The Key to U.S.-China Relations: ‘See You Again Next Year’

(Originally published in The Atlantic June 4, 2013)

Why the meeting between Barack Obama and Xi Jinping this week in California will be a good thing — even if nothing is accomplished.

In the run-up to the shirtsleeves summit between Chinese President Xi Jinping and U.S. President Barack Obama in the California desert at the end of this week, there are no shortages of suggestions about what they should discuss.

Foreign affairs and military advisers are crafting talking points on such hot topics as cyber hacking, territorial disputes with Japan, North Korean nukes and Syria’s civil war. Trade and business groups are prepping a smorgasbord of market access and cross border investment staples to chew over.

But the most important sentence these two leaders should say to each other during the July 7-8 confab is very simple: “See you again next year!”

If the U.S. Treasury had a dollar for every time somebody of importance has declared that the U.S. China bilateral relationship is the most important in the world — bar none — America’s budget deficit would be shrinking faster than congressional approval ratings. Keeping up with fear-provoking prognostications by politicians and pundits about what can and will go wrong in the world if the U.S. and China don’t intelligently recalibrate their relationship could be a full-time endeavor.

So, how does it not make sense for the American and Chinese presidents to meet face-to-face, one-on-one, once a year, for a couple of days set aside for just that? The risk-reward calculation for such a weekend retreat does not require an MBA. The downside would be that during difficult times the individuals would suppress their ire, and their aides would scramble to find sufficient common ground to announce a happy outcome.

The upside is that year after year, the two politicians who possess the most outsized influence on world peace and prosperity would sit together as humans and discuss their shared responsibilities and compare the array of burdens and rush of emergencies that disrupt their sleep.

People-to-people is what works best now in the U.S. China relationship. Chinese and American students are developing deep friendships as they study on each other’s campuses. Business ties between American and Chinese companies — and among employees who work together day to day — are much more friendly and trusting than the headline disputes would lead you to believe.

Long gone are the days when elder statesmen and business luminaries could back-channel messages between the top leaders of each government when the relationship got off track. We already have some five dozen bilateral dialogues through which battalions of American and Chinese bureaucrats talk to each other about everything from climate change to industrial standards to intellectual property rights and human rights. The truth is that these meetings are increasingly serving as forums for people to talk past each other.

Since becoming Communist Party leader last fall, and China’s president this spring, Xi Jinping has been increasingly talking about the U.S. and China forging a new kind of big power relationship. What that means has yet to be defined. But the broad strokes involve treating each other as equals. At the same time, some senior Chinese officials have been indicating to foreign visitors that China believes that current international institutions that stem from the post World War II Bretton Woods agreements, such as the World Bank and World Trade Organization, are considered so biased in favor of the West that China believes it may have to spearhead the creation of alternatives.

This is likely the motivation behind the announcement in March in South Africa when the BRICS nations — Brazil, Russia, India, China and South Africa — agreed to begin planning the establishment of a new development bank with each country putting $10 billion into the kitty. Some say this is an impossible endeavor given the size disparities, political differences and economic competition that exists between these countries. China is not one of the naysayers. A month later, the man who built the China Development Bank into a powerhouse, Chen Yuan, was assigned to lead China’s effort to establish the BRICS bank.

The storied Sunnylands Retreat outside Los Angeles appears to be the perfect venue for this president-to-president conclave. The sprawling estate built by the late media tycoon and political power broker Walter Annenberg has a 25,000 square-foot mansion that has hosted seven American presidents since Dwight Eisenhower signed the guest book in 1966. It has been a place for relaxation, realistic discussions and reflection.

During his presidency Ronald Reagan held New Year’s Eve parties at Sunnylands that brought together his Hollywood and political friends in a setting hidden from public and press scrutiny. The first President Bush hosted the Japanese prime minister at a Sunnylands summit and state dinner during a period of intense U.S. Japan trade friction. President Richard Nixon sought solace at Sunnylands after he was booted from the White House. He left behind this inscription in the estate guest book: “When you’re down, you find out who your real friends are.”

Right now, U.S. China relations are on a distinct downward trend, and comedian Steven Colbert’s description of America and China as “frenemies” is coming too close to being true. Areas of dispute are increasing, the erosion of trust is accelerating and neither country appears to have a clear vision for getting beyond the distinctly different DNA of each country’s political system and the pressures of domestic politics that will push the U.S. and China further apart if a path forward is not worked out at the top.

President Xi told National Security Adviser Tom Donilon last week that U.S.-China relations are at a “critical juncture” and that the upcoming meeting should “build on past successes and open up new dimensions for the future.” Donilon responded that President Obama is committed to “higher levels of practical cooperation and greater levels of trust, while managing whatever differences and disagreements might arise between us.”

The Sunnylands Retreat is located on Frank Sinatra Drive in Rancho Mirage, California. Let’s hope that the Sinatra hits “Strangers in the Night ” and “My Way” are not on the dinner music playlist.

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Is the Specter of a ‘Cyber Cold War’ Real?

(originally published in The Atlantic, April 27, 2013)

Why the best and brightest in China and the United States have the most to lose from a cyber-related conflict between the two countries.

A cleaner sweeps the logo of Google China outside its company headquarters in Beijing, January 19, 2010. (Alfred Jin/Reuters)

A cleaner sweeps the logo of Google China outside its company headquarters in Beijing, January 19, 2010. (Alfred Jin/Reuters)

“How do I screen when hiring Chinese employees?”

