ON BACKGROUND I studied Business Adminstration in Beihang University (Beijing University of Aeronautics & Astronautics). After I graduated, I volunteered in Inner Mongolia and when I got back I worked in the administration and logistic department of NEC China for two years. After that, I worked for NetEase (163.com) then during the Beijing Olympics, I switched to a friend’s training company to work as a director in charge of administration, finance and logistics for two years. I then moved back to NetEase and worked there until I joined momotech.
ON PRODUCT We only have one product and that’s momo. momo is a mobile social networking app which can be used on both iPhone and Android phones. With a GPS function on smartphones, our product focuses on social networking and helping people connect with acquaintances and even strangers near their location for chatting and friend-making.
ON STAFFING It was hard for us to recruit when we first started the company last August because we were a small startup and not many people knew us. We used to recruit staff through our founders’ connections and friend referrals. As we grew and became more well-known, more and more people started to apply for jobs through our website and we needed to screen before interviews. We do have a long term development plan for the outstanding staff and our compensation is above average in the mobile tech industry. Many people think that our company is promising and there’s a lot of room for future growth; so they would prefer to work for us rather than for some big companies with less potential.
ON STRUCTURE We have five departments with around 60 people on aboard. We have an operations department in charge of promoting momo and its branding, customer service, marketing, and maybe sales in the future. Our product department is in charge of product development and its future planning. We also have a tech department doing the technical work, a design department responsible for product design, and an admin and HR department in charge of staffing, finance, and logistics.
ON MARKETING We prefer to use weibo and renren.com as marketing tools to promote our product because they’re very popular and we do think that at this moment, that is more effective than buying advertisements for publicity because people talk and the information spread out really fast. When people who don’t know much about momo go on our weibo, they get to see how the app works in different situations and how it helps them to connect people around them in reality. For instance, if you go to France for travel and you want to know if there’s Chinese in your area, you can use momo to find them easily.
ON CAPITAL We did have some financing when we first started. Our CEO used to be the editor-in-chief of NetEase and he invested his savings and found this company with the help of some other friends. The startup fund was less than two million RMB and then we got more financing as we grew.
ON IP When we started, we only registered copyright for the name of our product, and this caused problems with many other similar apps who copied our interface. However, even though they have similar layouts and skins, they are not able to compete with us because we update our product really quickly, and they’re not capable of challenging us in terms of technology stability and product quality and functionality. We are very confident about momo.
ON PHILOSOPHY Efficiency is all we ask for. Unlike big companies, our work is based on cross-department cooperation. All of our five departments work very closely together for our product, momo. Everyone is treated fairly and equally, the interdepartmental communication and coordination is very efficient and everyone enjoys the company environment.
ON THE OFFICE We have moved three times. When we first started we stayed in an office in Xiaoyun Centre which was an average office building with a space of 100 square meter for a few months. Then we moved to King’s Garden Villa where we worked in a three-floor villa for half a year, and a few months ago we moved to Vantone Centre.
ON AMBITION The core value of our company is our product, momo. We hope that there will be more than 100 million users over the next year or two. We will only focus on momo, and our expectation is that every smartphone user will know about momo and therefore it will become the best mobile social networking tool in the industry.
ON BUSINESS ENVIRONMENT To me, the entrepreneur environment here in Beijing is fully saturated but not in a very healthy way. In general, a lot of the companies are only after short term money and profit making. However, we are more focused on long term development. We want to make momo a great app for the next generation in which all networking needs can be fulfilled.
Porter Erisman was one of the very first foreigners to work for Alibaba, joining the company in 2000 and working alongside Jack Ma in building the world’s largest e-commerce group. After making a documentary Crocodile In The Yangtze about Alibaba and its founder Jack Ma, Erisman has now written a book, Alibaba’s World, about the company and how it’s changing the face of business across China and the world. He recently spoke to Business Tianjin, telling us more about how Jack Ma started up a business in Hangzhou and led it to the largest ever IPO in September 2014 when it raised a cool $25 billion on the New York Stock Exchange.
You paint a nice picture of Jack Ma and his instinct for the business. To what do you attribute that instinct?
One of the reasons I wrote the book is because I wanted to pass along a lot of the lessons I learned from Jack Ma. I learned so much by watching a schoolteacher rise from obscurity to battle and beat eBay in China.
Overall I had a positive experience at the company and that’s reflected in my book. And, for the most part, Jack made more right decisions than wrong decisions during the time I was there. But I also don’t shy away from pointing out mistakes he made, such as allowing the company to expand too quickly in 2000, as well as some of the strategic missteps he made after our acquisition of Yahoo! China in 2005.
There was only one time at Alibaba when I saw Jack question his own abilities. It was when we had to lay off a number of early employees after expanding too quickly. But fortunately for him, and for Alibaba, he was able to bounce back from that.
What do you think are Jack Ma’s key attributes as 1. a CEO and 2. a manager of people?
When I joined the company in 2000, Jack was publicly proclaiming that he would leave Alibaba in four years in order to hand the company over to a “professional manager.” But over time I saw him transform into a very capable leader and CEO. His best skill was bringing together ordinary people with no special backgrounds and creating a culture where they worked well together as a team towards the company’s larger goals. He didn’t pull together a team of individual all-stars. Instead he created an all-star team that worked well together.
Was it hard for you to stop trying to bring your Western business education and background to Alibaba, in the early days? What are the lessons there for ex-pat managers?
It was hard, absolutely. I joined Alibaba in 2000, two years after obtaining an MBA in the U.S. Fortunately, I had spent those two years working in China and “unlearning” my MBA brainwashing! So by the time I joined Alibaba, I was able to hit the ground running and fit in with the company’s fast-paced entrepreneurial culture. However, the other MBA’s who joined at the same time did not have the same luck and so didn’t last very long at the company.
Back in 2000, there was still a perception among many foreigners that China’s local managers couldn’t grasp how to grow an internet company in the mold of the Silicon Valley giants. In my book, I talk about how at the time this created a culture clash between Alibaba’s local and international managers. What those first Western managers in Alibaba failed to realize was that in an entrepreneurial market like China and in an entrepreneurial company like Alibaba, those MBA frameworks had little value. It was more important to act quickly, learn from mistakes, innovate a solution and change direction. Over time, I learned that although Alibaba looked chaotic as a one-day snapshot, it was always moving forward in a positive direction. But sometimes getting from Point A to Point B involved a lot of trial and error.
Besides Jack Ma, who do you think deserves most credit for Alibaba’s rise?
Without Jack, there would be no Alibaba. But without Joe Tsai, the company’s CFO, it would not be what it is today. Jack and Joe balance each other out very well. Jack is a creative visionary who focuses on the big picture. Joe Tsai is a former lawyer from a finance background with a strong attention to detail, but an ability to grasp the big picture. They both have a common language and work well as partners. Beyond the two of them, Alibaba really was a true team effort, so most of the credit for its successful growth goes to the company’s 18 founders, many of whom are still partners in the company.
