What Is the Chinese Economic Model?
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The deck is stacked against foreign companies. If they get large enough their business will be manipulated to fail in the favour of a home grown competitor. There is no effective rule of law and most foreign companies are seen as resources to strip and discard when their utility has ended.
(I had posted a more detailed comment along these lines in the Google thread here: http://news.ycombinator.com/item?id=1050829 )
China also has a looming demographic timebomb that will tear the country apart. This year was the peak of the working age percent of the workforce. From now on the ratio of working age adults will only decline (thanks to the single child policy). China isn't wealthy enough to support all those non-working people.
The world needs to start being more forceful with China. We don't want their model to succeed. Trust me, you don't want to live in that world.
Successful examples would include Starbucks, KFC, Pizza Hut.
More importantly they're in an exceptional business segment (that of selling western fast food) which local Chinese companies are unable to play almost by definition. I suppose Intel is another example, but that's really only due to the fact that it's also not practical to have a local competitor to it. They would if they could.
I'm sure you could find other companies where there's an exception, so my statements and that of the OP's article should only be taken as generalities. But I believe they're true much more often than not.
P&G
Most Chinese choose P&G without even knowing it's not a Chinese company. It's the best localization I've seen so far.
Rationally, it's just the competitor will take advantage of your foreign identity to against you. Nationalism is an important market factor to consider when doing business in east Asian countries.
It's more serious if your business is in strategically critical industries.
If it were up to the Chinese consumer they would actually prefer to buy a foreign product assuming they could afford it. Foreign brands are associated with quality and status. And after all, foreign companies are not poisoning their milk and killing babies.
It's not free market and it's not fare game, but each side has their own shorts and longs. What if I tell you Baidu is not an Chinese company either?
http://www.tektalk.cn/wp-content/uploads/2010/01/baidu.jpg
Baidu got its investment from US even Google. Its boss Robin Li has a US passport.
Strictly speaking, many large companies in China are, in fact, not actually Chinese companies.
> the net is that most of the value created stays in China. This is the nature of the game. The real or de-facto operating entity, is almost always Chinese.
This is true. It will take some time for the Chinese to realize market is not always a zero-sum game. I blame the Communist education, sub-consciously everyone think capital is dirty and tries to grab their share as much as they can to feel secure. Voices inside the country are always fear of US invading China, this is laughable but it is true. So in business 'foreigners' are often excluded precautiously.
However it's important to realize that nationalism & patriotism is non-reversible for China. It's necessary to act like your business in China is doing good for China.
- Wholly Foreign Owned Enterprise: This is a Chinese LLC with foreign shareholders. All management and IP reside within the Chinese entity (or are licensed to). Management operates under Chinese laws and there are restrictions on how many Z Visas they'll give you to bring in foreign workers.
- Registered Office: This is just basically an outpost within China. It is quite limited in what it can do, notably it may not bill Chinese companies for services or products offered. Thus you can't sell anything from it. Interestingly here they tax you in China based on your Chinese expenses (since you have no revenue).
- Joint Venture: This is when you team up with a Chinese company and create a new company that has local management and IP which then engages the Chinese market.
As you can see your options for doing business within China are pretty restricted and pretty much always puts you at the mercy of the Chinese.
Similar system for personal gains. If your a foreigner working in China your supposed to be paid by the local company which means through their local bank accounts which can only pay to your local bank account (usually only to the same bank). If I recall correct, your default quota per year is $50K USD (or is that RMB? I never hit either limit). So if your making $200K a year in China and are not blowing all that on housing and having a grand time, your limited to only being able to send $50K a year out. Some get around this (as well as taxes) by paying their foreign employees through an international entity and then the employee bring in the cash he needs on a regular basis. But this practice is deteriorating as China is becoming better at policing payroll of foreigners working in China.
Your observation that many Chinese see deals as a zero sum game is on target. Most do not believe in win-win situations as they have no history of seeing such things.