I was asked that question the other day by a senior executive at one of America’s most prominent tech companies who is worried about Chinese employees stealing the company’s trade secrets. The epidemic of cyber-burglary and trade secret theft coming out of China is leading many technology and industrial multinationals to not only ask this question but to discuss avoiding hiring Chinese scientists, engineers and executives for key positions — or at least determine ways to isolate them from core company systems. Some companies are already doing both of those things.

I was immediately and sadly reminded of the late-1990s Chinese spy mania in the U.S. ignited by then House Speaker Newt Gingrich’s attempt to connect a scandal involving Clinton campaign contributions with accusations that American companies with ties to Clinton were sharing sensitive U.S. space technology with China. In the end, as is usual with Newt’s political nonsense, the smoke led to barely a flicker of fire.

But Chinese American scientist Wen Ho Lee at the Department of Energy’s highly classified nuclear laboratory at Los Alamos, Mexico, ended up badly burned. And, for a while, so were the career prospects of Chinese immigrants with technology and science expertise studying and working in the U.S. After being charged with 59 criminal counts, shackled in leg irons, incarcerated in solitary confinement, and pilloried by press leaks, Lee pled guilty to one count that amounted to bringing classified materials home to work on. The judge who accepted Lee’s plea said that his prosecution had “embarrassed our entire nation.” During this time, I ran into more than a few Chinese scientists and technologists in China who had returned home because they saw their future in America limited.

***

A couple hours after the screening question, I received the CNN email alert about the death of Lu Lingzi, the 23-year-old Boston University student from Shenyang, China killed in the Boston marathon bombing. She was the same age as my daughter Sally, who was also born and raised in China and speaks Chinese. It is impossible for parents to fathom how a child’s life and dreams can be destroyed by senseless criminal violence. As her classmate Zheng Minhui said at Lingzi’s Boston University memorial service: “Her dream was very simple. She wanted a not necessarily rich life, but a peaceful life, with a stable job, a happy family, and a lovely dog.”

Lingzi was one of the 200,000 mainland Chinese currently studying in the U.S. — and nearly 1 million who came before her — whose big dreams and bright futures depend on mutual understanding, clear communications and real trust between the U.S. and China as nations and as people. I chair the advisory board of a student group called Global China Connection with branches on some 60 U.S. campuses and a membership that mixes students from China with American and international students interested in China. The group’s mission statement is clear: Global China Connection is a student-run organization dedicated to fostering deep and trusting personal relationships among Chinese and non-Chinese university students. I believe the future of the U.S.-China relationship depends on these young people to help us overcome the inevitable friction between a rising global power and a reigning global power. When I travel on business in the U.S., I stop by campuses and talk with these students. I have met many, many like Lu Lingzi over the years. Sincere, decent and diligent Chinese who love their homeland but have great curiosity about and affection for America — and dreams and ambitions that involve both countries.

The fantastic Internet cyber world that has brought the globe together in so many ways is now endangering those dreams. The fallout for Chinese in the U.S., and those working for American multinationals in China, during the Wen Ho Lee fiasco was serious but short lived. The accusations were aimed at an individual who had resided in the U.S. for some 35 years at the time of his arrest. But today’s accusations and a large body of detailed and credible evidence point at Chinese state-sponsored cyber hacking and trade secret theft involving a Who’s Who of American multinationals.

Whenever American business talks about China with the U.S. government these days, this is topic number one. Most Chinese officials and business people I meet are completely unaware of the scope of the problem. The news and evidence is blocked by Internet censors. The Chinese government’s response so far has been to deny and dissemble, calling the accusations of state-sponsored Chinese cyber-theft “groundless accusations” with “ulterior motives.” After Secretary of State John Kerry and Treasury Secretary Jack Lew visited China in April and raised the cyber-hacking issue repeatedly, Qian Xiaoqing, deputy director of the state Internet Information Office told Reuters: “Lately people have been cooking up a theory of a Chinese internet threat, which is just an extension of the old ‘China threat’ and just as groundless.”

***

Here is a quick overview of what has become public.

Google closed down its self-censored mainland China search engine in March 2010 due to cyber-hacking of Google source code and attempts to steal the passwords of hundreds of Gmail accounts, including U.S. officials, journalists and Chinese activists. At the time,Google was one of some three dozen multinationals hacked from China . Except for Google, the other companies clammed up, lest they anger China and damage their China business. The problem continued to get worse, but few would talk about it publicly. The U.S. government didn’t want to reveal what it knew and how it knew it. Companies built stronger defenses and kept quiet.

China cyber-hacking news hit the headlines this January when The New York Times and The Wall Street Journal revealed that they had been hacked from China. Bloomberg BusinessWeek, in mid-February cover story entitled “Yes, the Chinese Army is Spying on You,” exposed a network of hackers, digging all the way down to a vacation photo of a People’s Liberation Army professor from Zhengzhou who had exposed his real identity by launching a small telecom side business that allowed investigators to connect his real name with his cyber-identity. The magazine followed the trail of Joe Stewart, director of malware research at Dell SecureWorks, who said he tracks 24,000 Internet domains “that Chinese spies have rented or hacked for the purpose of espionage.”