The hunger and vision of Alibaba is obvious from the start. But many startups have both but fall by the wayside. What made it different?
I know it sounds cliché, but Alibaba succeeded because it stuck to very simple values of focusing on making the customer happy, rather than making investors, analysts or the media happy. There was a lot of pressure on us, and on our competitors, to follow the latest investment fads. But we set our goal to be the “Last Man Standing” and focused on making money for our customers before we began to make money ourselves.
Your account of the battle with eBay is gripping. Do you think eBay could really have won in China, or did their lack of adaptation always stymie them?
eBay could have (and in many ways should have) won in China. But they made the mistake of thinking that because their U.S. platform had worked so well in Germany, it would also translate well to the China market. Any “Marketing 101” class would tell you that you need to build a local product for local markets. But they seemed to think that they could simply apply their same business model to China. If eBay would have simply taken a minority stake in its local company, Eachnet, and given them the freedom to run the business in China as they deemed fit, they would still have a strong presence, if not a leadership position, in China today.
Are there general lessons for how Chinese like to do business that translate to other business, or are there specific things that apply only to e-commerce?
I think that there are a number of cultural factors that make Chinese especially suited to build world-class, innovative companies. China is changing so quickly, that local entrepreneurs are much more open to new ideas than their US and European counterparts. Everything is so new in China that people do not get trapped in the belief that things need to be done “how they’ve always been done.” Beyond e-commerce, I truly believe that we are going to see more and more global companies emerging from China that build new products and business models that are truly innovative.
If an internet company is looking to get into China now, say an education app or something, what’s the best way for them to approach adapting to China?
The first question to ask is “how heavily regulated is the area in which I’m hoping to launch a local business?” News, information, finance and social media are very regulated and make it very hard for foreign companies to compete with local businesses, whom the government might trust more or even favor. But other domains, such as e-commerce, online retail, global trade, restaurants and so on are much more open to foreign businesses. It’s hard to compete with local entrepreneurs in any domain, but if I were planning to do so, I would choose those industries that offer a more open playing field.
Once that first consideration is sorted out, I’d tell people to forget everything they know about their product & competitors back in their home market. People used to give Jack Ma books about Google or eBay but he refused to read them. He was afraid of following what they’d done. As Jack often says, “learn from your competitors but never copy them. Copy them and you’ll die.”
Why did Alibaba.com go private following its 2007 IPO?
My understanding is that they wanted to absorb the company back into the group to allow them more freedom to adjust the business model and build synergies between Alibaba.com and its other group businesses. Personally, it makes sense to me, since so many sellers on Taobao and Tmall source for products on Alibaba.com. They belong under the same roof, at least for now.
Alibaba’s growth story is incredible. Logistically it must have been a struggle to keep upscaling all the time. What advice would you give to startups in a similar position?
The toughest part of scaling up was maintaining the strong company culture that we had back when the company was in a small apartment. But this is where Alibaba excels. One of the key turning points in Alibaba’s development, which I discuss in the book, is when we hired Savio Kwan to join the company. He brought with him 25 years of experience and built up our HR systems, making it so that 50% of our compensation was based on performance and 50% was based on how well we adhered to Alibaba’s core values. Most entrepreneurs spend time focusing on strategy but as soon as they start growing, they need to focus on building and sustaining a great organization and company culture.
Have you kept up with other Chinese startups, either personally or through your work?
It’s been fun to follow the growth of e-commerce startups in China. If you use the analogy of Alibaba building a large reef for e-commerce, there are increasing numbers of large fish and unique species of business thriving alongside the Alibaba reef. I just spent the last week leading a delegation of Indian e-commerce managers who wanted to understand how e-commerce is done in China. Through all of the meetings, I was amazed to see how many different Chinese startups have grown up to build businesses around the Alibaba ecosystem.
How has the documentary gone? What has been the feedback from entrepreneurs?
The documentary has in many ways been a fascinating and life-changing experience for me. It’s taken me to 25 countries on six continents and allowed me to meet entrepreneurs around the world. It’s fun to see that so many international startups are now taking inspiration from China’s entrepreneurs. Just 20 years ago, no one would have imagined that. I think the documentary has challenged a lot of assumptions and shared with people outside China the level of innovation and creativity happening in China every day.
The book’s reviews have been excellent. What’s next up for you?
Well, I hope the reviews stay good. But more important to me than the reviews is that people who may have a dream of their own will take some lessons and inspiration from Alibaba’s World and be able to apply them to their own lives and businesses.
I’m happy to share that I’ve just been offered another book opportunity to write about the e-commerce boom in emerging markets. I’m looking forward to it as it will give me a chance to share what I’ve learned over the last few years while traveling with the Alibaba story to such places as Nigeria, Bangalore and Bogota. I’ve learned that the entrepreneurial spirit is universal and I hope my book will capture a lot of that spirit so that entrepreneurs in emerging markets can learn from each other’s experiences.
Jack Ma’s tenacity and competitiveness were great assets when he was building Alibaba Group from nothing to the ecommerce giant we know today. But there can come a time when that very pugnacity, on the behalf of a market leader, is self-defeating. His speech last week at an investor conference at Alibaba HQ in Hangzhou was a perfect case in point. But the speech perhaps revealed rather more than he may have intended.
Ma’s speech was no doubt intended to tweak the noses of Western analysts and the International Anti-Counterfeiting Coalition (IACC), both of whom have been putting pressure on Alibaba Group this year, as reflected in its share price falling 11% over the past year. On May 13th, Alibaba Group was dropped from the IACC, just a month after joining, with the IACC board claiming the move was “in consideration of some of the concerns raised by our membership.” Michael Kors fashion group described Alibaba’s membership of the IACC as giving “cover to our most dangerous and damaging adversary.”
Fighting talk, then, and Jack Ma has rarely been one to turn the other cheek, as eBay and Yahoo! will attest. His speech last week however not only struck the wrong note – the classic public relations move would have been to strike a note of humility and to emphasise the work Alibaba is doing to prevent and intercept counterfeits on its platforms. But no. Ma struck back aggressively, saying, “The problem is the fake products today are of better quality and better price than the real names. They use exactly the [same] factories, exactly the same materials but they do not use the names,” he said, adding, “It’s not the fake products that destroy them [luxury brands], it’s the new business models.”
This received a scandalized press, shocked at Ma’s equivalence of counterfeits and the genuine. Ma perhaps was intending to suggest that the only reason counterfeits are so popular is because they can do it better and cheaper than the genuine manufacturers, who ought to up their game so that people don’t need to buy fakes. The “new business models” he mentioned are of course the Alibaba model, where sellers can operate online for the barest fraction of the cost of an expense retail outlet in a premium shopping location, with the savings to be passed to the consumer. But by saying that fakes are comparable to the real thing, Ma also seemed to be suggesting that there was a free market, as it were, in each product, with counterfeits and the genuine article competing in terms of quality and customer satisfaction.