Many consumer product companies: Coke, P&G, Nike, etc.. have done well. How their revenue breaks down to sharing with local partners and how much gets back to the international public entity is unknown to me.
The article makes some good points, but still tries to label the gov as "Communist China". The author makes a good case for educating Westerners that China isn't what you think it is. We need more of this kind of talk. But reusing the old label of "Communist China" misses the mark. I don't know what a better label would be.
I agree with much of what you have said. The deck is stacked against many types of foreign companies. It is well past time for these entities to start publicly acknowledging this.
All that said, I cannot agree with everything the author has said. His 9 points listed under "What is the Chinese Economic Model" are well identified (the bold bullet text itself). But his rational in each of the associated paragraphs is one-sided. He seems to fully support Western economic models without acknowledging their flaws and culpability in our engagements with China. Stolen IP? Slave labor? Western government and business knew this full well when we got started and we did it anyway because we reaped short-term value from doing so. We helped fuel this fire. We allowed the Yuan to be a fixed/manipulated currency and knew full well why China was doing it and what would happen after they amassed enough wealth. These "playbooks" have always been completely open. We may not be able to directly influence China, but we can directly influence the Western leaders we elect and the Western companies we buy goods and services from.
If you need to understand the mindset of the typical Chinese government official, I will offer this: Many of them are living a "good life" and those that support their governance are living good lives. They do not want economic growth to collapse and do not see communist-era economic methods as appropriate tools. They kept the structure of governance but replaced the tools. But even though the structure of governance has remained very similar, the number and variety of participants has changed considerably. Unlike most U.S. leaders and citizens, most Chinese have experienced great suffering. There is support by mainstream Chinese for much of the current heavy handed behavior and as such the government will continue to use such tools they feel are useful in hedging against various forms of collapse. Its critical to understand much of this is not big gov oppressing its people as the majority of Chinese approve of hedging against extreme failure at most all cost. Will this approach even out over a reasonable period of time? Will it avoid more severe outcomes? I have no idea. I do know if things get bad enough that it effects the security of Western countries, then its already extremely bad for the Chinese.
What is the structure of the Chinese government? National, Provencal, City? How are their leaders elected? Are there term limits? Does no one get to vote? If not, who determines the leadership?
How do laws get made in China (National, Provencal, City)? What are the rights of those accused of a crime? How does Judicial Process work? In general, are laws "common" or "codified"?
Is the military in control? Is the military allowed to take action within the country to keep order? Or is this the domain of local and/or National Guard as it is in the U.S.? Is China a police state? How so? Do the police not answer to anyone?
Does China have a "constitution"? What if any basic rights does it guarantee its people?
How does China's government (through answering the above) differ from Cuba? Russia?
This is how the United States developed in the past. Alexander Hamilton's economic strategy for the United States followed a similar script. See his Report on Manufactures: http://en.wikipedia.org/wiki/Report_on_Manufactures
This report was read by Friedrich List, who then wrote a similar development strategy for the 19th C. German economy. It was this strategy that made the German industrialization so rapid and effective. http://en.wikipedia.org/wiki/Friedrich_List
There are a number of spectators who have correctly characterized China's model as modern-day mercantilism (even though they disagree on specifics and the appropriate response):
Krugman: http://krugman.blogs.nytimes.com/2009/12/31/macroeconomic-ef...
NRO: http://www.nationalreview.com/nrof_bartlett/bartlett20031105...
See also: http://www.associatedcontent.com/article/1764172/china_merca... and http://chinaconfidential.blogspot.com/2006/06/mercantilism-w...
The US is far from a proponent of free trade!
As far as I know, only one country ever practiced fully free trade, and that was Great Britain for about thirty years starting in 1846 (after the repeal of the Corn Laws, a feat accomplished in part by David Ricardo, who you might remember came up with the theory of comparative advantage). This time period was more or less the height of the British Empire's power.