Days later, Mandiant, an American private cyber security company, issued an explosive report on Chinese hacking. The company said it had traced “one of the most prolific cyber espionage groups in terms of the sheer quantity of information stolen” to the neighborhood of a PLA building in Shanghai that houses an intelligence organization known as Unit 61398. The individual hackers tracked by Mandiant at 61398 included those such online monikers as “UglyGorilla” and “SuperHard.”

Mandiant said the group was one of more than 20 Advanced Persistent Threat (APT) groups it had been tracking in China. Mandiant said that in a seven year period, the Shanghai group – which it dubbed APT1 — had “systematically stolen hundreds of terabytes of data from at least 141 organizations” by periodically revisiting “the victim’s network over several months or years” to “steal broad categories of intellectual property, including technology blueprints, proprietary manufacturing processes, test results, business plans, pricing documents, partnership agreements, and emails and contact lists from victim organizations’ leadership.” Mandiant added that the companies targeted by APT1 “match industries that China has identified as strategic to their growth, including four of the seven strategic emerging industries that China identified in its 12th Five Year Plan.”

The “2013 Data Breach Investigations Report,” issued in recent days by Verizon’s RISK Team in conjunction with 18 others including the U.S. and other governments, for the first time separated hackers with financial motives from state-sponsored cyber-theft of intellectual property. Of the 120 occurrences of state-connected IP cyber-theft discussed in the report, 96     percent came from China. “We don’t think there was a super spike in that kind of [cyber-espionage] activity,” Wade Baker of the RISK team told the Washington Post. “It’s more about our ability to find them.”

The “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets” published by the White House in February labels China a “persistent collector” and cites a long list of trade secret theft prosecutions involving Chinese employees of multinationals in the U.S. The cases include: Space shuttle secrets from Boeing; Trading platform source code from the CME Group; Light emitting diodes from DuPont; Hybrid technology from GM; Car designs from Ford; Food component information from Cargill; Military technology from L-3 Communications; and paint formulas from Valspar. “China’s intelligence services, as well as private companies and other entities, frequently seek to exploit Chinese citizens or persons with family ties to China who can use their insider access to corporate networks to steal trade secrets using removable media devices or e-mail,” the report states. “Of the seven cases that were adjudicated under the Economic Espionage Act — both Title 18 USC § 1831 and § 1832 — in Fiscal Year 2010, six involved a link to China.”

***

Congress is searching for ways to respond. Mike Rogers, a Michigan Republican and chairman of the House Permanent Select Committee on Intelligence, is focused on making China pay a price. “Right now there is no incentive for the Chinese to stop doing this,” Rogers told The New York Times in February. “If we don’t create a high price, it’s only going to keep accelerating.

Unfortunately, Congress failed to do an inventory of U.S.-China trade before setting its first price. Congress in March added sanctions to the continuing resolution that funds the federal government through September. The sanction provision bars NASA, Commerce, Justice and other federal departments from purchasing information technology systems “produced, manufactured or assembled” by entities “owned, directed, or subsidized by the People’s Republic of China” unless the purchase is determined to be “in the national interest of the United States.”

If Congress continues down this road Americans may soon revert to manual typewriters and talking into tin cans with strings stretched between them. Here is the state of U.S.-China trade today: China sells America laptops, servers, routers, phones and televisions. America sells China beans, bits, Boeings and garbage. It would do House leaders good to read their own November 2012 report: Patterns in U.S.-China Trade Since China’s Accession to the World Trade Organization by the U.S.-China Economic and Security Review Commission, a body mandated and appointed by Congress.

10 years ago, Chinese exports to the United States were dominated by toys and games, footwear, textiles and apparel. Today, atop the list are all types of electronic exports, which increased to $145 billion in 2011 from $25 billion in 2000. Many of the components come from America. U.S. chips now account for about 90 percent of advanced technology products exported to China. Since 2008 soybeans have been the single largest export to China. The export of American scrap metals, waste paper and industrial leftovers to China has increased to $11.5 billion in 2011 from $740 million in 2000. “Yes, that’s right,” Clyde Prestowitz of the Economic Strategy Institute wrote in 2010. “We’re swapping garbage for computers with China.”

To complicate matters further, the electronics arriving in the U.S. are nearly all manufactured by foreign invested enterprises in China. In testimony to the Commission, economists estimated that some 60 percent of all Chinese exports to the U.S., and more than 90 percent of advanced technology product exports, come from foreign invested firms in China.

***

While Congress stumbles, others are exploring a wide array of alternatives.

The Heritage Foundation suggests that Chinese State Owned Enterprises (SOEs) that benefit from state cyber-burglary be charged with “trafficking in stolen goods” and have their offshore assets seized. Dan Blumenthal of the American Enterprise Institute suggests that Congresscreate a cyber-attack exception to the Foreign Sovereign Immunities Act as was done with terrorism. That Act prevents foreign states from facing civil suits in U.S. courts. The terrorism exemption allows such suits and the collection of damages if the country has been designated as a state sponsor of terrorism by the State Department. Then there is George Mason University law professor Jeremy Rabkin and scholar Ariel Rabkin’s Hoover Institution study that proposes the U.S. “think about cyber conflict in more imaginative ways.” One of them is creating a cyber-militia by reaching back 200 years when the U.S. and others signed “letters of marque” to “privateers” who were commissioned to attack pirates ships and allowed to keep a percentage of what they seized.

