The Time

Economies don’t grow indefinitely.  Low cycles follow high cycles and after 30 years it is about time. China cannot break the laws of economics, so the recession must necessarily come in the next X years. The country hasn’t prepared itself politically and psicologically to face this period. In the end, we are sure to have trouble.

Of course, this argument is of little value without the X, and many proponents of a time limit have failed in the past. This is the field of technical analysts and other mystical thinkers. Mythology also plays a role:  In Chinese history, cataclysms mark the end of a cycle. An earthquake preceded this crisis, and a solar eclipse is coming in July, the dynasty has lost its virtue. These arguments tend to work better with a bit of hindsight.

The Markets

The World’s economies are interdependent today. China’s economy is largely dependent on exports and FDI. The weight of these external factors in China’s growth has been much discussed, but regardless of the exact numbers, few doubt that it is a significant motor of the economy. External motors failing, China turns to internal ones: investment and consumption. Today, strong public investment, mostly in infrastructure and energy, is making up for the loss.

But infrastructure on its own does not move an economy, an empty highway is dead weight. Its value lies in the economic activities that are created or improved by using it, and those activities need markets to get them going in the long term. Optimists have pointed out that the crisis might turn developed economies to cheaper products, but international markets are saturated with cheap Chinese wares, and the latest news are discouraging. This leaves the Chinese consumer.

The People

Since the urban consumer was already developing at full speed, it is to the masses of Chinese peasants that all the eyes turned when a new market was needed to replace the failing exports. The peasants had been left out of the economic miracle, and measures were announced to get them back in.  But few of those social measures have materialized in any significant way, and the government seems to realize that this is a long term effort, not to be mistaken with an emergency financial package.

 Chinese peasants don’t like to spend money. They like to save it.  Some argue this is an immutable principle of a post-confucian society, others attribute it to the lack of “safety nets”, such as  health care plans, and the fact that poverty is still seen as a very real option.  Perhaps Chinese have too much common sense, and in the face of all evidence, they continue to act as if working hard and being thrifty will make you richer.

Meanwhile, the optimists of internal consumption see hope in the low-tier cities, the segments of the population that have already abandoned the peasant lifestyle, but still have a long way to reach East Coast level. 

The Government

China’s authoritarian system has some advantages over Western systems. The executive can take strong, quick measures unhindered by parliament debate and popularity surveys. A good example is the stimulus package. China was the first major country to announce it, and it is has been the biggest  relative to the size of the economy. Government technocrats tend to know more of economics than voters.

But some see in the system the seeds of disaster. The Son of Heaven is human, and bound to the wheel of favours, factions, patrons and clients. The lack of checks and balances makes it easy  for personal interests to take precedence over the common good. Some have a stake in the stock market, others in real estate, there are ways to pump up these markets with the connivance of Beijing. One day they might all decide it is time to cash in, and the rest of the population will be caught by surprise, watcing the CCTV report with the 8% growth spreadsheet. Lack of transparency usually works well to bubble up crises. 

The Package

China has a good package, timely and sizable. Few doubt now that it has delivered the desired stimuli. The thrust in infrastructure and energy investment is spilling its effects over the rest of the economy, and the feared legions of the unemployed are still nowhere to be seen today. 

But the package can only be a temporary patch, as we have seen above, and its function is just to cover the gap until the economy gets back to normal. In the meantime, the investments should be preparing the path for the return of sustainable growth.

Optimists point at the positive parts of the package, such as social measures, education, or development of new sectors of the economy in biotech or renewable energies. Pessimists note that the bulk of the package is actually flowing into very few sectors related to heavy construction, and this will cause unbalances and excess capacities the minute the financial tap is turned off.  In their view, the package is just postponing/aggravating the consequences. Some mention the devastating and unpredictable specter of deflation.

The Chest

China has also a nice chest. It is a war chest, and it is full of foreign-exchange reserves denominated in dollars. Optimists and lovers of logic alike see salvation in these reserves. They like to point out that China has room to go on with its package for a long time, thanks to all the years that the country has spent saving saving money and acting as “Americas banker”.

From a plain logical point of view, this makes sense, but unfortunately financial logic is anything but plain. The specialists in the area are quick to remind us that these reserves are not unencumbered wealth, and not free for the government to use. The central and provincial governments finances are already under stress, and the banking system is channeling all financial resources to the package SOEs, with the consequence of drying up available finance for other sectors of the economy.