Note that this came out more than a week before Google made its announcement that it was considering pulling out of China. I think other startups or established companies considering an expansion into China should read this first. There are certainly opportunities, but lots of asterisks too.
I think any CEO should be concerned about his and his employees' safety in light of this kind of thing.
The funny thing about cost is that it defines itself.
The playing field isn't level.
There are many human rights problems in China, but it is unfair to say they throw _all_ these issues aside. I known many Han Chinese that openly support Tibetan culture and wish to see it preserved.
Environment damage has been a calculated cost and there are many in China that push against it trying to say its time to pull back. A few years ago, I was walking up to a subway station in the Shanghai suburbs. There was a group of local college students with a huge banner urging people to protect the environment. They were asking people to sign the banner. I stopped and said hello and signed. The students were thrilled to have a foreigner sign, but the banner already had hundreds of local Chinese signatures on it. There were no police harassing them and the students seemed at ease in their public protest.
Sure, the playing field is not level. This is by design and China is fairly transparent about the mechanisms they will use to protect or lock in economic growth.
Look at a different trading partner with the U.S.; take a look at Mexico. NAFTA was promoted as a "trade highway" to U.S. voters. Most would take that to imply the highway goes in both directions. But if you have done business in Mexico or travelled there outside the confines of a resort, you'd notice that U.S. goods do not move into Mexico as freely as Mexican goods move out. In English, we always distinguish something that is "one-way" by being sure to say so. But, I never heard a U.S. politician talk about the one-directional nature of NAFTA. I think much of our problem with China is that most simply don't know what the real deal is and some of us are just starting to figure it out.
I take two related issues with this statement:
1) He says "in fact... human rights have recently suffered" as if it demonstrates that China remains a communist country. Certainly attempts at communist societies and human rights violations are correlated in recent history, but human rights violations are not evidence of communism.
2) China is not communist, it is Communist - that is, run by a political party which has the name Communist in it. People use the phrase "communist China" as slur. I believe this perpetuates the notion that China is actually communist among a non-trivial portion of the American population. It would be better to call attention to China's authoritarianism, which I think is what he's taking issue with.
However I do agree that China is better referred to as an Authoritarian government with communist and capitalist influences.
Also, we should all not underestimate how revolutionary the Chinese can be. They have a short fuse and do not in general enjoy the authoritarian regime. They put up with it for strictly pragmatic reasons, if given a path of their own choosing that they perceive as better they quite possibly will take it.
When one of Australia’s top mining firms, Rio Tinto,
refused to allow China’s Chinalco to double its ownership
interest last year (to 18%), China arrested local CEO
(and Australian citizen) Stern Hu and three managers,
who remain in jail today, under espionage charges.
China denies any connection. ... In politics, thought,
and business, China remains a police state.
The event that immediately preceded the Rio executive being arrested was the closing of contract negotiations for a yearly contract on iron ore shipments [1]. The rejected Chinalco acquisition mentioned in the quoted section was only a month before, but evidence for link of causality between that and the arrests is weaker than between the price negotiations and the arrests.
Other motivations need to be weighed up as well:
* At the time the arrest happened there were internal riots in China's western provinces (causing their leader to abort one of those G meetings and fly back to China). There's nothing like stirring up trouble against foreign devils as a mechanism to distract your people away from internal strife.
* The snubbing given to the Australian foreign office also suggests a political aspect. Did the Rudd government imply that it could cause things to happen that it could not deliver? Or did it hamper the process? Or are China just being big-girl's-blouse because they can? [2]
In weighing up iron ore issues you need to be aware that China is easily the largest producer [3]. It tends towards bilateral deals on 'strategic' commodities rather than working through global markets like the other major consumers (e.g. oil). This pushes the dynamic of areas affected by those commodities from flexible markets into a zero-sum game.
[1] See http://en.wikipedia.org/wiki/Rio_Tinto_Group#Arrests_in_Chin...
[2] "The Chinese seem determined to continue to humiliate Canberra.", http://www.theaustralian.com.au/news/beijing-ramps-up-the-hu...