A more mundane approach comes from defense consultant and author James Farwell. He wrote in the National Interest in March that Chinese hacking should be taken to the WTO. While espionage is not against international law, he says, the theft or infringement of intellectual property is. Farwell suggests that the U.S. should initiate a case under the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement. “An internationally-recognized ruling, handed down in legal proceedings that found China guilty of intellectual-property theft or infringement, could render it liable for billions of dollars in compensation, expose it to multinational economic sanctions and cause it to be branded a ‘pirate state’,” Farwell wrote. “As a nation whose strategic thinking focuses on playing for psychological advantage, China would find that result uncomfortable.”

Real progress can only start with the separation of sleuthing and shoplifting. The U.S. and China should lead a global discussion of acceptable behaviors and protocols for cyber-spying and cyber-warfare. Those discussions could take years to become meaningful. But they at least open communications channels to avoid accidents, or a “Cyber Pearl Harbor” as Defense Secretary Leon Panetta put it as he headed into retirement. Even a cursory look at published studies makes it clear that both countries are cyber probing for ways to shut down each other’s financial markets, electric grids, telecom networks and transport systems in the event of conflict. China certainly took note in March when U.S. National Security Agency and Cyber Command chief Gen. Keith Alexander told Congress that 13 of the new 40 CYBERCOM teams being assembled would focus on offensive operations.

The Obama administration’s approach so far is to enlist allies and engage China in quiet talks about cyber-security, much like was done with some success when China was publicly denying mounting evidence of its nuclear proliferation. In the end, China realized that such proliferation was against its own interests. A cyber security working group between the U.S. and China is now being organized as a result of the recent visits to Beijing by Secs. Kerry and Lew and others. Public statements from Chinese officials appear to accommodate this. “Cyberspace needs rules and cooperation, not wars,” Foreign Ministry spokesman Hua Chunying said in mid-March. “China is willing, on the basis of the principles of mutual respect and mutual trust, to have constructive dialogue and cooperation on this issue with the international community including the United States to maintain the security, openness, and peace of the Internet.”

Even the Global Times, the Doberman of the Party propaganda press, suggested a good idea in a February editorial claiming the “insane U.S. accusations” reflected American intentions of “cyber hegemony.” The Global Times said that “China should confront the U.S. directly. China should gather, testify, and publish evidence of the U.S.’ Internet intrusions.”

That would be helpful as both countries could know who is doing what to whom. Many facts as the U.S. sees them are already on the table. If China has evidence showing that the U.S. government is stealing trade secrets from Chinese companies — or the companies of any country for that matter — that should be exposed and stopped. After all, the White House’s own February report on mitigating cyber hacking mentions a press report citing France’s Central Directorate for Domestic Intelligence calling China and the United States the leading hackers of French businesses.

As talks begin, both the U.S. and China need to step back and assess where this could be heading. Do the leaders of either nation really think a Cyber Cold War would benefit anybody? The longer this cyber-mess festers, the more distrust builds up, the more American companies question the trustworthiness of Chinese employees, the more China questions market access for American firms.

The victims I most worry about are our children, growing up in the age of globalization but in danger of being divided by distrust. Lu Lingzi’s father, Lu Jun, gave an eloquent and inspired eulogy to his precious daughter in front of 1,200 mourners at her Boston University memorial this week. He cited a Chinese proverb: “Every child is actually a little Buddha that helps their parents mature and grow up.”

The leaders of the U.S. and China may consider listening to Mr. Lu and manage this issue like mature grown ups who care about the world their kids will inherit.

China went from being a closed system with open minds to an open system with closed minds

Originally published December 3, 2012 (Quartz.com)

xi-ap-photo-yves-logghe1
Communist Party Chairman Xi Jinping must learn to appreciate outsiders’ contributions to China too. AP Photo / Yves Logghe

When I first visited China in 1985, the country was a blur of bicycles, blue Mao suits and impatient curiosity. As my sister Lisa and I backpacked across the country, we were besieged by people of all ages who wanted to practice English and quiz us about the world beyond their borders.

China was a closed system with rapidly opening minds. Today, China is a much more open system with some purposely closing minds.

China has advanced at a dizzying pace in the 23 years I’ve lived in Beijing. Foreign investment and its workshop-of-the-world export prowess have created incredible wealth and made China the world’s second largest economy.

According to a thorough new study by Associated Press writers Joe McDonald and Youkyung Lee, China is fast replacing the US as the top trading partner for countries large and small:

As recently as 2006, the U.S. was the larger trading partner for 127 countries, versus just 70 for China. By last year the two had clearly traded places: 124 countries for China, 76 for the U.S. In the most abrupt global shift of its kind since World War II, the trend is changing the way people live and do business from Africa to Arizona, as farmers plant more soybeans to sell to China and students sign up to learn Mandarin. The findings show how fast China has ascended to challenge America’s century-old status as the globe’s dominant trader, a change that is gradually translating into political influence. They highlight how pervasive China’s impact has been, spreading from neighboring Asia to Africa and now emerging in Latin America, the traditional U.S. backyard.

So how is China preparing it citizens to become global leaders? By preserving ancient habits and purposely stifling knowledge while instructing its citizens to become the world’s most creative thinkers. The Party is pushing its behemoth state-owned enterprises to “go global” and beat the leading multinationals as it exhorts scientists and entrepreneurs to transform China into a technology and innovation powerhouse.

