Ya Gotta Love Chinese Fixed Asset Investment

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This song, written back in 2010 at the start of China’s 12th Five-Year Plan (FYP), is still relevant today, at the start of the 13th FYP. It describes China’s intention to reform, restructure and rebalance its economy away from an investment-led, export-led growth model to a more consumption oriented economy. It also highlights the challenges of that process and the frustrations experienced by many along the way. (In China you will need a VPN as this video is on Youtube, link here.)

This post originally appeared on LinkedIn.

 

 

 

Please join me this Friday at 7:30 p.m. at the Bookworm in Beijing.

Please join me this Friday at 7:30 p.m. at the Bookworm in Beijing.  Two of my research assistants and I will be discussing some of the key issues highlighted in “No Ancient Wisdom, No Followers” with a forward view toward possible reforms and policy changes. It will be an interactive session with audience members.  Here are the details:

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.

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: Back to the Future

What the poet Lu Xun — and other voices of China’s past — can tell us about the country’s present challenges.

(Originally published in The Atlantic on March 28, 2013)

I just arrived back in Beijing after a month-long trip across the U.S. My trip started with discussions with mutual and hedge fund managers, corporate executives and Washington policymakers. It ended in Palo Alto where I talked to technology executives and then stumbled across the Chinese literary legend and social critic Lu Xun, who has been dead since 1936 but still dispenses great insights and wisdom.

I am writing this under winter camping conditions in my Beijing apartment, wearing long underwear and three layers of fleece. That is because the Beijing municipal government annually turns off the heat in all residential complexes on March 15th and then turns it back on November 15th, no matter what the weather. As I write this, the temperature is 34 degrees, and the air pollution level is 224, which is considered okay these days as it only qualifies for “health warnings of emergency conditions” and “protections recommended.” After readings of more than 1,000 on New Year’s Eve, today’s murky atmosphere is a relative oxygen bar, though I have my newly installed air filter whirring behind me.

I return to China asking myself if the country is poised to move forward or if China is heading back to the future. For much of the trip, I was watching the National People’s Congress and the Chinese leadership transition from afar. While doing so, I found that everybody I talked to — from those who have hundreds of millions invested in Chinese stocks to those who are advising Obama on how to interact with China during his second term — is simultaneously very negative about China and also very hopeful that the new leadership can turn the country around and revitalize reform and opening.

The new Communist Party chairman and China president Xi Jinping is in a similar situation to that of Obama after his first election. People at home and abroad are disenchanted and disappointed with Xi’s predecessors, and expectations are so high about Xi bringing positive change that even if he does a decent job he is likely to disappoint. We are seeing some early hopeful signs in Xi’s governing style, messaging and the people chosen by the Party and rubber-stamped by the NPC for important government posts. The new foreign minister, Wang Yi, is a fluent Japanese speaker, former ambassador to Japan and was China’s front man for the Six-Party talks with North Korea. He has the experience and relationships to help wind down the very dangerous and volatile China-Japan territorial dispute over the Diaoyu islands and help China rejigger its outdated “close-as-lips-and-teeth” relationship with an increasingly whacko North Korea.

The new finance minister, Zhu Rongji protege Lou Jiwei, has the experience and relationships to find a face-saving solution to China’s dispute with the U.S. Securities Exchange Commission and U.S. accounting regulators. Left unresolved, the dispute could lead to a wholesale delisting of Chinese companies from American exchanges if China doesn’t allow U.S. inspectors to examine the auditors in China who are certifying the books of U.S.-listed Chinese companies as well as American companies with significant business in China. Lou is coming from the China Investment Corporation sovereign wealth fund that needs free access to overseas investments.

One discouraging sign is that speculation that Pan Yue would become Minister of Environmental Protection did not pan out, no pun intended. He had been sidelined years ago when as deputy director of the then State Environmental Protection Agency he had criticized the “growth at any cost” development model and tried to enforce environmental laws against powerful, high-polluting state-enterprises.

American government officials who deal with China who I met with in Washington are increasingly frustrated that China doesn’t even bother to pretend to tell the truth when discussing contentious issues. Very solid evidence of state-directed cyber-hacking of just about any American multinational with valuable technology and industrial trade secrets is met with the admonishment that the U.S. must cease with these “groundless accusations” that result from “ulterior motives”. The hedge funds and mutual funds that have been big investors in the China growth story and strong proponents of patience with China’s reform process have run out of patience themselves. They figure that all Chinese companies are lying to their investors so they are now turning toward investing in American and European companies with significant China exposure or playing China stocks on pure speculation. In short, the American business community that has long been the stalwart supporter of China in the U.S. has basically lost trust in China as an entity while they still have great respect for the Chinese people and what they have accomplished.

