Friday, December 12, 2008

A Dragon on Winter's Eve

With one foot in the future, one in the past, China faces the global slowdown

China is like a dragon that has slept for hundreds of years
Now it has woken up
Open your eyes, look carefully
Who wants to be a slave of fate?
History has shown that evils from outside will be defeated

-- Qing Dynasty song

In Xi'an, China's ancient capital, the past meets future. Strolling atop the city wall on a cold December day, one can observe both. The vibrant city street scene below is teeming with modern double-decker buses and fashionable European, Japanese, American, and Chinese autos. Giant Starbucks and KFC signs appear near the city center. The city walls encircle a downtown resplendent in its past history, with Buddhist temples, charming old-town vendors, top-notch museums, and all one would expect in a city of such renown. In many ways, downtown Xi'an is China at its modern best.

Travelling a bit further afield in Xi'an, one can observe a few contradictions that baffle the Western observer. On a traffic roundabout, an elderly bicyclist on a three-wheeled scooter pedals backwards against the flow. Chinese drivers take it in stride, dodging cyclist and pedestrian alike as they move through the city. Any trip through a modern Chinese city will leave the unitiated western observer shaking their head, as pedestrian, cyclist, and driver are forced to make split-second decisions to avoid one another. I pass a few accident sites, testimony that they don't always succeed. Crossing the street with my Chinese hosts is a adreneline pumping experience, as we dodge bus, car, and bike to dash across underneath the ancient city gate. A bewildering variety of foot-powered and electric contraptions fill the streets. China, it seems, has not made peace with the motor vehicle age just yet.

But the love affair with the auto now runs strong in China's younger generation. The young man escorting me that day explains "I want the Jeep, but I can only afford the Focus". Ever curious, I ask him where he plans to drive. "Around Beijing for the work, and away on the weekends to the country", he replies, waving his hand as if to transport us away from the traffic jam and smoggy streets we find ourselves in this day. In every major city on my journey, the oppressive haze gave a harsh reality check to this evolving love affair with the auto. China's 1.3 billion people and dense city infrastructures are not conditions that suit widespread auto ownership. Chinese government infrastructure spending notwithstanding, one cannot escape the conclusion that China's love affair with the automobile may be coming too late in the global fossil fuels age. Their attitude mirrors the golden age of the automobile, hearkening to the days of Route 66 in America. Spending to build more modern roadways is probably on the government's short list of economic stimuli, but China's cities are not the most desirable places for drivers.

Not that China's roadways are not impressive. Many of them are as modern as any found elsewhere. They feature a dazzling array of makes, from the European Citroen and Volkswagen to Korean and US staples like Buick and Chevrolet. Chinese vehicles comprise an increasing number of these cars. My host makes sure I understand: "All made in China". I point at the sleek Audi. "Made in China, in a Chinese factory. All the companies have factories here". I ask about the Buick minivan. "Made in China". My hope that Chinese auto demand could somehow replace a cratered US car market and save US auto jobs is dashed. All of the cars sold are and will continue to be made here. How could it be otherwise in a country known as the factory to the world? And China is an increasingly sophicticated factory at that.

Changing Lifestyles

China's cities are stunning in their modernity. My itinerary takes me to several, including Shanghai and Beijing, two jewels in the Tiger's modern crown. Each city competes with the other across the board, including erecting the most stunning modern skyline, shopping malls, hotels, airports, and everything in between. Beijing's Olympic facilities are works of modern industrial art. China has approached its modernization with a vengeance, almost a wild-west boom mentality. The country reminds me of an old mining boom town on a grand scale. Global capital flowing in, courtesy of China's position as factory to the world, bears immediate fruit. On the surface, China is emerging as a great power. But my goal is to look deeper, to determine if China has what it takes and what the world, it seems, now expects of it.