At the same time, the ancient tradition of Yumin Zhengce (愚民政策, keeping the masses ignorant so they will follow the leaders) is still at the core of Chinese education and propaganda. In the days of Qin Shihuang, the first emperor, the idea was that an ignorant population would focus on agriculture, thereby providing the solid economic base needed to defend against invaders and conquer enemies. As Shang Yang (390-338 BC), a prominent scholar and statesman during that period put it: 民愚则易治也 (minyuzeyi zhidian, an ignorant populace is easy to rule).

The Chinese people today are anything but easy to rule. They are informed and often indignant about what is happening in China thanks to the internet and social media, despite pervasive and sophisticated censorship. But they are much less informed about or focused on international affairs. To distract from out-of-control corruption, gaping income disparities and a litany of inequities resulting from the lack of rule of law and breakneck growth, the Party blames most of the country’s problems on “foreign forces” that are determined to quash China’s rightful rise. Inflation? US Fed Chairman Ben Bernanke’s quantitative easing. Resource and territory disputes with neighbors? American manipulation and encirclement.

The Party refined this victimization narrative for the October 2009 60th birthday of the People’s Republic. The vehicle was the “Road of Rejuvenation,” a Broadway-style show with some 3,200 performers singing and dancing their way through 170 years of Chinese history, from the mid-1800s Opium Wars to the 2008 Beijing Olympics. Rag-clad peasants staggered under crates overflowing with gold bars destined for foreign ships. Electronic waterfalls of blood dripped down the theatre walls as hundreds of Chinese corpses stacked like timber came alive to rise up and vanquish Japanese invaders.

The storyline is simple. China was a glorious place until the foreigners came to exploit and humiliate. And China is regaining past greatness because the Party protects the country from foreigners who remain determined to keep China poor and dependent.

On Nov. 29, newly installed Communist Party Chairman Xi Jinping brought the six members of his top leadership team (his colleagues on the Politburo Standing Committee) to visit the “Road of Rejuvenation” exhibit at the National Museum bordering Tiananmen Square. After “carefully examining the exhibits,” according to Xinhua, Xi said that “we have to continue taking this road, unswervingly.” But he stressed the positive instead of stewing in victimization: ”I believe that by the time when the Communist Party of China marks its 100th founding anniversary, the goal to complete the building of a moderately prosperous society in all respects will be inevitably achieved.”

It is gratifying to see Xi begin his decade-long term as China’s top ruler trying to stress a positive vision. For Chinese people to be comfortable with the country’s role as a global leader, Xi will have to sideline the anti-foreign rhetoric that is the core of today’s foreign policy propaganda.

It is a pity that his Party’s censorship strictures will make it difficult for Xi to get his hands on the new book “Restless Empire” by historian Odd Arne Westad.

In a Washington Post review this weekend, veteran China watcher John Pomfret says the book “tells the story of the foreigners who helped China become what it is today, from China’s first interactions with the West to the current era. In doing so, Westad upends, but ever so politely, a slew of misconceptions about China that have been concocted by his academic predecessors both in the West and in Asia.”

…despite claims by communist historians, foreigners were key to China’s modernization. British, Americans, Japanese, Germans and Russians played enormously important roles as advisers, models, teachers, guides and enlighteners of the Chinese. While Westad does not underplay the depredations meted out by the imperialist powers, he also tells the other side of that story — that American missionaries brought education, science and modern medicine to China, that the British imported modern administrative techniques, that the Germans taught the Chinese a significant amount about warfare. Heck, the French even created China’s postal service.

Pomfret also directly contrasts the book with his own visit to the “Road of Rejuvenation” exhibit.

(Westad’s) book will not be published in China because a mainland publisher demanded too many cuts. And that’s important, because how China frames its past weighs on how it will face our common future. I recently visited the permanent exhibition on China’s rise at the newly renovated National Museum of China on Tiananmen Square: “The Road of Rejuvenation.” Foreign contributions — other than those from Karl Marx and Vladimir Lenin — are nowhere to be found. Panel by panel, a story emerges of murder, rape and pillage by one Western army after another in a totally distorted netherworld of humiliation and pain. The operative sentiment I felt on leaving the exhibition was: “Earth to the Chinese Communist Party, grow up.” Reading Westad would be a good place to start.

I just downloaded the book and look forward to reading it. I hope Xi also finds his way to a copy.

These Pictures from Social Media Say What the Chinese People Can’t About their New Leaders

Sina Weibo users liken their seven new leaders to these images.

Sina Weibo users liken their seven new leaders to these images.

Originally published November 15, 2012 on Quartz.com
So what exactly came out from behind the curtain in China’s Wizard of Oz political system today? Is the new seven-man Politburo Standing Committee a group of hardliners determined to keep the tight grip of the Communist Party on the country’s economy through monopolistic state enterprises? Or will they be making more room for private enterprise to reignite growth and give China’s restive and demanding citizenry the rapidly improving living standards that they have become only accustomed to.

The Actual New Leaders (AFP/Getty Images)


My usual advice is to watch what Chinese leaders do, not what they say. But all we can do today is parse the words a bit. They are usually talking to each other, certainly not the outside world and sometimes not to the wider population outside the party, warning some to get with the program while reassuring others by repeating bromides from Party liturgy.

In his speech yesterday, China’s new leader Xi Jinping offered some standard bromides from party liturgy to reassure party members that he won’t wrench the steering wheel sharply left or right.

