwan, and the World

All this brouhaha about Taiwan – is it real, or is it a crimson anchovy?
Joseph Kahn at the New York Times makes a good case to suggest that Jiang Zemin remains firmly in control of security policy in China. Not terribly surprising given Jiang’s role as chairman of the Central Military Commission (junwei).

Some observers question how Jiang, virtually the creator and chief guardian of “the middle road” between conservatives and reformists in Zhongnanhai, could possibly have become a leading voice in government for “the slow road” to reform. There are a range of possible explanations, but the most likely is that he has used his new position to solidify his credentials as a hawk and conservative so that Hu Jintao could afford to play the reformist card. Not exactly “good cop/bad cop,” more like “black cat/white cat.”

What continues to cook my noodle is exactly how concerned junwei remains about Taiwan. The more one looks into the issue of Taiwan and its place in the military doctrine of China, the more one begins to realize that this is likely the reddest of red herrings. This is not to suggest that the possibility of Taiwan going it’s own way doesn’t concern China’s leaders greatly. Rather, that Taiwan is a convenient target on which China could appear to focus its attentions, thus making the world assume that China is focusing its attentions on Taiwan. Clearly, the PLA has to be worried about a broad range of security issues, of which Taiwan is just one. In the land of Sun Tzu, the birthplace the art of strategic distraction, how far could this be from the truth? Regardless, if I were Chen Shui-bian, I would studiously avoid believing my own rhetoric and cool it a bit. The last thing this region needs right now is a tinpot politician with delusions of greatness ready to sacrifice peace in some grand, futile, and horribly costly gesture.

Potential Chinese Geopolitical Security Concerns:

1. A rogue North Korea (not just because of what Kim could do, but because of an expanded U.S. presence in the region.)
2. A re-armed Japan driven by neo-Keynsian thinking (“tired of building bridges nobody uses and roads to nowhere? Hey! I’ve got it! Let’s rebuild our military! Banzai!”)
3. An unstable Russia
4. The growing influence of would-be muslim theocrats in Central Asia
5. Growing American “adventurism” in Southwest Asia
6. A fluid leadership situation in Pakistan leading to instability in the Subcontinent.

Shrimp Joins Steel as a Sino-U.S. Irritant

One week after the U.S. gets all steamed about the revocation of Pfizer’s Viagra patent in China, sending China’s critics into a media tizzy, the United States government masterfully demonstrates its possession of the free-trade moral high ground by slapping 100% duties on Chinese shrimp, then turning around and passing that money directly to American shrimpin’ boat captains (thanks to the Byrd Amendment, which the U.S. has been ordered by the WTO to revoke and which even Forbes excoriated on its passage) This largesse for America’s fishermen comes on top of state subsidies they receive. BusinessWeek suggests that this will raise the cost of shrimp to the American consumer by 44%.

Notwithstanding whatever case there may be to offset hardships felt by U.S. fisherman and China’s fairly mild initial reaction , the move is the latest in a series of rulings likely to complicate the job for U.S. trade negotiators seeking to protect a broad range of industries by opening the door for trade in China, and will likely raise the tit-for-tat battle for mutual market access with the PRC.

While the case for an industrial policy is still weak in the U.S. (given that to many Americans such an approach would reek of favoritism, which is ostensibly un-American,) the U.S. is going to have to begin making unpleasant choices. A world of free trade does not permit a nation to demand open access for some of its industries and protect others. Somewhere, somehow, something is going to have to give, whether it is textiles, cotton, steel — or shrimp — in the name of access for automobiles, aircraft, high-technology, and a host of other industries.

Interesting reading on this is Robert Lawrence‘s seminal debunking of the hollow-America myth in his 1984 work Can America Compete . I’m not normally a fan of Brookings Institute authors, but this little gem is a rare and worthy exception, and Lawrence (currently a senior faculty at the Center for Business and Government at Harvard’s Kennedy School) defies the liberal bents of his institutional affiliations as one of academe’s leading free trade advocates. He quite nearly makes a convincing case for an industrial policy, and this was at a time when there weren’t very many major U.S. industries to favor — in 1984, IT was a tiny fraction of its current size and Microsoft wasn’t even a public company.

China: Want to succeed in the WTO, Get Off the Defensive

I’m quoted in the China Daily and a special edition of the Beijing Review covering this year’s plenary session of the National People’s Congress in the lead article. The topic was the WTO, and I said that while it was pretty clear that the government was doing all it could to implement, it needed to communicate its challenges in implementation to manage the expectations of the rest of the world. The core challenge for China is that what IT sees as compliance, and what other parties would see as compliance, will be two different things unless it steps forward and establishes a defensible benchmark.

Political Correctness Be Damned: Ten Things You Aren’t Supposed to Say About China

Ten truisms about China that usually upset my fellow Americans…and others.
1. China is not a democracy because the Chinese don’t want one. Not yet.

2. The human rights situation in China is steadily improving.

3. The Falun Gong is a genuinely dangerous fringe group and should be controlled, even supressed.

4. Tibet is better off a part of China than independent.

5. The Communist Party is China’s best shot at this time.

6. Most foreign companies who fail in China do so more from incompetence than anything else.

7. The Sino-Foreign joint venture in its classical form is the worst business structure imaginable from a management point of view. Just because some very bright people have made it work does not make this point less valid.

8. What we think China’s real problems are, and what they think they are, are different. Neither side is completely right.

9. IPR issues in China cannot be solved by legal processes alone, or even as a primary focus of effort.

10. Localization is a good thing as long as you dont take it too far. There are some things foreigners still do better than locals.