All eyes are now on Xi Jinping and the new premier, Li Keqiang. So far there are many positive signs. Their atmospherics and rhetoric are mostly progressive and positive. In their speeches both leaders have emphasized that the Chinese government needs to loosen its grip and be more of a “service oriented” government. Xi has told Party cadres to “think a little more, learn a little more” and focus on fulfilling “the Chinese dream” of job stability, quality education, higher income, reliable social security and better medical care. Li Keqiang says that there needs to be a “division of power” between the government and enterprises, the government and investors and the government and civil society. As he exited his decade as premier, Wen Jiabao set the stage for Xi and Li by passionately calling for political and economic reforms — which it seems he didn’t have the power to carry out – while characterizing the economy as “unstable, unbalanced, uncoordinated and unsustainable.”

If you get right down to it, Xi and Li have inherited a huge pile of unsustainability. The OECD is projecting that China will overtake the U.S. economy in size in 2016 in terms of purchasing power parity. To keep that engine humming, however, the growth model has to shift from investment-led to driven by consumption.

As Economist Andy Xie put it in Caixin Magazine recently: “If China keeps pushing growth through fixed-asset investment and credit, a full-blown banking crisis is likely within five years. Kicking the can down the road is not a viable option for the new government. Reform is necessary for survival, not a choice.

During his “southern tour” in December, Xi paid homage to Deng  Xiaoping and his transformative market reforms. Xi said that the Party Congress that had just appointed him as Party chairman had issued “a new mobilization order” to deepen reform and opening up. An official speech from that tour is now circulating among Party officials. According to an analysis by independent Chinese journalist Gao Yu, Xi expands his vision for “the China Dream” to lay down firm lines against political reforms. He discusses the Soviet Union’s collapse and complains that the Soviet Communist Party fell because “nobody was man enough to stand up and resist” when the military was no longer under the firm grip of the Party.

The speech makes clear that Xi does not want to become China’s Gorbachev and undertake risky reforms that could unravel the system. Instead, Xi emphasizes that “Only socialism can save China. Only reform and opening-up can develop China, develop socialism, and develop Marxism.” An evolving early mantra employed by Xi is being called the “three confidences.” They are: “confidence in direction, confidence in theoretical foundation, and confidence in system.”

And this brings us to Lu Xun, who I ran into at Bell’s Books, a wonderful used book bookstore in Palo Alto on my last U.S. stop. I stumbled upon a copy of “A Brief History of Chinese Fiction” that grew out of notes Lu Xun drafted for his lectures at Peking University between 1920 and 1924. Paging through this English translation from 1959, I found several passages that offer some ageless insight and wisdom about China that can explain the obstacles facing Xi and Li and how their efforts could play out.

As Lu Xun told his students 90 years ago: “When we look at the evolution of China we are struck by two peculiarities. One is that the old makes a comeback long after the new has appeared — in other words, retrogression. The other is that the old remains long after the new has appeared — in other words, amalgamation. This does not mean there is no evolution, however. Only it is comparatively slow, so that hotheads like myself feel that ‘one day is like three autumns’.”

As for Xi and Li’s campaign to eradicate government corruption and extravagance with such efforts as limiting official banquets to “four dishes and a soup” and banishing traffic-choking official motorcades, Lu Xun cites the difficulties faced by reformers in the Qing, China’s final dynasty. “They carry on as usual, concealing the true state of affairs from above and below, while the worst of them employ bad men to get them off by bribery. Thus the evil, instead of being checked, goes from bad to worse.”

Xi and Li’s pursuit of plain talk and less formalism brings to mind this advice from a Qing Dynasty novel “Exposure of the Official World” cited by Lu Xun.”The son of the Minister of Justice sought advice for how to handle his first audience with the emperor from a senior adviser to the emperor who his family had provided with “ten thousand taels of curios.” He was told “Kowtow a lot and say little: that is the way to be promoted,” later adding, “Even kowtowing when it isn’t strictly necessary will do no harm.”

In Deng Xiaoping’s day, when nobody had nothing, nearly everybody in China supported reform and opening. Now that there are so many vested interests that profit handsomely from the current system, Xi and Li have their work cut out for them. The last leadership team in China seemed to be stuck in a reform pattern of taking one step forward and two steps back. Maybe the best Xi and Li can hope for is two steps forward and one step back.

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.

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