Since its founding, the Communist Party of China has made great sacrifices and forged ahead against all odds. It has rallied and led the Chinese people in transforming the poor and backward old China into an increasingly prosperous and powerful new China, thus opening a completely new horizon for the great renewal of the Chinese nation.

But he also obliquely addressed the task the party faces in rebuilding its credibility in the aftermath of the Bo Xilai scandal and unveiling of spectacular corruption and wealth among party leaders’ families.

Under the new conditions, our party faces many severe challenges, and there are also many pressing problems within the Party that need to be resolved, particularly corruption, being divorced from the people, going through formalities and bureaucratism caused by some Party officials.

The key sentence from his entire speech came near the very end. He said that he can’t do this by himself. The era of strongman politics in China is over. Xi’s biggest challenge is to get the six men standing in the stage with him in the Great Hall of the People to work together and modernize the Chinese economy and political system.

We are well aware that the capability of one individual is limited. But when we are united as one, we will create an awesome power and we can certainly overcome all difficulties.

What is clear as this new leadership team takes over is that China’s current economic model is running out of gas and the political system has fallen behind the country’s society and the people’s aspirations to have a say.
Xi nodded to this by saying:

Our people have an ardent love for life. They wish to have better education, more stable jobs, more income, greater social security, better medical and health care, improved housing conditions, and a better environment….They want their children to have sound growth, have good jobs and lead a more enjoyable life. To meet their desire for a happy life is our mission.

Chinese citizens on the country’s highly censored Internet could hardly comment on the leadership transition as just about any key words they could use, including the names of the new leaders, are blocked. So they resorted to posting pictures. These photos from China’s homegrown Twitter services shown above demonstrate most clearly what many people think about the party these days. They most graphically show the difficult job that lies ahead for Xi and his comrades.

The Good Life or Western Manipulation?

My former Dow Jones colleague Mark Clifford has just completed a report entitled “Through the Eyes of Tiger Cubs,” which Chinese leaders may want to take a peek at. Mark, who now heads up the Asia Business Council, sorted through some 400 essays from young people across Asia who offered their views on life and the future. Excerpts from and a link to Mark’s essay in Caixin are below. The opinions in these essays are consistent with what I have been hearing from young Chinese friends. The children of boom-time Asia have grown up with much different views than their parents, and they have very high expectations. Their opinions provide a stark contrast to recent rumblings from Beijing that “hostile international powers are strengthening their efforts to Westernize and divide” the Chinese people. In the latest edition of the CCP magazine “Seeking the Truth,” Chinese President Hu Jintao warned that Party leaders “must be aware of the seriousness and complexity of the struggles and take powerful measures to prevent and deal with them.” Chinese leaders, and parents, these days probably feel a lot like my parents generation. They had gone through World War II, and their parents had suffered through the Great Depression. But their babyboom children, born in the late 1940s and 1950s, turned into the rebellious and demanding teenagers and young adults of the 1960s and 1970s. China is not facing an onslaught from the West. If is facing the consequences of a couple of decades of incredible progress and success — and younger generations that are very different from their parents. There must be a Beatles song that can help Chinese leaders understand what is coming…..

What will Asia look like in 2020? If the young Asian contestants in the ‘Asia’s Challenge 2020’ essay prize have their way, there will be a lot more transparency and accountability. Governments and companies a decade from now will be far more responsive to their citizens and customers than they are today. Throughout Asia, there will be less corruption, less poverty and greater social equality. Asians will have more – and better – education and health care. There will be an increasingly unified sense of regional identity.

The ‘Asia’s Challenge 2020′ contest was sponsored by the Asia Business Council in partnership with Time and the Lee Kuan Yew School of Public Policy at the National University of Singapore. We asked young Asians to tell us what they felt was the biggest single challenge facing Asia over the next decade and what should be done to solve this problem.

…The most striking common theme is a massive generational shift in looking at the world, one that reflects Asia’s increased prosperity and self-confidence. Young Asians’ expectations – material and political – are high and rising.

…The ‘Asian miracle’ melded good economic policies, a favorable global political climate that was open to freer trade, and a hard-working and increasingly productive work force. The Tiger Cubs’ parents didn’t have time for thinking about grander issues – they were too busy trying to make a living and to ensuring that their children had a brighter future.

…They have grown up in an era where their economies and societies, despite short-lived crises, have for the most part just kept getting better. The hardships of their parents’ and grandparents’ generations are just stories to them.

…What’s particularly striking, though, are the Tiger Cubs’ worries: America frets about the rise of Asia; young Asians worry about a lousy education system, lousy governance, bad jobs, and environmental degradation. They are the “in-a-hurry generation” (as they’re called in India), and their demands for accountability, transparency, and results are likely to keep challenging governments and companies. Their performance on standardized math and science tests is, in some countries, at the top of global charts. Yet they complain their education isn’t providing the critical thinking needed for the jobs of tomorrow. They want better access to education – for without universal literacy sustained economic growth is impossible – and they demand higher-quality education.

There’s little tolerance for corruption. There’s a demand that education be improved. Government workers who think that they can slack on the job or teachers who count on not teaching classes, will be held to account. Social media makes possible a level of accountability that would have been unimaginable even ten years ago – before YouTube and micro blogs and Twitter and texting and the like.

Link: http://bit.ly/wVnerx

Vision, grit, decisiveness, and pragmatism

Here is a review on Amazon.com of Ezra Vogel’s new book on Deng Xiaoping. Somebody sent it to me today, and I think is summarizes the way many people think. It helps remind us of where China has come from in the past few decades. I guess the question China now faces is whether the country can continue to move forward with the same system that worked for the past decades.