My travels lead me to backwater areas,like the small city of Yinliang. Only an hour from Xi'an, yet the place could have been transplanted from Soviet Bloc Eastern Europe; soulless industrial buildings surrounded by dreary farmlands. Industrialization has taken a heavy toll on some of China's smaller towns. One of my hosts explains that her hometown,once a charming old town, now features modern, drab architecture like this. "You see this old town?" she says, pointing to a pretty section of Xi'an. “My hometown once had this. But no more." Having seen Yinliang, I can relate to her angst. I pester her to take me to a farm. I find a mostly pre-industrial landscape worked by hand, where farmers haul their implements in hand-drawn carts. China's farms certainly merit some modern attention.

My host explains to me that, in fact, the farmer is the focus of a lot ot attention and plans as the government reacts to the global slowdown and Chinese export drop. In some ways, this has been forced on the Chinese. The global financial crisis threatens to reverse decades long trends of migration to factory boom towns. This year, tens of millions of farmers who travelled to work in the factories of provinces like Guangdong in the south are now returning early to their farmland homes for the Chinese New Year, uncertain of whether factory work will be there for them again. Regional governments have been forced to make good the wages of defunct factories in some cases, facing worker riots. The governments most immediate need is to figure out, quickly, how to react to this adjustment, and how to absorb this excess workforce back from whence it came. For many of the jobs the workers left this year will not be there after the Chinese New Year.

Economy – Change and Reaction

Ever ambitious, China's government's plans range from stimulating consumption to modernizing the farm areas to encouraging farmers to form small businesses to take more responsibility for the food chain. The government has a seemingly endless string of ideas, and they will need them. China's adjustment will be severe. On the flight in from Los Angeles to Shanghai, I had seen stark evidence of this. For as we approached the coast, eager to see my first glimpse of China, I peered out the aircraft window. Seeing lights, I thought I finally saw it. A closer look revealed the truth - these lights were not the coast, they were hundreds of cargo ships, anchored in rows off the coast. China's lifeblood, stagnant.

The grand capitalist experiment that is China today does not only manifest itself in buildings and infrastructure, it has planted its roots into the Chinese soul. The sense of hypercapitalism pervades everywhere. In my trip to the Great Wall, I am accosted by increasingly pushy souvenier vendors. "400 Yuan" they say for a beautiful feather painting of the Great Wall.. I walk away. "Good price for you. 200". No, too big to carry, I say. "100, you name price". I offer 70. "OK". I have just bought a handmade, framed work of art for $10. At the famed Terracotta Warriors site near Xi'an a veritable strip-mall of souvenier vendors calls out to me in broken English, beckoning me to see their wares. My hosts explain that this capitalist mentality is very evident, even in the basic necessities of China. If you need health care, you pay for it up front. If you want a quality education for your child, it requires a second salary to provide the necessary income for private schooling. Everything is for sale, and everything up for negotiation. It makes for a thin social safety net, a real danger in a slowdown. At a souvenier shop, I finally find my treasure, an antique Mao clock from the Cultural Revolution era. I wind it, and the lady on the face waves her flower bouquet at Mao. It is perfect. For me, Mao symbolizes one link in the flow of history that has left China still grappling for its own unique Chinese future.

In a fundamental way, the people of the export capital of the world are importers at heart. The flow of Chinese history reveals a constant tension between western imports and Chinese traditionalism. When accompanied by trade imbalance as in the Taipeng Rebellion of 1850, this tension has had disastrous results for China. China has imported Buddhism from India, communism from Russia, and capitalism from the west. My business contacts reveal that they are also eager to import technology, preferring to build and integrate rather than invent. It is a strange dichotomy, for history shows a long history of Chinese innovation. But Chinese approach to innovation these days is more likely a product of their desire to engage with the west at ever increasing levels of spohistication. But it is in this area that I find my greatest surprise about the Chinese. For the Chinese, it seems, have a view of America that many Americans themselves no longer seem to believe in. They see America as a shining city on the hill - of technology and innovation.