Of course, in such a system, the government is still mucking about in the economy, substituting cronyism for market decisions, and trying to dictate profits and define their rate of economic growth just like that state legislature tried to redefine pi. Even Europe and the post-bailout US look like libertarian fantasies of free enterprise and transparency in comparison.
We have nothing to fear from the Chinese Model. Their explosive economic growth has almost certainly been exaggerated, and even if taken at face value, this fascist system still leaves China, aside from a few rich spots, closer to the third world than the first. Companies dealing with China should be aware of what they're getting into - but to put it coldly, they should do so at their own risk, without tariffs or rattled sabers on their behalf when things go wrong.
Tangentially, I'm a little amused that "locovorism" has a better cachet than open "anti-globalism".
The Chinese may participate in free trade, but it's a mistake to assume they've become liberals in any sense. When the Chinese learn about free trade, it's in the context of gunboats shelling their cities to protect drug runners, not John Stuart Mill.
It's a textbook, but extremely readable and full of interesting history, as well as modern stats and tables.
Consider a few points:
- The conditions inside US prisons (daily, predictable rape, etc.) rival those in any labor camp anywhere in the world.
- Many US prisoners are nonviolent drug offenders.
- Don't forget the human rights abuses in Abu Ghraib and Gitmo and the hundreds of thousands of innocents killed in our oil wars.
- China's main social issue is rich coastal cities and extremely poor inland areas. This geographical accident is behind many economic policies. The US is lucky to have rivers that tend to lead to a far more even distribution of wealth across geographical areas.
- In its early days the US embraced mercantilism. It has particular political causes and over all countries who practice it lose more than they gain from it, but the tradeof is considered worthwhile for political reasons in spite of its foolishness. In China's case, it represents a way to grow the Chinese economy while not risking social stability (which is considered highly important considering the above bullet).
- The US was also formerly a thief of intellectual property. Notably, many writers and publishing houses in England were irate that presses in the colonies paid no royalties, etc., a situation made worse after the American revolution.
- Massive sectors of the US economy are under significant government control, even before the bailouts. It's splitting hairs to bemoan China's "communism".
- The average person in China does not care about all the political nonsense that we are being propagandized to stew over. Most people all over the world just want to be able to lead a reasonably happy life, etc. China surely has some "backward" aspects, but consider that we did not have women's suffrage in the US until quite recently, and that we had a draft until VERY recently. Suppose China is 100 years behind, is that the end of the world? Do we really deserve to feel such righteous indignation?
When someone points out something bad about a country it's silly to say they can't say that because there's bad things about their own country. There's bad things about every country, it doesn't make them beyond criticism.
And that sir is why you get my downvote.
Also, I think he doesn't deserve that downvote. He contributed his own thoughts, which were in no way rude or trollish, and seemed more or less educated. They also sparked a bit of interesting discussion. Anyway, my upvote balanced it out. ;)
Why is it not possible that Chinese leaders are not all-powerful despots who rule with an iron fist? They do not have absolute power, and regardless of whether they have official democracy, power is largely decentralized and influenced by populist needs (notably channeling some of the coastal wealth to the country's majority who are extremely poor)...
You are, I think, falling into what I call the "Saddam Trap". Saddam was a bad guy, most likely, but we were all told to hate him so that we'd support a war that killed hundreds of thousands of innocents.
I think a far more accurate and rational perspective is to realize that no ruler has fully centralized power and that by its nature decentralized power is essentially populist (if not somewhat democratic) in nature, even if there isn't an explicit constitution declaring it to be. The Tienanmen square uprising offers evidence of vibrant currents of dissent within China, and so change is inevitable over time. The question is why you think it must happen on your timetable or on the timetable of the Tienanmen protesters.
* * * *
Also, are you sure that the propaganda is not intended to make Americans view the Chinese people as broken saps held hostage by despots and worth sacrificing a few hundred thousand of should our leaders deem military action necessary? For all the concern about Saddam's despotism, the myriad innocent Iraqi dead from our oil war don't make US headlines.