Review on Deng Xiaoping and the Transformation of China by Ezra F. Vogel

This is a great book that offers by far the most balanced view of a legendary figure who has done more than anybody else to transform China and the lives of the Chinese people. I had lived the first 28 years of my life in an inland province of China. Before I went to college in early 1980s, my hometown of 600 thousand people was an economic backwater. There was only one run-down hotel (or more appropriately, a lodge) and a couple of restaurants, offering no more than wanton soup, wheat buns, deep-fried saseame twists (MaHua) and maybe a handful of other simple items. By the time I traveled back there in the summer of 2011, the same town now has a 4 star hotel with state-of-the-art facility and amenities, several 3 stars, countless beautifully decorated restaurants offering full menu of hundreds of items. Many families have their own cars. It used to take 3 hour bumpy bus ride to go from my hometown to the provincial capital located merely 60 miles away. Now you can get there in 45 minutes via a 8 lane freeway (though the way some locals drive left much to be desired, but that’s a whole different story). The changes China has accomplished in the last 3 decades are beyond recognition and beyond description. I later traveled to several other cities, including Beijing, Xiamen, Shenzhen, Hong Kong and Macau. Standing in front of the Water Cube looking out at the spectacular nightly skyline where the PanGu Hotel Complex paints a flying dragon, my only feeling was: China has risen.

And for this, Deng deserves a major share of leadership credit. His vision, grit, decisiveness, and pragmatism has helped shape one of the greatest transformation mankind has ever witnessed.

Admittedly, Deng was not a fan of Western style political system. He once commented that western politicians’ words could not be trusted, because they say one thing in the campaign to get elected, and say another thing when they are in office, and then say yet another thing when they try to get re-elected. In his view, Chinese policy in the post Mao era is more consistent, more coherent and more efficient. He viewed the political infight accompanying western-style democracy as too costly in time and resource, and therefore not suitable for developing countries, who badly needed to catch up rapidly, or else they would lagged more and more behind. Looking at what’s happening in the US nowdays, one has to say Deng’s view is not without merits. No system has no vice. No system has the monopoly of virtue. I tend to agree with what Tom Friedman et al pointedly noted in their latest book “That Used to Be Us”, China may have a second rate system, but the Chinese people make the best out of their second rate system; US may have a first rate system, but we only make 50% out of this good system. Deng once remarked that if China proves its model really works, then it will reveal an alternative path of development for the majority of humanity still remaining have-nots. As the China model gains more traction, history may prove he’s right.

Link to Ezra Vogel’s book on Amazon: http://amzn.to/k8xOxp

US heads toward rehab as China faces a hangover?

I was in Washington last week as the US debt limit drama was at its most intense. Like everybody else, I was transfixed by the television coverage and how politics now blends into the US media blather as just another reality show.

The media is about conflict – and politics is about compromise. But in this day of ravenous and ideological 24-hour cable news, conflict is the key driver of our political culture as it is with the reality shows. It all blends together as you channel surf from Fox News to MSNBC to Jersey Shore to The Biggest Loser to Jerry Springer.

I don’t think anybody in America would be shocked to click on their TV and find Sean Hannity provoking an argument between Snookie and Mitch McConnell about whether losing belly fat or cutting the deficit is the paramount issue facing America. I am sure that more than a few TV viewers last week were disappointed that House Speaker John Boehner and his snarky, upstart majority leader Eric Cantor didn’t punch each other out Jerry Springer style.

While our politics as entertainment may provide mind-numbing escape for a country with 10% unemployment and few signs of impending economic recovery, we Americans should care that we look like a very silly, sad and fast-slipping superpower to both our allies and challengers around the world.

I was recently talking to a European friend in Beijing about US politics. He looked at the ground, shook his head and said he was “very sad to watch America self-destruct.” Others with less affection for the US seem both gleeful and worried.

Our biggest benefactor and debt holder, Chinese central bank governor Zhou Xiaochuan, greeted the debt ceiling agreement by offering some guidance and a warning.

 “China hopes the U.S. administration and Congress would take responsible policy measures to handle its debt issue in light with the interests of the whole world including those of the United States,” Zhou told Xinhua. “China would continue to seek diversification in the management of reserve assets, strengthen risk management, and minimize the negative impacts of the fluctuations in the international financial market on the Chinese economy,” Zhou said.

China’s harshly nationalistic Global Times, published by the Communist Party’s People’s Daily, called last week’s DC drama the “latest Hollywood blockbuster” … “filmed with special ‘democratic’ effects.” The paper said:

“It is too early to cheer for this deal, since raising the debt ceiling simply means the US can now borrow itself into further debt … This is not a selfless sacrifice made to save the world, as debt-holding countries are all chained to the US. They would have to keep the US afloat, or everybody would suffer.

Getting back to the reality show theme, it does appear that American political dysfunction has hit a new low, leaving our addled political organism slouched outside the door of rehab. Congress now has four months to take a few more guzzles and tokes to enhance the hallucination that rebalancing American finances is possible without serious tax reform and significant cuts to the military and entitlement programs.

But they can’t avoid much longer walking into that rehab door. The deal Obama signed on Tuesday creates a panel of six Republicans and six Democrats that by November 23 are tasked with identifying and recommending  $1.5 trillion in deficit reduction. If they don’t reach agreement, there will be an automatic $1.2 trillion reduction in all areas of spending beginning in 2013.