"We need to work with Americans to get the high tech. We are not so strong in this", my host admits. "In China, we have many engineers, but not so many who now how to build the whole system, to design it". Eager to work together with Americans, their motivation does not seem to be so much to get their hands on technology as it is to work with the ones they see as the best at technology - the US. I get the sense that, if good old US engenuity and innovation is America's strength, the Chinese strength is in their ability to apply almost limitless energy and resources to implement. One article I read puts it succinctly - China's next step may be as a value-added outsource partner higher up the value chain, employing their abilities for rapid change and almost limitless manpower to meet time critical manufacturing needs. It puts the Chinese manufacturing boom in context for me, and invigorates my hope for the future relationship between the countries. We need Chinese innovation, they need ours. Each has strengths.

Government – For the People?

Mao's portrait looks commandingly across Tiananmen Square as we circle it at nighttime. My Shanghai-biased host is dismissive of the capital. "It is like Russia for me" she says. "Big, square, full of monuments". On this cold night, I certainly feel like I could be in Moscow, looking at Red Square instead of the vast concrete expanse of Tiananmen Square. But the government run from the imposing People's Congress building is uniquely Chinese. Never before has an authoritarian, state-run government juxtaposed itself with a free market system in the way China has today. It is a strange combination, with much freedom in business, less freedom in other areas. In Xi'an, a Buddhist monk holds forth on the Dalai Lama, probably one of the only people to be found to speak so freely. I do not succeed in starting such discussions with any other Chinese. I quiz my hosts on other topics, with better luck. For instance, I ask about trade unions. "We have them, but no power". I ask my hosts, since a dispute between a company and workers must then be resolved by the government, where would the government side, since it has stakes in both? "I cannot say".

The Chinese must place a lot of their trust in government these days, for it has difficulties aplenty to solve. As the global trade gears slow rapidly, the government is stressed. Money is not in short supply, but effective means to apply it where needed may well be. In many cases, the route of the money runs through provincial authorities. My hosts explain they are not confident the money will reach where it needs to go. "Chinese people can take bad times, but they cannot take unfair. This is my biggest worry.", she says with a conviction I find frank and startling. The levels of Chinese bureaucracy have not always been known for the upstanding integrity, and in the speculative boom of the past 20 years, I can only imagine what trouble they have gotten themselves into.

While there are business losses to cover, my host explains that the Chinese real estate boom has not ensnared the individual homeowner in China anywhere near as deeply as in the US and the EU. In fact, the Chinese indebtedness is not severe, courtesy of a savings mentality borne from the thin social safety net and tradition. A housing correction in China is underway, but they have not had the chance to grow as much of a bubble at the West. I find evidence that it may not be so for commercial real estate, however. In Shanghai and Xi'an, major unfinished buildings are common. In Xi'an, on the drive out of town, 20 story skyscrapers sit bare and gray, stopped in the middle of construction. I cannot imagine that major bank losses have not followed.

The half-finished buildings really drive home the contradiction that is modern China. I take in the usual tourist sites, and they reveal a truth about the Chinese soul - the love of all things natural. Pastoral scenes decorate ancient vases and jade sculptures. Art portrays the natural world, such as stunning silk paintings in Suzhou or carved stone from the southern provinces. Even the desire for a car is a way to get back to nature. Endless car ads show sophisticated Chinese in flashy sedans at the seaside or navigating pretty mountain passes. It strikes me that, for modern Chinese, the freedom of the automobile is one way to connect with their past. But the infrastructure required to make this happen is, unfortunately, one way to destroy their link to it further.

As I reflect on China, what occurs to me is that China needs, most of all, to develop a modern, sustainable, localized community structure. Development focused on moving the population out of the vast urban centers and into smaller, green communities would seem to be a good way forward. As I contemplate this, I cannot escape the thought that the current needs of China are ten years too early for the technology required to build such sustainable infrastructure. Needing to move quickly, China may be forced to stay its course. As in other aspects of the global crisis, the timing is terrible.