This fundamentally misunderstands how product are developed and sold. Of course it’s easy to produce high quality fakes, and at lower prices: there’s an already-existing template. Counterfeiters do not have to bear the costs of the genuine brands: they have no designing, no prototypes, no advertising, no customer feedback, no endorsements, no marketing, no materials sourcing. These higher-order components of the luxury market are precisely where value, such as it is, is generated – not in the manufacturing. Without advertising, sponsorship, endorsements and marketing, Gucci and Louis Vuitton and all the others would be nothing. They don’t manufacture fashion items – they generate meaning. Similarly, the retail experience – smoothly seductive, expensive, exclusive – is part of the branding.
The lack of respect for IP is often seen in developing countries. It’s only natural to value that with which you are more familiar, with the international division of labor split between high-end intellectual property and lower end manufacturing. But with China striving urgently to ascend the value chain of manufacturing by encouraging high-tech innovation, IP has to be given more respect. China’s e-commerce and tech products are now some of the best in the world, with WeChat superior to Whatsapp and taxi app Didi Chuxing more than holdings its own against Uber. But for Chinese innovation to be taken seriously, there has to be sufficient protection for those who spend the time, energy and money to come up with quality products.
Steve Jobs’ famous business strategy was that you didn’t need to market or focus-group great products; they created their own advertising and customer base. The same is true of the reputation of Chinese innovation: the products create their own narrative. Jack Ma’s comments unfortunately show that even some at the top of Chinese business don’t recognize the importance of intellectual property. Until that changes, the reputation of Chinese products will suffer.
We recently reviewed the book Consumers and Individuals in China: Standing Out, Fitting In by Michael B Griffiths of Ogilvy & Mather. The author took some time from his day job as Director of Ethnography to talk to us in more detail about the book, Chinese consumers, self-determination and all that jazz.
Hi Michael, it’s a pleasure to speak with you.
Thanks. And thank you for reading the book!
My pleasure. How long were you in Anshan, and what were you doing there?
I first went there in 2005 and spent approximately half my time there every year till 2010 when I joined Ogilvy. I was doing field research as a PhD student. Anshan is my wife’s hometown, so I spent my time making connections, listening and observing like any good ethnographer.
What is involved in being director of ethnography with Ogilvy & Mather? What led you to that position?
Essentially my job is about providing consumer insights. I consult on brand strategies and positioning; deliver new business pitches to clients; design and supervise cultural analysis projects; manage clients, project teams and third-party vendors; analyze and interpret research data; identify insights and strategic recommendations; and deliver results to clients in the form of reports, workshops, presentations etc. I also publish on Chinese consumer trends, train junior staff on researching, and create knowledge transfer partnerships with universities and China experts around the world.
You open the book with an introduction examining the methodology of sociological books on China heretofore, and discussing your open approach. Can you explain briefly what you’ve felt lacking in sociological studies of China thus far, and what your contribution aims to be?
OK, this might be a bit long though! Commentators on China’s transition have tended to equate “modern” and “Western” with “individuality”, and “Chinese” with “backward” “non-individuality”. To the extent that it is recognized that China is not a static and amorphous “Confucian” culture, it is usually only allowed that China is modernizing towards an ever increasing similarity with the West. Consumer culture, in particular, is seen as the vehicle of this transformation: younger, wealthier and better educated Chinese supposedly enjoy conspicuous consumption, aspire to self-actualization, and worship Western lifestyles. But seen through this either-or logic, there seemed no methodological way for Chinese individuals to be all of these binary oppositions — individual/collective, modern/traditional — at the same time, albeit in ways considerably different to individuals from Western societies. Other parts of the literature over-emphasized either the individual’s capacity to act “freely”, or the domination or subjugation of individuals by corporations or governments.
My research in Anshan examined the problem of Chinese individuality head-on without privileging any of these perspectives. I borrowed from post-structuralism, where “individuality” is never seen as a thing in itself but rather constantly asserted by using languages, symbols, and the human relationships around these, and where self-assertion is seen as already informed by discourses of social standing and evaluation. So my research sought to demonstrate the interaction of those discourses by applying a critical discourse analysis to the ways people in Anshan drew and managed symbolic boundaries through judgments of of things like purity, taste and worthiness.
My approach is also distinct from sociological studies of individualization, which emphasizes the extent to which Chinese must deal with the increased risks and responsibilities they find in a less collectivist infrastructure. These basically just point out the new possibilities available for people, but doesn’t ultimately explain how or why beyond “because they can”. My approach also differs from cultural sociologies which examine social distinction in ways similar to my research. I wanted to demonstrate how Chinese take up pervasive cultural norms and use them for personal ends. In this way, I could situate Chinese individualities within debates about the globalization of capital markets and cultures, and speculation about whether China will realize alternative (i.e. non-Western) forms of modernity.
You’re quite down on the hard left sociologists. Can you say a bit about why this is?
Well, it’s not just the hard left I disagree with, but let’s explain why. I find the hard left “critical” sociologists as condescending as I find hard right positivists brutish. In their quest to reveal unequal power relations in society, to demonstrate economic exploitation and so forth, hard left sociologists effectively deny individuals the right to take cultural norms and economic constraints and appropriate them in ways that are meaningful to themselves and others. Individual agency is removed, or at least under-emphasized. Whether ordinary people are “dominated” is not for well-schooled sociologists to decide. Arguments of this form are tautological: they start by assuming that domination must exist, then look to reveal its dynamics. They can summon compelling calls for justice, but from the start, they are biased, arrogant and self-righteous. They do not start out by trying to avoid this kind of bias, as my research does. The whole point is not to privilege either the individual’s capacity to act or the constraining influence of social structures.
You look at consumers and individuals in China. Can you explain the sociological significance of consumption, particularly in contrast to the Marxist emphasis on production as the determiner of class?
The sociological significance of consumption is that it makes culture as important an organizing factor as economic relations.
Marx’s emphasis was about how society is structured according to economic relations. People with money had a dominant position in society because they controlled the forces of production (the factories and shipyards etc) and because of the exchange value of their commodities on the market. People without much money only had the value of their labor. The exchange value of commodities robbed workers, as Marx saw it, of the value of their labor. They were exploited and alienated from the product they produced not only in terms of ownership and control but also in terms of meaningfulness and satisfaction.
Modern sociologists, on the other hand, emphasize that the structure of society is no longer primarily about asymmetric economic relations, as though we were back in the nineteenth century Europe that Marx wrote about. It is now also about how individuals use the full range of cultural products, consumer goods, brands, symbols, tastes and lifestyles available to them. From this perspective, consumers are seen as both subjects who act of largely unconscious forces shaped by the productive needs of capitalism and as actors consciously seeking to satisfy creative needs and desires in meaningful ways. Class is a much more diverse and fragmented notion than with Marx. Class in this sense is hard to define: it is both economic and cultural, shaped by “objective” facts about wealth, education, family background etc, and by consumer cultures and individual tastes.