Maybe to make this work we need to include on the congressional panel the producers of the A&E network show “Interventions.” According to its website, Interventions “has conducted 172 interventions since its premiere in March of 2005, 134 individuals are currently sober.” If the show can help clean up heroin addict artists, beauty queens on meth and mothers with a vodka habit, they may have a chance at helping push the American body politic down the road toward recovery.

If America is hanging outside rehab’s door, China is on the 4th year of all-night benders fueled by a cocktail of government spending and debt that is likely to leave a bruising hangover. So China shouldn’t take too much solace in America’s dysfunction. If America cleans up its act, there is an even chance that China and America will be in role reversal a few years from now. Premier Wen Jiabao for several years has repeatedly warned that China’s economy is “unbalanced, uncoordinated, and unsustainable.”

But it appears that Premier Wen has been shouting into the wind. The “China Model” of authoritarian politics and state-capitalism is as rife with vested interests as Washington, and increasingly unable to make the significant reforms that the world is accustomed to seeing from China. The command and planning side of the economy still works fine as long as it involves free-flow government spending, easy credit for government projects and increasingly cushy subsidies and protections for re-bloated state-owned enterprise.

China’s stated debt numbers don’t seem to point out a serious danger of default. But they are certainly nothing to brag about. In a The Wall Street Journal article entitled “Why China Needs a Recession,” veteran China journalist Peter Stein portrays the post-financial-crisis China financial festival.

 “Of particular concern has been the debt of local governments that built bridges, paved roads and erected luxurious new office buildings for themselves as part of the country’s stimulus plan following the global financial crisis. The National Audit Office recently estimated those debts total 10.7 trillion yuan ($1.66 trillion), or about 27% of 2010 GDP.

“That may well understate the size of the problem. Hints by China’s central bank put loans to local-government financing vehicles at close to a third of total bank loans—or 14.4 trillion yuan at the end of 2010. The banks report very low nonperforming loans on this debt. But with much of it incurred with little regard for how it would be repaid, a sizable chunk is expected to turn sour.”

A glimpse into just how exponentially worse this problem may be is being provided by scandals at the Ministry of Railways and the finances of its massive high speed rail build out.  According to Jeremy Warner in The Telegraph:

 “The funding of this grand ambition is beginning to look increasingly shaky too. Financially, the project has already effectively broken the Ministry of Railways. At the last count, the ministry was nearly 2 trillion yuan (£200bn) in debt and clocking up losses at the rate of about £400m a quarter. On any Western definition, the ministry is completely bust. To meet the plan, another 2.8 trillion yuan has to be found in the next three and half years.”

A harsh spotlight hit the MOR following the July 23rd crash of two high-speed trains in Wenzhou. The collision killed 40 and injured 191. Before propaganda officials shut them down on the subject, Chinese bloggers and journalists were exposing how an addiction to fast growth enabled cash-rich bureaucrats, obedient government bankers and bare-knuckle state-owned enterprise bosses to turn the railways spending into a fountain of cash for people with influence.

The scrutiny began with the February arrest of Railways Minister Liu Zhijun. The 58-year-old career bureaucrat oversaw an empire of 2.5 million employees that shoveled out trillions of RMB in contracts to a half-dozen state-owned companies to build the globe’s largest network of high-speed rail. Before the Liu scandal was declared verboten by propaganda authorities, the Chinese media reported that Minister Liu had collected 18 mistresses and pocketed some $20 million in bribes.

As China’s Caixin Magazine reported in March,

 Today, a legacy of Liu is that high-speed railways are spreading nationwide but “almost every project exceeds budget,” a railway contractor said. “The Beijing-Shanghai high-speed railway was initially estimated at 12.34 billion yuan. In the end it cost 21.5 billion.

Construction of the “Guangzhou South Station went from an estimate of a couple billion yuan to 14.8 billion yuan. This is because every project is contracted, subcontracted and subcontracted again,” the contractor said. “If you want to profit from the process, you have to continuously modify the plan.” …

And safety issues are on the agenda for the post-Liu period. China’s rail construction cycle is considered by many industry experts to be too fast, since contractors are laying rails even while ministry experts are still formulating high-speed rail construction standards.

Many in the high-speed rail construction industry have publicly expressed concerns. A foreign supplier of high-speed rail materials, for example, told Caixin that China’s tendency to rush projects raises safety risks: It takes only two years to build 300 kilometers of high-speed railway in China, but a decade in other countries.

The Party has ordered coverage of the crash to focus on heroic rescues and survivors, leaving the rest to come from Party propagandists through Xinhua and The People’s Daily. Nonetheless, Chinese journalists appear to be more angry and defiant than any time in the past decade. Directly defying Party propaganda orders, the Economic Observer published an 8-Page special report on the accident and cover-up — which included an attempt by the MOR to quickly bury without examination the locomotive of the high-speed train that crashed into the back of a train said to be disabled by lightning.

Party controlled China Central TV even lashed out. Presenter Qiu Qiming said as the media clampdown began:

“If nobody can be safe, do we want this speed? Can we live in apartments that do not fall down? Can the roads we drive on in our cities not collapse? Can we travel in safe trains? And if there is a major accident can we not be in a hurry to bury the trains? Can we afford the people a basic sense of security?”

 

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