China and Technology

I suffer a hard drive crash, courtesy of a virus I picked up in the hotel. We take the laptop to a Chinese computer store. It is like an open-air bazaar, with individual sales people calling out for me to look at the laptops, digital cameras. “Laptop, sir, best price for you”. We push our way to the back where the service counter is. My host negotiates for a hard drive, and the young technician rapidly disassembles the laptop and exchanges the drive, putting the old one in a USB enclosure. Another tech hooks the old drive to a different computer, an old desktop with an LCD featuring large black cracks in the screen. The salesman offers us a 20 yuan copy of Windows XP. The CD case features a picture of a thoughtful looking Chinese, and was printed with an inexpensive bubble-jet printer. “Not an official one”, they freely volunteer. The technical skill of the young Chinese is evident, but the IT infrastructure and their regard for ethical concerns like IP and software piracy seem rapidly erected, half finished, like so much else in China.

My business mission in China is to facilitate high-tech exchange, enabling the Chinese by licensing American written software. As I work with our Chinese partners and visit with their customers, I find high tech Chinese engineers eager to learn and to use the latest technology we are offering. I sit with them in a smoke-filled tea bar in Beijing where we are demonstrating our products. They quiz me about our software. With the help of my hosts, I explain our capabilities. The Chinese engineers become very animated when they realize what we have, realizing the application to their problems. The conversation explodes in Chinese, rapid fire. They are well studied in the techniques of the industry, and they recognize innovation when they see it, and want to use it. But to innovate themselves, it seems is a risky proposition.

Risk and Reward – Past and Future

Risk aversion was the topic of a particularly revealing conversation I have on the train to Suzhou with my host. We are discussing the prospects for success of China's adjustment. "There are many levels of Chinese government", she says. "The central government gives the money, but the one at the regional government - he doesn't want to make any decisions. If his decision is wrong, he will get blamed". This is a key point for me, a limiting factor to success. For it occurs to me that, to effectively apply government stimulus, and to grow domestic demand and raise up local communities, local focus will be required. In democratic America, this happens through the workings of democracy at every level of government, answerable to the people it serves. Govrenment flexes, innovates and adjusts to meet local needs. It is not clear that the Chinese way will provide what is needed, for China has not grown up in a democratic tradition and its experiment with capitalism is facing its most severe test yet.

It is in the archives of history that I look to find corollaries to the current situation. For China suffers from familiar afflictions, its present in many ways echoing its past. When an antiquated Chinese autocracy faced western influence and trade imbalance in the early 1800s, it was unable to adjust and cope, leading to the Taipeng Rebellion, war with the west, revolution, communism, and ultimately to today's China. I ask myself - Is the Chinese bureaucracy of today less antiquated? Can the outside influence of western capitalism, with its booms and busts, be contained? Or will the current downward cycle of capitalism send a shock back through the Chinese system that it cannot absorb?

A dragon on winters eve. Will it react fast enough to claim the promise of the future? Will it implode due to its heavy structure and tradition? Will it embrace sustainability, reclaiming what lies deep in the Chinese soul? Will the West cooperate with it to allow each to leverage each others strengths in building the world of tomorrow? China today is at a crossroads, a fascinating study in contrasts. It bears watching to see how the dragon will fare in the global long winter ahead.


  1. Great insight, a pleasure to read. Unlike Bernanke, I am not a "great" student of the depression but my understanding is that the hard times in the US happened despite the fact that we were the numero uno exporter in the world with a balance of trade significantly in our favor.

    Given that the US economy back then was a lot more dynamic than the Chinese economy today, I would not be surprised if the drop from top to bottom China will experience is at least as bad, probably worse, than what we saw in the depression.

    Octavio Richetta

  2. Thanks OR.

    I agree, they have climbed way too quickly way too fast. Their fall I am afraid will be severe. And their society just seems rickety, poorly set up. Only the velocity of money has sustained it up to now, I fear, and that velocity has slowed considerably.