Now, I have no doubt there are dozens of examples. On the other hand, at least US laws allow the rest of the world to know about these examples when they happen.
And yes, if China is 100 years behind, it may be a significant. Is there any reason that the suppression present should be endured? The more pressure is put on China and other countries that devalue human rights, the sooner they'll have to change.
Personally, I would love to see more indignation at the United States as well. Some of the stuff going on with this country is just plain unacceptable for a first world country.
Another way to put it is, everyone learns differently. You don't publicly scold a sensitive child and think that is going to be effective. China is that sensitive child (at least relative to the in-your-face ways of US politics).
Evidence please?
The conditions inside US prisons (daily, predictable rape, etc.) rival those in any labor camp anywhere in the world.
China's main social issue is rich coastal cities and extremely poor inland areas. This geographical accident is behind many economic policies. The US is lucky to have rivers that tend to lead to a far more even distribution of wealth across geographical areas.
Do we really deserve to feel such righteous indignation?
I think your conspiracy theory about China's poor regions is fairly off the wall. Look at the mountains and rivers and see how there are not good shipping routes, etc.
China believes that it imprisons people who are doing things that are harmful to its society.
I think your conspiracy theory about China's poor regions is fairly off the wall. Look at the mountains and rivers and see how there are not good shipping routes, etc.
I think any bias that exists is not so much anti China as anti authoritarianism, anti-democracy, anti-suppression-of-freedom-of-speech, anti-bunch-of-thugs-killing-people-for-having-a-different-opinion etc.
I doubt it is really China specific. It is just that the present Chinese government is a nasty ruthless authoritarian dictatorship. The same arguments would be raised here against, say North Korea or Saudi Arabia in other circumstances.
People here seemed to be biased towards democracy, rule of law(even with occasional lapses), freedom of expression(even with an occasional lapse or imperfection) etc etc. Not sure it is a bad bias to have.
However, the question I have it "what should we do about it?".
Should we impose trade sanctions? (surely the US tire lobby would appreciate that). Should we begin flying drones over Beijing? (surely our defense lobby would appreciate that), should we engage the CIA to help Chinese dissidents bribe/assassinate Chinese officials who oppose democratic reforms? Should we send warships to wait near Taiwan?
All the ire must be directed into action if there is any purpose to it other than self-congratulatory "we're so great b/c we don't use tanks to shut down civilian protests, at least since the 1960s"...
What range of actions are you comfortable with? Which of them truly promote the interest of democracy and freedom in China, and which serve a more narrow or militaristic interest?
China is full of enlightened people who see the direction they wish China to go over time. Do they all want to become martyrs and die in some coup attempt engineered by the CIA? Or would they rather make a few sacrifices and do what they can to nudge their country toward change?
I think it's awfully arrogant for anyone in the US to attempt to engineer revolutions and suffering abroad. The sort of self-righteous moral high ground that China bashers use is essentially neoconservative ideology. Yet we are told it's about human rights. Wake up!
Claiming the workers are underpaid relative to the USD because of the RMB peg is one thing, but saying that they underpaid relative to their own economy (which is how I interpret "slave wages") is a very different thing. He suggests that the government is the source of these "slave wages". In what way is the government responsible for low wages for uneducated workers when those workers are in competition with many other uneducated workers in a country with a population of ~1.3 billion?
Is it so unreasonable that an "auntie" who cleans houses and does laundry for a living is paid about 1.25 USD / hour (approximately the rate here in Beijing) when a low-level analyst at McKinsey here makes 15,000 USD a year? In relative terms, the manual laborer doesn't seem like she's making slave wages to me.
"If you are building a downtown tower in Shanghai (and there are a lot of them, many empty), you may not have to pay some of your workers for six months to a year. Or you fire them just before that: free labor!"
