Understanding China

TODAY

BY DEVADAS KRISHNADAS -

MAY 2, 2014

China is a phenomenon that has and continues to receive considerable worldwide attention. This can only increase as its economic share of global gross domestic product grows and it flexes its political and military muscles.

In this context of a rising China it is conventional to perceive China as a modern state with the institutions and norms that are the standard in Europe and North America. After all, it has been a long-standing member of the United Nations Security Council and was accepted into the World Trade Organization (WTO) in 2001.

As China’s presence makes itself increasingly felt on multiple dimensions, there is a growing preoccupation with the future of China and its ambitions. It is conventional for institutions, corporations and governments to try to explain this with what may happen to China or what it will do under varying conditions. But these conventions are misguided.

First, China’s future is best understood with reference to its past and not with hypotheses about future conditions from merely present terms.

Second, using a history-based approach, it is possible to make the case that modern China is actually continuing its past.

Third, far from being an economy best at routine and duplication, it has the capability of becoming an economy powered by innovation and that this will be transformative of its economy.



A CHOICE OF LENSES

There are three lenses that can be used to understand China.

1) Events

The most common lens is one of events. This involves trying to make sense of a situation out of an event. But this incident-based approach is suitable for use only at a localised level and limited by being reactionary. It also does not contextualise or localise the significance of incidents and can thus easily lead to misinterpretation of the significance, meaning and causation of the events. The result could be misjudgment in decision making.

2) Policies

The second lens, and the next most common, is one that places emphasis on policies. This approach of examining policy direction is often adopted by political scientists and occasionally by the media. A study of policy direction is useful in medium-term assessments of the future and it has particular applications when considering a specific issue. For both businesses and governments, a policy-based understanding of China is vital, practical but not without limitations.

First, unless one considers the underpinning premise for any policy, knowledge of past policy action may still result in failure to detect the future shifts.

Second, in China, premises for policy are often left insufficiently unexplained or couched in impenetrable ideological jargon. The environment for public intellectuals is also weak and the number of informed commentators small for a country of its size.

Thus, there is little non-public sector supplement to perform the necessary deeper explanatory function with regard to policies. Hard information is also often lacking from government sources, leaving observers to make hazardous guesses.

Think-tanks within China are also driven by an agenda to appease the authorities rather than to critique or verify pronouncements. So, a policy approach is useful but given conditions in China, it has limited utility, or worse, it can cause confirmation bias leading to misguided decisions.

3) History

The third approach is history based. This approach considers major and long-term structural issues that underpin and animate change over time. It is uniquely suitable to understanding China, a country whose present and future can be best understood from the vantage point of its past.

LOOKING BACK FOR ANSWERS

Winston Churchill commented: “The farther backward you can look, the farther forward you are likely to see.” An understanding of the history of China is to obtain a looking glass into the future of China.

In the Chinese language, China is also known as the Middle Kingdom or Central Kingdom.

China’s geographical remoteness from other great civilisations had given it time to flourish and develop unique characteristics. By the time of its interactions with the Persians and Romans in first century BC, China had already taken on a recognisable form of a single civilisation.

Qin Shi Huang unified China in about 221 BC using a centralised administrative regime centred on an Emperor who wielded a “mandate of heaven”. To maintain coherency and control, China adopted a binding ideology — Confucianism.

Doing so paved the way for the emergence of generations of ideologically homogenous bureaucrats. The institution of a pool of administrative bureaucrats, the so-called Mandarins, rooted in Confucianism was further sealed by imperial exams that accorded social status and material gains to those who demonstrated the deepest self-indoctrination of the Confucian orthodoxy.

At its heart, Confucianism as a system stressed the maintenance of the established order. Each dynasty drew on the service of the Confucian scholars, whose governing mandate was made complete by their moral authority.

For long stretches of time, Chinese traded over land and sea with far reaches of the globe. This spirit of adventurous commerce would periodically be abruptly terminated by a centrally made decision to turn inward.