Authenticity is a large theme of your book. Within a country known for shanzai products, and far from the “red authenticity” of the Cultural Revolution, what are some ways that authenticity is now signified?
Authenticity in China today is often signified in a quite clever, postmodern way, which brings into focus the fact that authenticity is only ever an ideal anyway. It really goes right to the heart of what it means to be an individual in society – it’s all about authorship, originality, trust and accountability. And it’s also about one’s fundamental relation to the social world and to others.
The idea of authenticity raises more questions than it answers. We may look for it but the harder we look the further away it can seem. The pursuit of it is signified everywhere in everyday social interaction – through being “sincere” (shizai), unaffected, down to earth, familiar, naive, innocent, trustworthy and so on. We project these kinds of values in the hope of finding these returned by others – it’s about friendship, simply put.
Socialization of this form is a major part of North-easterners’ social and regional identity, and I’ve written more on this in chapter 5 (“Sociability”). North-eastern Chinese see themselves as down-to-earth, honest, sincere and unaffected.
Kind of like how we see ourselves in Scotland, compared to England.
Exactly. Or indeed how the north of England, where I’m from, sees itself compared with the south. But if we combine all these elements, we should observe that Chinese people are aware that authenticity can be affected, i.e. put on for a social purpose. But in certain contexts this intentionality is mutually understood and reflected, as people demonstrate their affection for each other. It’s really just about making friends.
The really interesting question is why there is so little trust in Chinese society for people outside of your immediate social circle. The vast changes China has undergone in the last two decades and the stifling political status quo have resulted in a rootlessness contemporary Chinese society where it’s all up in the air – morals included. The perception of a singular, dominating order from which the majority of individuals feel excluded implicates so many Chinese into tactics of “legitimate inauthenticity”: this is why you get so much cheating, IP infringements and so on. Whether we’re talking about beggars who are famed for their ruses, or cunning entrepreneurs who are said to be “eight sides all wide and slippery”, many Chinese are positively tricky operators. Stealth, deception, and even outright cheating (pian) are recognized as entirely legitimate insofar as they are necessary parts of outwitting others. The airwaves are full of tales of Socialist moral heroism, but what really gets you credit is seizing the moment.
In the “Sociability” chapter, you make some pointed observations regarding the contrast between Chinese respect for individuality and the British fear of standing out. Can you explain the ways that Chinese society is more open to difference than might be expected?
This part you mention is really about the strength of social norms and rules in a culture like the UK compared to China, particularly regarding objective facts about individuals’ personality or character. In the UK, one of the biggest crises young people face is that they’ll be branded with a marker of abnormality. At school, it is utterly unacceptable to stand out as different. If you’re branded “freak”, “geek”, “nerd” or “pervert”, you do not say (for example) “I’m a nerd and proud of it”, but rather do everything you can to conform. Even in the best of schools, any marker of difference is subject to being highlighted, ridiculed and corrected as part of the imposition of a median or norm for identity. Even in adult life, markers of character extremes such as “introvert” or “extrovert” are implicitly seen as deviant. Eccentricity is labelled weird, and work environments disguise brutal character assassination as banter. There’s a sense in which very worst thing an individual can do is to try to opt out of this discourse, which would be understood as a weakness.
In China, on the other hand, there is a high level of tolerance towards those objective factors you can’t change. Young people are not pursued by this same kind of angst, nor are adults plagued by the same kind of insecurity. Though China’s official education system is widely accused of striving to annul individuality through rote learning, students generally feel it far less necessary to grind the individuality out of others, and differences in terms of innate character are far easier to negotiate. Social pressure certainly characterizes life in China, not just for school-children but for hard-driven and existentially insecure adults also, but these are insecurities of a quite different nature. If you’re short, fat, wear glasses, have a stutter, are somewhat introverted etc, there is far more acceptance. Social currency accrues not by conforming to norms regarding look, shape or personality, but by what you do to make the best of what you have. If you work hard at school, perform well at work, achieve success in business, or adapt fashion norms to what suits you, you will be viewed positively.
Traditional Chinese Medicine provides an interesting perspective on this. Individuals are always more or less “sensitive to” (pa) hot (re) or cold (leng). Both principles are understood as legitimate directions rather than extremes. These ideas penetrate deeply into everyday life and proliferate in judgments about individuals’ physically embodied constitutions and “tempers” (piqi), such as whether your “stomach” (wei), “spleen” (pi), “kidney” (shen), or “lung” (fei) is suited (shihe) to particular tastes: “sour” (suan), “sweet” (tian), “bitter” (ku), “hot” (la) etc. Accordingly, it is perfectly legitimate to accept or decline colors, dress-styles, activities, environments, jobs and even relationships, just because these do or do not suit (shihe) your character.
Everyday discourse in Anshan, as I saw, finds almost no illegitimate extremes in terms of the particular mix of character attributes that makes individuals “them”. Where a wife identifies her husband as “introverted” (neixiang), “liberal” (kaifang), or “conservative” (baoshou), this is seen as an entirely good thing, not as deviance from a norm, but as a statement of difference taken precisely to as an indicator of the person’s normality. Similarly, children who might elsewhere be pilloried at school just for being “different” are recognized as uniquely valuable social contributors.
The section on public nudity (in the “Civility” chapter) would have most waiguoren chuckling. Can you explain how Chinese negotiate what to us are fraught moments without loss of face?
Face (and we’re talking about mianzi rather than lian here) is a layered notion. People put up these layers and bring them down as they go about social interaction. Face is a logic of social esteem which runs somewhat counter to the logic of intimacy that you share with your spouse or immediate family – it is about positioning a positive public-facing image of yourself to non-intimate others, or affording – i.e. “giving” — non-intimate others that sense of face. Being naked in public could potentially bring these tensions into focus. But the way Chinese negotiate this completely depends on the context.
Say for example you’re in the changing room of a higher-end health club in a lower-tier city. You’ll be surrounded by attendants from rural backgrounds, unaware that customers might prefer space to shower and towel away from their immediate gaze. They probably think they are giving you face by being there to wait on you, and particularly so since you are foreign. Indeed the attendants are usually briefed to treat customers in exactly this way by their bosses, and many local customers expect this kind of treatment in accordance with their own perceived status. On the other hand, the middle-aged wealthy male customers in the changing rooms will remain totally indifferent towards you, in accordance with their perception of the appropriate norms. They probably think their indifference is to give you face, and may even acknowledge that this is the case by commenting on the attendants’ treatment of you – “They just don’t know how to behave”, or some such – and thereby, as they see it, marking their belonging to a “modern” sphere.
So the ways that Chinese deal with this kind of situation completely depends on the context and who we’re talking about. It’s all about the interface of intimacy and social distance as appropriate in different contexts and situations. While Westerners and increasingly many Chinese now expect the intimate sphere to be closed and out of sight, for Chinese individuals who bath their bodies, breastfeed babies, and even sleep directly before the public eye, the sphere of intimacy remains distinctly within public space. Age, generation and gender are major factors in this divide, but it also has a lot to do with formal education, exposure to international norms, the difference between higher cities and semi-rural lower tier towns, and the experience of working in state-owned enterprises and agricultural communes.