That's not to mention the children and mentally handicapped that are literally sold into slavery. http://www.time.com/time/world/article/0,8599,1635144,00.htm...
The Ayi doesn't have much beyond a subsistence living. Needless to say she's probably supported as well by her kids or something, but if not she's in a world of hurt when she's too old to work.
I do appreciate why it's used but slave wages is probably the wrong term, the Ayi is working in a market economy that simply has way too many completely unskilled workers for the work needing done.
I wonder what would have to happen for America and Europe to stand up and deal with this? What would be worth the conflict and political outcry due to temporarily lowered standard of living?
If the Chinese let their currency float on the open market, my bet is that China would go from being extremely cheap for Westerners to fairly expensive. They're effectively using currency manipulation to compensate for an uncompetitive internal economic structure. (Hopefully in the long run they will be able to use what is in effect a huge foreign subsidy to fix their problems, but who knows).
I once worked with a North American automated parking meter company that was ambitious at entering the untapped Chinese market for parking meters. This was doomed since parking is almost always done by a parking attendant, even on the street. Parking is also often controlled by the owner of the block. The attendant is usually someones uncle or whatever that needs a subsistence job.
Another example are elevator attendants who sit on stools (often in private apartment buildings) and press the button for you. They often come with the building and are relatives of the manager or property developer. Absurd, but there you go.
Chinese work gangs always take at least 3 times more people to do the same job that you'd do in the west. Most of the peoples jobs in such a gang is to sit around watch and offer advice as far as I could tell.
Because of the excess of cheap, expendable labour in China and India, there was never really any push for mechanization and automation and associated development of technology and methods related to mechanized production.
Of course, the ascendance of the science in the West also contributed substantially.
Also, let's take your parking example. Putting aside the Chinese disregard for all road signs and instructions, let's imagine that they install coin-op parking meters. (Yes, I know, with the coin shortage in China this isn't realistic, etc. etc.). Your uncle now has the much easier job of cleaning out the meters, rather than running around all day. And maybe someone gets a skilled-labor job as a parking meter repairman?
But there are fewer jobs available in this situation in aggregate. This is a problem with several criticisms of automation that I have seen in liberal and libertarian circles - they claim that automation does not decrease the number of workers since workers are needed to deal with the automation. Apparently they are totally innumerate, since while new jobs are created servicing the automation, the total number of jobs is significantly reduced.
One thing that greatly impresses me is road construction work in Shanghai. I've seen them rebuild a street, completely rip it up, install new sewage and fiber optics at lightning speed. This entails coordination of at least 3 different departments of the municipal government. In contrast, there is a construction project on I-95 through the middle of Jacksonville, Florida that has been ongoing for over 20 years!!
In short, the complete report tells how china is extracting and securing its future flow of raw materials. China is extracting all that is possible from the continent by every mean available to them.
They've created something new, and it seems to be very powerful. By allowing some small-scale free-market enterprise at the local level, but keeping iron-fisted control at the top, they seem to be maximizing their competitiveness wrt the rest of the world, in a no-holds-barred fashion.
Our Western system is in some ways inherently too fair to compete effectively with this new scenario. Not sure what that means but I suspect it isn't great if you're a big fan of western ideals, most particularly the idea that the rights of individuals should be paramount.
I sometimes wonder if Asian cultures simply don't believe that the way we do. They seem to have a bit more of a 'hive mind' thing going on. Europe and USA have had to deal with a crazy mix of cultures and ethnicities; not so much in Asia.
What did they mean by this?
I didn't get that either. My reading of it was simply to answer the question of what could possibly be more dangerous? I don't think it's referencing any actual event, only pointing out that the western model is vulnerable to top-down destruction as well.
I think it's a bad point.
The cartel hope that in the process the Communist China will transform and become integrated in the political control system before the scheme comes crashing down.
The Chinese hope to acquire sufficient technological and industrial base to mount a credible defense/attack which will inevitably occur when the scheme crashes.