This decision came in a period of Chinese history where they had powerful internal problems to deal but also a sense of elitism and complacency that the Chinese culture was superior and they had nothing of value to learn from the rest of the world.

A STAIN ON THE CHINESE PSYCHE

It was a search for markets and a means to achieve a balance of trade with China that saw the West wrench open a closed China. The first “Opium War” with the British ended with a treaty in 1842 which marked the onset of a series of forced concessions, indemnification, and territorial losses by China.

These concessions provoked the “Boxer movement” at the turn of the 20th century which resulted in the humiliating defeat of China by an alliance of eight nations formed by Germany, Britain, Russia, France, Italy, US, Austria-Hungary, and Japan.

This humiliation remains a conscious stain on the collective memory of the Chinese. The contemporary Chinese preoccupation with internal and external security while economically engaging with the global economy is a reflection of its tortuous history.

The choice is not which of the three lenses — event, policy and history — to use but how best to use these approaches in combination. Unless one has a grasp of China’s past, the probability of drawing inappropriate conclusions from events or policy action is a real risk.



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This is the second of a three-part series on Understanding China. 

The forces that drive the Chinese Communist Party

The realisation of the goals of the Twelfth Five-Year Plan will be important to the Chinese Communist Party and it remains to be seen whether the reforms and, with them, the lifeline of the party, can be sustained. 


BY DEVADAS KRISHNADAS

MAY 9 2014

The Chinese Communist Party (CCP) has ruled China since 1949, after prevailing in a bloody civil war against the National People’s Party (Kuomintang). The CCP’s coming to power followed a period of social upheaval upon the collapse of the Qing Dynasty in 1911. In place of power manifesting itself in one ruler, China today is ruled by a unified party.

Since the undertaking of market reforms in 1978, China’s economy has taken on a form that critics pointed out as being capitalist in substance, but which the CCP maintains is “Socialism with Chinese Characteristics”.

The CCP has 80 million members in almost four million grassroots organisation. It adopts a pyramid-like hierarchical structure. Its network is expansive yet tightly knitted and its influence permeates all important organisations and institutions. Its power is made complete by the inter-locking of the country’s three organs of command and control — namely, the party, the government and the military.

The CCP practises social democratic centralism. Personnel are selected for appointments, not elected. Entry to the party is contingent on the endorsement of existing party members.

PRESERVING POWER

The CCP recognises that the support of the masses is critical for its survival. President Xi Jinping, in his maiden speech as the new party chief in 2012, said: “Our strength comes from the people and masses.”

The adoption of the Twelfth Five-Year Plan in 2011 also marked the party’s change in emphasis on a “higher-quality and inclusive growth”, setting a lower annual gross domestic product growth target of 7 per cent and focussing instead on creating an environment for sustainable growth.

This includes setting priorities in equitable wealth distribution by developing rural and inland regions, promoting environment protection by curtailing pollution and developing clean energy, as well as promoting a sustainable economy via continued innovation and increased domestic consumption. Mr Xi has also signalled a change by advocating the greater use of the market system in China.

The realisation of the goals of the Twelfth Five-Year Plan will be important to the party. It remains to be seen whether the reforms and, with them, the lifeline of the CCP, can be sustained.

Mr Xi has made fighting corruption a key feature of his regime, pursuing corrupt “tigers and flies” — senior and junior officials. Critics have expressed doubts on whether the move is motivated by a desire for a clean government or a way for Mr Xi to consolidate his power. Nevertheless, since announcing a crackdown on corruption, there has been an about 20 per cent increase in major corruption cases prosecuted.

Between January and November last year, there were close to 22,000 major corruption cases handled by China’s prosecutors, of which 16,000 cases that resulted in public losses were dealt with and 23,000 officials punished. Close to 13,000 of these cases were considered major and important, involving more than 5.5 billion yuan (S$1.1 billion).