The chapter on “Workers” is fascinating in illuminating the social strata of Anshan. How did you get people to really open up their feelings and opinions to you?
Thanks – it’s really nice to hear that. Well, I suppose this is about spending a lot of time in the field, returning to Anshan year after year and coming alongside these people, and earning their trust. It’s also about ethnographic skills – listening, observation etc.
Anshan is of course my wife’s hometown, which helped with initial introductions. I saw that the access to the field this personal affinity provided was an opportunity rather than a problem. Being the “marginal native” meant that I had a reason for being there that informants could understand, and that also made them feel it was worthwhile investing time in getting to know me. They were a little suspicious at first: it was only natural to be wary of confusing a relationship with a research project and vice versa. But as time went by, informants just accepted that I was going to be around, and as I expanded my research, they facilitated my reaching places where informants had nothing to lose.
Naturally, the language barrier was an issue, and I spent a lot of time cultivating my Chinese, especially in the first two years. But my identity as a foreigner was precisely what made informants willing to inform me. I was unavoidably “outside”, which meant that I was not at all a threat. Yet in another sense I was “inside” by virtue of my intimate relationship, which meant that I could be trusted with information. From many of my informants’ perspectives, I needed informed, and with time I was able to balance my real ignorance with an affected ignorance, and my intense interest with a cultivated disinterest, making my ambiguous position suit the demands of data collection quite well.
Away from my hosts, I found that being a young(ish), Western, white, relatively tall, blond-haired, blue-eyed and initially-unmarried male was a significant opener in its own right, and one which provoked a particular set of meanings and power relationships in the China context. For example, some young female migrant kitchen workers refused to be interviewed one-on-one, stating that “Chinese cultural tradition” prevented them from conversing alone with a man to whom they were not married. But challenges such as these were seen as an opportunities rather than hindrances, and reference points against which to evaluate all other contextual variables. In this particular case, young male migrants excused these women’s choices as a function of their “backward rural background”, thus trying to identify with the urban and the modern with me.
My role was simply to develop quality information by earning trust through dialogue; to listen and be informed, to react impartially but sensitively, taking every conversation as a valuable example of self-assertion.
In the conclusion, you say that “purity is an ideal to be exploited only in the act of its assertion”. Can you expand on that, particularly on the forms of purity which are exploited?
The point is that Chinese recognize that there is no form of purity. Despite circulating narratives about Socialist moral heroism (an echo of Mao’s time which still finds expression through tropes like ‘serving the nation’, etc), and highly politicized notions of racial, ethnic or national purity, there is a high awareness in everyday Chinese culture that assertions of purity are fundamentally flawed — that they have a particular social utility – and that the ideal of purity is always evoked with a certain socio-political ends in mind. Purity does not exist. Like authenticity, it is an ideal. And the extraordinary flux in Chinese society in the post reform era brings this in focus.
Many thanks for your time, Michael. It’s been a great pleasure talking with you.
I am a professor at the Guanghua School of Management at Peking University. I teach China’s future business leaders. It is an awesome responsibility, and wonderfully rewarding. I mostly teach in our International MBA program, where students from all over the world come to learn and to get a top ranked MBA education.
My first career was as a partner with PricewaterhouseCoopers. I spent 28 years with them, about half in the US and the rest in Asia. PwC brought me to China 15 years ago. I had taught while I was in graduate school and wanted to do a second career. Fortunately PwC had a generous early retirement program that let me do that. I retired at 50 and went back to school – first studying theology at Fuller Theological Seminary and the getting a PhD at Macquarie Graduate School of Management in Australia.
Most of my career has been in international business, and I have lived abroad for more than half of it. Life as an expatriate can be exceptionally rewarding if it is approached with patience and perseverance. I am not naturally gifted with either skill, yet I acquired them along the way. The most important thing I learned about succeeding in an international environment is to be authentic. People in every culture can spot someone trying too hard to fit in a mile away.
I teach using the case study approach made famous by the Harvard Business School. The case study approach is a great way to teach business, but it is a real challenge for Chinese students.
I grew up next to a firehouse and would run out when the fireman scrambled to go to a fire. They would let us play in the firehouse, and the best part was sliding down the fireman’s pole from the top floor to the ground. I never had that job, but we did build a fireman’s pole in our apartment in Beijing.
Every job I had was a great learning experience. In the early years I learned how to work, then developed deep technical skills. In later years I learned how to influence others, win new work and develop talent. Gandhi told us to live as if you will die tomorrow, learn as if you will live forever.
A career is made up of a few really important projects that punctuate long periods of routine. You need to work hard on every project because you never know which will end up changing your life.
I work on one of the most beautiful university campuses in the world. When I need some inspiration I often take a stroll around Weiming Lake. I love being with young and intelligent people. They keep me young.
One of my goals is to keep the kids off the street – Wall Street. Too many of our graduates end up in finance, yet the world desperately needs their talent directed towards more important problems. I encourage students to find careers that will build business, create jobs and solve social problems. It is tough, because the Street pays too well, and we do a pretty good job preparing them for life there.
Most of my students want international careers. For international students the best option is often to return to their home countries and establish their career. Competition for entry level positions in China is too tough, and it is important to have high level skills that are needed in China. Just being able to speak Chinese is not much of a selling point in a country with 1.3 billion fluent Chinese speakers.
My best boss was always the client. If you always put the client’s interest first – whether that client is a graduate student or the CEO of a Fortune 500 client – everything else takes care of itself. I usually ignored the people I reported to, which you can get away with if your clients love you.
I was given two great projects in my career with PwC – building an expatriate tax practice in Singapore and building the China practice. My current project, helping Guanghua School of Management become one of the world’s best MBA schools, is very exciting.
I need to stay current on what is going on in China business so I can bring relevant experiences into the classroom. My research is focused on US listed Chinese companies, so I spend a lot of time with regulators and on Wall Street. I will make at least seven trips to the US this year, so jet lag is my major challenge.
I teach China’s best and brightest. That is an incredible responsibility – shaping the minds of the people who will shape the 21st century. My students also come from all over the world, and they will be playing important roles facilitating business between their countries and China. I really enjoy the cultural diversity in the classroom, and it really helps to prepare students for international careers.
There are many who discuss the Chinese economy, from apocalyptic collapse merchants to the China-hyping bulls. But one economic commentator seems particularly respected, with his opinion widely sought from the highbrow financial media through to local TV. Patrick Chovanec is professor at Tsinghua University’s School of Economics and Management, who through his media appearances and his forthright blogging at chovanec.wordpress.com offers the world insight into how the economy is really doing. He met Agenda to talk about where China is at, and where it needs to go.
What sparked your interest in economics, and if forced to label yourself (such as Keynesian or Freidmanite), which would you choose?
I had a great teacher in high school who really got me into the subject. But really my first interest was in politics, and like many people like that, I was a history buff. Reading histories of businesses and the way economic policy affected people, I realized that’s where my interest really lay. Everyone in China knows how central economic policy is to society and history – so much so that political debate here is usually done by proxy via economic debate – so it’s utterly central to what we do. I don’t like to label myself, because labels shut off what you can talk or even think about, but I’ve been influenced by the Austrian school of economists. They really focus on value creation – which I think is the central question. Keynes had great insights into modern economics, but omitted this central issue. If value creation is done right, the rest tends to follow.
How long have you been resident in China now?
I’ve been living in Beijing for four, having moved to Hong Kong in 2000. I first came to China in 1986, when from the day I landed it was like nothing I’d ever seen. That’s what caught me the China bug. It was all just beginning to change then. I came back in the early 1990s for half a year and could tell the differences. I went through Shanghai, Guizhou, Xian, back through Tibet and down the Yangtze river – and those places were a lot harder to get to then. There were no highways in Sichuan!
Is there truth to the phrase that the longer you’re here, the more you realize you don’t know?
China always surprises you; you should never assume you have it down. Even Chinese people don’t know everything that’s going on– foreigners here should have that humility, but like Americans back in the US, some people can assume they know it all. So of course the main thing is to keep asking and learning. There’s not one story, one narrative, in China. A country this big is always a multiplicity and often contrary.
What does your work at Tsinghua involve?
I teach a couple of courses: “US Business History”, where I compare business and development models, and “Doing Business in America”, which is about what Chinese companies need to do to go global, and how you function in a different legal, social and political environment. We look at the challenges facing CNOOC, Huawei, and Haier, for example. It’s a lot of fun.
Recently you’ve been blogging and tweeting about a potential severe downturn in the Chinese economy. What trends are driving this?
China has for thirty years had a successful growth model, which also worked for Japan and Korea. But it has imbalances: it depends on suppressing domestic consumption and channeling resources to exports. As long as the rest of the world can absorb this, it’s fine. This is easier for a small country but when you have the second largest economy in the world, this causes problems. In the last three or four years, the global financial crisis has shown the limit of this approach. But instead of changing it, officials here have pushed the model to the limit by maximizing investment. The trouble is that they are creating capacity (in real estate, production and so on) which has to be used. There’s not enough internal demand to run these, and the Chinese economy is geared to export. This knocks the legs out of current growth.
Thomas Orlik of the WSJ wrote a book about reading China’s economic indicators. How much of a problem is the opacity of the system?
The National Bureau of Statistics says China has a long way to go in statistical measuring. It’s something of a black box. Sometimes rules change and nobody is told, and they don’t revise the figures to take account of that – this has even happened with the monetary measure M2. A lot of statistics are fed to people from local officials with vested interests. So even if they’re trying to be honest, it’s difficult. You can’t take anything on face value; you have to see it all as a mosaic. Much of what I do is gather data points and extrapolate from that to form a story.
Are the recent incremental moves towards internationalizing the yuan having any effect on the overall economy? What further steps are needed?
The one meaningful way to internationalize would be to make the yuan fully convertible. Anything else is negligible. Some steps have been taken but this goal is far off. Some have said that it could be done in three or four years but that’s really unlikely. If China opens the yuan to be convertible, it loses control of either the exchange rate or interest rates: you can’t have all three. The impact on the closed banking system would be extremely difficult, too: all the bad debts would be exposed, as happened with Japan. So while the government likes the sound of having the yuan as an international reserve currency, when they see the implications, they back off.
Is it fair to say that vested interests have too much skin in the game for rebalancing?What’s preventing the change in economic course that everyone agrees is needed?
Partly, with the influence of state-owned enterprises. But even if not, the process of creative destruction is not so accepted here. Is China willing to accept industries fail as well as succeed? So rebalancing is painful to all, not just vested interests. There’s this notion that China plans for five to ten years ahead, but infrastructure development isn’t really intended for the long term but for immediate GDP numbers. Most leaders want the immediate highs and reform takes a backseat. Similarly, always pushing for surpluses is an entrenched mindset. The challenges and solutions that China is grappling are of a different order now, and are a result of its success, not its failure. But the challenge is to proactively recognize the change and the different ways required to progress now.
What data sources do you find most informative or telling?
You can’t get too fixated on one indicator. There are always multiple explanations, for example with electricity. What I’m trying to do is tell a story and there’s no limit to what you can find. Real estate is important because it’s a major driver of the economy and it plays a role in underwriting credit. The flawed data you encounter leads you to seek as many data points as possible. So you follow the story, even when that takes you to surprising places.
Martin Jacques’ book When China Rules The World presented a picture of China inevitably developing towards a modern market economy like South Korea or Taiwan. Is this likely or even feasible?
Jacques’ thesis that China and India will return to their preeminence of 500 years ago is right, according to broad historical trends. But growth is not linear. If you look at US GDP growth over the past hundred years, the Great Depression looks minor but of course it was a major event. It’s the same with China: what looks like minor blips have huge effects. The 19th century US went through great booms and busts with creative destruction stripping out the inefficiencies. So any correction here is likely to be more severe since such corrections aren’t ongoing. Sure, China will probably be more influential and powerful, but over five or ten or twenty years, it could easily be very bumpy. So it’s a bad reading of history of Jacques’ part.
“So, how long have you been in China?” is often one of the first questions you get when meeting another ex-pat. Just as you can tell a lot about someone from their job, so the length of time you’ve spent in China determines your attitudes, capabilities and positions on the Middle Kingdom.
Wow, this place is amazing! The food is SO cheap! I got a bowl of noodles in a restaurant for five kwai! And the beer – just RMB3 for a bottle of Qingdao! It’s all so different from back home. The buildings are so tall, there are so many people, it’s all so fascinating. I’m so privileged to be in a country of such history and when is developing so fast. And the people are so friendly! I love it! I email all my buddies back home all the time, to tell them everything I’m experiencing. They love it! My company set up everything for me so I haven’t really had to handle much Chinese stuff, though I’m sure it’ll be easy enough. I can’t wait to visit Beijing’s Forbidden City and see the Great Wall. I’ve got so many nice photos of amazing stuff. This has been an incredible experience for me.
Goddamit! I can’t find anything I need! I can’t get any cheese, or maple syrup, or Hershey’s chocolate. I really miss my friends back home, but I can’t use Facebook or Twitter, for christ’s sake. And why is everything I like so expensive? It’s more expensive to buy a laptop or iPod or Levis here than back home! How can people afford it? And just buying things isn’t that easy either. It took me an hour to buy an external hard-drive, and I took a taxi the other day and the driver dropped me some place that totally wasn’t where I asked. Why are all the shop and restaurant staff so unhelpful? I can say “Ni hao?”, “Ting bu dong” and “Duo shao qien?”, but not much more than that. It’s all too hard for me! I read “Wild Swans” – so sad. Beijing was pretty damn impressive, though I’m not sure I’d like to live there. Too many people, too big, but Sanlitun is a really cool place – lots of nice bars. Looking forward to visiting Shanghai next, too.