DRIVING FORCES

Fulfilling China’s destiny as a great nation is intuitively held as the duty of all Chinese and the supreme goal of the CCP. Within this visceral belief lies a deeper core conception. The leadership may not have all its future moves figured out, but it is adamant that it will keep the political structure in place. This is not only out of self-interest, but also because of a genuine belief that the party and its emphasis on central authority are essential for China’s success.

The concept of a strong central authority is held together by a binding belief of the party in its own righteousness. Today, the notion of party and not communism is the prevailing ideology and its tops leaders, a form of collective emperorship. The slogan of “if the Party succeeds, China will succeed” captures the inextricability of the two ideas in the minds of those in power.

Second, the party’s legitimacy is tied to the success of its long-term reform programme. Mr Xi himself acknowledged that “the more developed China is, the more open it will be”. The challenge will be how to marry an open economy with a closed political system. To this end, it will continue to follow Deng Xiaoping’s axiom of “crossing a river by feeling the stones”.

Third, China is committed to protecting its sovereignty and playing a role in global affairs. Until recent times, it has been content to follow Mr Deng’s advice to “bide its time, hide its brightness”.

However, internationally there is growing concern over China’s assertiveness. Beijing’s unilateral demarcation of an Air Defence Identification Zone (ADIZ), covering the bulk of East China Sea, the release of a 350-page “blue book” by the semi-official Chinese think-tank last year recommending that China be more proactive in the Indian Ocean region, and recent skirmishes between the Chinese and Japanese over the waters of Senkaku Islands are obvious examples of a new-found confidence in the Chinese leadership’s handling of international affairs.

Nevertheless, the Chinese are pragmatists. It exports more than US$160 billion (S$200 billion) worth of goods to Japan last year, making it Japan’s number one trading partner. It also exports more than a sixth of its goods to the United States, its largest export market. Hence, the increased economic linkages between China and its neighbours should serve to ensure a calmer sea, though there may be missteps arising from tactical miscalculations that could potentially erupt into geopolitical turmoil.

PAST IS PROLOGUE

Fourth, as Shakespeare wrote in the Tempest, “past is prologue”. China’s present and future are best understood from the perspective of its past. However, tellingly — as in the Tempest — there will be storms ahead. China’s past is also a narrative of volatility underpinned by consistencies. This quixotic mix will continue to be China’s fate.

China will continue to be a source of fascination, but it is not for the risk-adverse or for those who want a “surprise-free” experience. For those who dare and who can live with its internal contradictions, it could still be a land of opportunity, but it will certainly remain a land of adventure.

Most important are two initial conditions — first, is the willingness to understand China on its own terms and second, the ability to be patient. For the foreseeable future, China is not going away — it is the rest of the world that has to learn to deal with it. China is a rising tide, but as the Chinese saying goes, “water can float a boat, but can also sink it”.


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This is the third of a three-part series on Understanding China.

Getting growth right (this time)

DEVADAS KRISHNADAS

MAY 16, 2014


The industrialisation of China has been historically a narrative of low-cost, large-scale manufacturing in contrast to the vitality and creativity of the American economy. With Beijing notorious for its intellectual piracy, it has become convention to think of it as good at emulation, but poor at innovation. But is this an accurate perception?

PROMISE UNFULFILLED

The Chinese were the originators of gunpowder, the compass as well as both printing and paper-making — collectively known as the four great inventions of China. They made advances in time-keeping as well as military and maritime technology well ahead of the West.

However, the Chinese did not realise the revolutionary potential of these inventions. Paper-making and printing did not result in the education of the masses. The possession of the compass did not extend the boundary of China. Their arsenal could not resist the advances of foreign powers.

More self-injurious was a turning away during the Ming Dynasty from the world just when China achieved a scale and reach that could have been a springboard for its global dominance. Having sent fleets out into the world and discovered that China was more advanced than other civilisations, the Ming leadership seemed to have decided that they had nothing to learn from the world. They thus failed to act decisively on their own achievements and strengths.