OK, I’m getting a hang of this. I can haggle prices with shopkeepers and know where to buy the stuff I like. I can tell you all about VPNs and proxies and have dozens of cheap DVDs bought from that friendly guy down the street. I got the first three series of “House” for CNY10! I’ve got some Chinese friends and they’re really nice, even if they drag me to KTV more than I’d like. And I love chuar! I can even tell the guy what to cook in Chinese – not bad, eh! I’ve visited Shanghai, Beijing and Qingdao, all fascinating places, but I really want to visit Tibet and Hong Kong, and maybe go on holiday to Thailand too. My Chinese is alright – I managed to give the taxi driver directions to my flat the other night, no problem! I still don’t know too many characters, though I am getting to recognise more and more of them above shops and everything. I’m studying Chinese in the evening and have a tutor, which helps. I now have a Chinese boyfriend/girlfriend, and things are going well, though sometimes there are breakdowns in communication.
How long am I going to be here? What will I do when I go back? Will I ever go back? Will my Chinese partner get a visa? Man, the healthcare here is terrible – what if we decide to have a child? I know where all the international schools are, and can discuss their relative merits with other ex-pats who are parents. Beijing and Shanghai – pah! That’s just the tourist stuff. You want to visit Xian or Yunnan or Hainan to experience the real China, and the Harbin Ice Festival is pretty amazing. My Chinese is getting pretty damned good now – I can chat away with the locals, and tell my ayi what to do when she comes round. As for those China newbies all excited about being here – god, they’re so naïve! I remember when I was like that – ah, things were so different then. Maybe I should write a book about my time in China. It’s been some experience.
An American friend of mine (Matthew – he’s on weibo, at @damaxiu) recently posted on Facebook an interesting analysis of behaviour in McDonalds in Tianjin. Several downtown branches had initiated a new system, where customers ordered at the cashier counter, took a ticket, and had to wait to the side, in front of a pick-up counter, waiting for their ticket number to come up on a screen.
The new system worked – for a time. Customers obeyed as staff asked them to keep clear of the pickup counter and wait for their order to be called. But after a few weeks of the new system operating as planned, customers effectively broke it by crowding round the pickup counter, impatient to get their order, to the point that they blocked other patrons from getting their orders in a timely manner, or even took the wrong food.
Matthew then discussed how “the situation is actually a cooperation game with two easily identifiable equilibria: (1) the Pareto optimal equilibrium desired by McDonalds, which is all customers waiting across from the pickup counter and giving workers time and space to fulfil orders; and (2) the equilibrium customers at lunchtime have arrived at, a dominant “crowding strategy” with zero sum assumptions”. (He’s a smart guy). So faced with two strategies (“wait-as-requested” or “crowd-the-counter”), whether through impatience, group behaviour, or fear of losing out, the better option has succumbed to one causing aggravation, harassed staff and mistakes.
This sort of thing, unfortunately, is one of the most recurring and frustrating aspects in China of life: the way that Chinese people will game any system to destruction. A system is any kind of social convention, where certain behaviours are known and expected. And if there are expectations of behaviour, some people will try to use that to their advantage. But it doesn’t work when everyone is trying to get ahead. Things fall apart.
To take some other examples: I once worked on the top floor of a 16 storey building. At lunch time, the elevators would become crowded, everyone seeming to have lunch at the same time. So people on the higher floors would enter the elevator when it was still going up, in case it was full when going down. People from lower and lower floors followed suit, so that by the time it got to the sixteenth floor (hell, by the time it got to the tenth floor), it was always jam-packed, and unable to take any more passengers. Or another example: to see a doctor at the hospital, you have to buy a ticket beforehand. But because everyone knows they will sell out early, you have to go as early as possible. So everyone lines up hours before the hospital even opens – and so the tickets, of course, sell out instantly. (And this is before we even consider touts, or why there aren’t appointment booking systems). Or how, when driving, everyone will weave in and out of lane, trying avidly to get ahead, making drivers behind them brake and thereby causing the traffic to choke up quicker than if everyone had simply stayed in lane. Or how, at some buffets, people seem to act as though the food is running out, thus causing everyone to panic and grab as much as they can, causing the food to run out. Even the stock market can be understood this way. Investors pile in on changes in share value rather than the bottom line – leading to arbitrary booms and busts.
For the most part I applaud the tenacity and ambition of the Chinese. So many people are striving to get ahead, to develop. And in many situations, if people cooperate, it’s a non- zero sum game – everyone benefits when the rules are followed. Elevators aren’t full when they shouldn’t be, roads run smoother, McDonalds get orders out faster. But if everyone is battling to get ahead, the behaviours and expectations they should observe collapse. When there’s a finite amount of goods to go around, it is unpleasant to see people trampling down systems in their urge to grab some. Worse than that, it’s just counterproductive. You’re not gaining an advantage – you’re destroying the very methods that everyone is relying on. And that makes everyone worse off.
A fascinating piece appeared in the Wall Street Journal on Saturday 8th January by Amy Chua, a professor at Yale Law School, on “Why Chinese Mothers Are Superior”. (You can see the piece at http://on.wsj.com/hp4Ynx). The author was upfront about what some might see as harsh tactics in pushing her two daughters to pursue excellence, and made me consider the differences between “Chinese” and “Western” parenting. (I put the names in quotation marks because, of course, some Western parents are “Chinese” in their parenting style, and vice-versa – no nationality has a monopoly on parenting styles. Nonetheless, the image of the hectoring Chinese mother is commonplace in the western mindset).
Ms. Chua cites what she believes are the three major differences between Western and Chinese parenting. First, “Western parents are extremely anxious about their children’s self-esteem” while “Chinese parents … assume strength”. Second, “Chinese parents believe that their kids owe them everything… [therefore] Chinese children must spend their lives repaying their parents by obeying them and making them proud”. And third, “Chinese parents believe that they know what is best for their children … That’s why Chinese daughters can’t have boyfriends in high school and why Chinese kids can’t go to sleepaway camp.”
Having formerly been a teacher in the UK and China, and a Scout leader too, I’d like to put forward my own observations. Regarding her three main differences, she may have some good points, but from them she draws the wrong conclusions. To take the first point, children are resilient, true, and the current Western tendency to wrap up children from risk or danger is unwise. But this does not mean that a parent is therefore justified in calling a child coming home with an A-minus or even a B in a test stupid. Reacting with horror at a grade that’s merely good rather than excellent devalues what efforts were made in attaining that grade. To be sure, you can as a parent go through the paper and work out how to improve. But dismissing everything that isn’t first class shows a freakish competitiveness that distorts school into being an insane grades-chasing. It isn’t just a matter of believing a child can get an A; it’s an appreciation that there’s more to life to academics.
Which brings me to the next point. Ms Chua says she would never let her children have sleepovers, playdates, and that they must get A grades and learn the piano or violin. OK, that’s her choice. But to me, her children’s curriculum (indeed, their world-experience) is extremely narrow. Where are the sports, the hobbies, the play, the natural world, the self-reliance, the friendships? Where is the unfilled time that forces you to look within and consider what you want to do? I believe that Chinese mothers who cram as much education down the necks of their children, rather as farmers do to geese for foie gras, are entirely misguided on personal development. There’s education, the storing of facts. But far more important than this is knowledge, which can only come from experience.
When I have spoken with Chinese university students, I have consistently sensed that they have little life experience, and all the facts crammed into their minds do not compensate. To put it another way: the most valuable things I learned at school were outside the classroom. Many of my most formative experiences were gained as a Boy Scout, where I learned how a million practical skills and how to apply them: I gained such valuable life-skills as teamwork, leadership, self-reliance, concern for others and how to engage with strangers. (And my schoolwork improved in direct correlation with the time spent in Scouts. If my mother had been Ms. Chua, I would never have been allowed to join!). My experience with Chinese students suggested that many of them lacked such skills. I was often surprised, for example, at the social backwardness of the male students, who seemed to have their adolescent energy and boisterousness drummed out them. They seemed like they would have been happier spending hours at an internet café, avoiding direct social contact. I do not think this is a recipe for a healthy society.
As for Chinese children owing their parents everything, I have sometimes been embarrassed by western children and their selfish behavior towards their parents. Wishing to make your parents proud is a good thing; but spending your life repaying your parents? It sounds like Chinese parents see children as an investment, something which you work at for the sake of the return. There’s nothing wrong with seeking the best for your children, but seeing your children as investments strikes me as narcissistically self-centered, and entirely devaluing for the child. I doubt that anyone likes to feel like a horse bred to win the Grand National.
I can’t disagree entirely with Ms. Chua, however. I do believe that often Western parents are reluctant to push their children to achieve, and sometimes fearful of disciplining them. The tick-tock swing between authoritarianism and anarchy which has long affected western culture is in an anarchic phase, and children accordingly often have it too easy. I’ve sometimes been surprised by the ease with which parents give up when it comes to their children smoking, for example, or giving up extra-curricular activities. The absence of boundaries is as much a problem for some children as an over-structured life for others. It’d be easy to end saying the forms of parenting should be balanced out: in fact, I think both are wrong. Hectoring parenthood is as bad as absent parenthood. Parents should help children grow as individuals. The more life-experiences they have, the better; the more enriching a child’s experiences, the better. This requires a broader vision of what it is to be a parent than Ms. Chua would recognize, but I think her children would be far the better for it.
A bubble is never known until after the fact. I remember the dotcom madness of the late 90s, when absurdities were occurring like Boo.com burning through $188 million of venture capital in six months, with their TV ads achingly hip, but no doubt fearsomely expensive, and Yahoo! buying the Geocities web hosting site for over $3.5 billion when it never looked like turning a profit, despite then being the third most visited US website. (It was shut down 10 years later: an incredible rate of amortization). Yet while these colossal misjudgments seem self-evident, at the time no doubt intelligent people were urging them on. Hindsight is always perfect, of course, and it’s the easiest thing in the world to criticize the mistakes of others, but only in hindsight can errors like these be known: until then, they are cited as proof of “the new economy”. (The most horrifying phrase in business and finance is surely, “It’s different this time”.)
The question on many people’s minds is whether China is different, and whether it can get through what looks to surely be a deflating property bubble without causing a hard landing (a sudden slowdown). In many respects, of course, China is different. The effects of its economic boom have been unprecedented, transforming the world economy in areas as disparate as raw material markets and the US deficit. But to assess what’s currently happening in the Chinese economy is a difficult task, given its macro scale and unique position of being so large and yet still medium-developing. A wise provincial governor, rather than simply accepting the GDP figures presented to him by statisticians, used to look at the underlying figures, such as electricity demand and shipping volumes. When trying to do similarly, I am struck by some of the stories regarding the Chinese economy, despite it still reaching an annualized growth figure of 9.1% in the Q3 of 2011. Let’s look at the various aspects.
1 Local government debt in 20 provinces is over 100% of GDP. Following the economic crisis of 2008, the central government encouraged banks to lend and local government to borrow, to keep the economy buoyant in the face of a sharp decline in import orders from western nations. This was successful insofar as the economy kept growing above 7% (seen as the essential growth rate, below which the economy may fail to absorb new workers). However, the debts remain to be paid off.
2 As much of the money was issued by banks based upon bureaucratic channels rather than based on credit assessment by banks, the lending and spending too often went into unproductive areas. You may have heard about the “ghost towns”, entire cities constructed with not a solitary soul living there. Consequently, the rate of return on these loans is expected to be poor, leaving banks burdened by bad debts. As Reuters commented on October 10th, “Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered [Bank] reckons as much as 8 to 9 trillion yuan will not be repaid — or about $1.2 trillion to $1.4 trillion.”
3 One of the main sources of funds for local government is land sales. At the moment, developed cities (and not just those in the richer eastern provinces) have astronomical land values (and consequently property prices). For example, Bloomberg (July 13th) cites Loudi, a city of 4 million in Hunan province, which issued 1.2 billion yuan ($185 million) of bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year”. Average incomes in Loudi, by contrast, are $2,323.
4 Consequently, property prices, as has long been well known, are extremely expensive, but with interest rates below inflation and few other investment opportunities, most Chinese feel there is no other sound investment. However, for prices to be sustainable, there must be willing buyers. Recent moves by the central government to tame property inflation by diminishing demand look to be increasingly effective; but perhaps there comes a time when people at the bottom can no longer afford to step on the property ladder. The Economist (October 23rd) noted, “the number of residential properties sold during the weeklong national-day holiday earlier this month—usually a brisk period for sales—was down by 72% compared with the holiday in 2007”. Prices in one district are down from CNY15,000 a square metre to CNY9,000, while “in March a company in the southern city of Shenzhen caused a stir after it cut prices by 20%”.
5 One of the most worrying signs comes from Patrick Chovanec, associate professor at Tsinghua University’s School of Economics and Management. He says that “With credit conditions tightening, [property developers] systematically ran through the credit lines available: first the banks, then high-yield bonds in Hong Kong, then the private wealth management vehicles that have been popping up all over China, then the loan sharks. Finally, they ran out of options, and had no choice but to start selling some of their inventory at whatever price they could get.” This perhaps explains why, as the Financial Times reported (October 9th), “the ‘big four’ state banks suffered a net loss in deposits of RMB420bn – more than four times their lending in the same period – as savers fled to high-yielding shadow banks.” Savers, and developers, it would seem.
I am sure there are still many signs of strength in the Chinese economy, too. The fact is still it is still growing at 9.1% a year and doubtless has a great pool of would-be buyers waiting for prices to drop to affordable levels. All the same, it shows the tightrope upon which Beijing is walking. These are very delicate days.