It was arguable that a social structure rooted in Confucianism had a part to play in both the withering on the vine of innovation and the withdrawal from the wider world. Confucianism accorded the highest social status to gentry, whose preoccupation with the dogged rote-learning of Confucian classics and mastery in the arts did more to promote a literary culture than an innovative one.

GETTING IT RIGHT

The China of the early 21st century could not be more different in its attitude to innovation.

First, driving innovation is a central concern of the central government. In the 12th Five-Year Plan in 2011, the Chinese Communist Party’s target is for research and development expenditure to account for 2.2 per cent of China’s gross domestic product and for Beijing to achieve a rate of 3.3 patents per 10,000 people.

The 2013 World Intellectual Property report showed China being the main driver of global growth in intellectual property (IP) filings in 2012. Chinese residents accounted for the largest number of applications for all four types of IP — patents, utility models, trademarks and industrial design.

China’s State Intellectual Property Office was also the only IP office to record double-digit growth for all four types of IP filings. It received 2.4 million IP applications last year; a third (825,000) of these pertained to the “invention” or patent category.

Today, Beijing has the highest number of graduates in the world. It adds seven million graduates to the job market each year. It produces more than half a million engineering graduates annually — more than either the United States or European Union.

Second, far from ignoring the world, Beijing is extending itself on several different planes — political, diplomatic, economic and financial — into all corners of the globe.

Modern China has shown itself eager to learn and innovate. From high-speed trains, alternative energy generation to complex infrastructure management, these skills have been picked up by Chinese firms over the past four decades.

In information technology, Lenovo is set to become the world’s largest manufacturer of personal computers after acquiring IBM’s PC and server businesses. Its technology entrepreneurs have copied and improved on ideas from the West to develop Sina Weibo (a hybrid of Facebook and Twitter), Taobao (similar to eBay and Amazon) and Baidu (an Internet search engine). By volume of service, these platforms are set to become the world’s largest of their kind.

These trajectories and achievements give reason for optimism that the Chinese economy will manage the transition from merely efficient manufacturing to being creative and innovative. The future global consumer and technology standards may well be set by Beijing Road, Guangzhou, rather than Madison Avenue, New York.

INNOVATING FOR REGIME PRESERVATION

China faces multiple internal challenges. First, it will have a rapidly ageing population after 2025. This is largely the result of the historical one-child policy.

Beijing cannot for much longer rely on the masses of cheap labour from the countryside to fill its factories. Its labour force will progressively be characterised by more educated urbanites with middle-class aspirations.

Second, for the ruling Chinese Communist Party (CCP) to maintain its legitimacy, it has to spread the benefits of economic growth.

The income gap between its urban and rural residents is significant, at 3.1 times in 2012 and the national Gini coefficient is a high 0.473. To tackle this, all geographical areas have to be connected to the economy so that wages can grow.

Innovation is an important part of the answer to all these internal challenges. Moving from low-cost and low-wage manufacturing to an economic model with higher value-add and, hence, higher wages is critical.

The wage growth will show the increasingly well-educated populace that they are benefiting from economic growth. But the new rich will need to consume to help rebalance the economy from one that has been investment-led.

CRITICAL QUESTIONS

As I close this series on contemporary China, it is useful to recap the critical questions that need to be resolved both for China to fulfil its potential and for it to do so peaceably and stably.

First, can Beijing continue to maintain a stable coexistence between an open economy and a closed-policy system?

Second, can China maintain its geographic integrity in the face of the economic disparity between metropolitan centres and the countryside?

Third, can China transition smoothly from a labour-intensive and investment-driven economy to an innovative, consumption-powered economy?

Finally, can Beijing and other powers navigate its passage in the international arena such that it takes its place at the top table without catastrophic miscalculations?

Given the inexorably growing importance of China, the working out of answers to these questions will occupy not only the Chinese, but also the rest of us.

ABOUT THE AUTHOR:

Devadas Krishnadas is chief executive officer of Singapore-based Future-Moves Group, which provides consultancy and executive education on strategy and risk. He is also the author of Sensing Singapore: Reflections in a Time of Change.