The Riots

One of the main subjects in the Crisis discussions has been the possibility of large scale riots caused by unemployment. These riots could have the effect of destabilizing the system, with consequences in politics as well as in the economy. Perhaps because of the political derivations, unemployment has attracted a lot of attention from Western observers. Around the turn of the year, when the Western Christmas season was over and many semi-seasonal workshops were closing, the discussion reached the peak of popularity.

But the package has kicked in, and for the moment unemployment doesn’t show signs of getting out of control. The riots have increased in number, but they remain essentially local in nature, directed to claim arrears from a particular company, or against local authorities. There is a climate of relative optimism among the Chinese, and it looks like the the propaganda package that came with the financial one is having the desired soothing effects.

Inflation/Deflation

Predictably, another high point will come when the investment package is left behind, or when the financial situation makes it unsustainable to continue pushing it. At this point, we might see more passionating discussions, with the added appeal of possible deflation risks. 

Inflation has historically been a major cause of riots and wars, so a logical mind would assume that its opposite -deflation- has opposite effects, forcing everyone to stay in at home reading self-improvement books and drinking green tea. I doubt very much the economists will let us get away with this theory. In the meantime, I will stay tuned to the blogosphere for any interesting development to add to this list.

Panic spreads fast in the crowds. In the emergency stairs people screamed and treaded on each other as they desperately prodded at their cell phones. The crammed staircase felt like it would fall on us any moment. It is a sense of utter helplessness of man against the forces of nature. It feels terrifying and it feels unfair. 

Ten minutes later the building was empty, and thousands of employees were safely reassembled on the People’s Square. It was a sunny day in Shanghai.  We smoked cigarettes and, to get over our nervousness, we turned to joking about the reaction of our client. Only later the messages started coming in, and we understood we had just had a slight taste of the tragedy that took place 1,000 miles to the West.

Chinayouren’s thoughts today are with the brave people of Sichuan.

On the internet, the best and most tasteful homage to the victims I have seen today is the one on the taobao site. You have to be used to the exuberant front pages of  the Chinese internet to fully appreciate the impression. Only a little candle on the right side of the logo is in yellow colour, but you will have to follow the link to see it, as animations didn’t come out in the picture.

Chinese ultra-blogger Han Han is starting a magazine. He announced it previously on his blog, and his last post is already giving the details to send in article drafts and job applications. I learned this last night from my friend 2Ting, who was eagerly preparing her CV and intro letter. The literati of the post-80s are very excited, it appears.

Han’s magazine, which still doesn’t have a name to avoid imitations, is presented in this blog post. A very Chinese and a very Han Han announcement, interesting for several reasons. But before I speak of it let me give some background on Han Han. I’ve been planning to write about him for ages, and never found the time until today.

The man

Han Han is 2Ting’s idol. He is also the idol of thousands of others post-80s Chinese, and he has become – in spite of himself-  a symbol of this often caricatured generation. His bio is interesting: while attending middle school he won a first prize in a famous literary contest, then he dropped out of high school and started writing  popular novels and driving race cars. By now he has become one of the best selling authors in China, and, if I got my stats right, the most read personal blogger in the World.

Han Han’ s appeal to the Chinese youth is based on his character and his life as much as on his incisive writing style. For modern day Chinese students, stifled by a cut-throat education system and the high expectations of their parents, there is no room for the big ideals. It is not Communism or Democracy that worries them, but rather the daily struggle to improve their grades. And  the fairness of a system that should allow them in the future to find a job according to their efforts.

In this world, dropping out of school has to be the ultimate rebellion. Han Han fought the system and Han Han won.  And not only he won, but he took to denouncing the gaps in the establishment, directly challenging the older generations that hold the power today. Add to this that – I am informed- Mr. Han is “hot”, and you got the bearings to start to understand the Han Han phenomenon.

The blog

Like a sort of Robin Hood of the Sinosphere, Han Han writes about injustice. He complains and makes fun of things that are wrong, by people who have power (political or other) in the older generations. Like his readers, he is not interested in the big words, you do not see “Charter” or “democracy” on his blog. You see a mayor in Chengdu who spent too much for a luxury “earthquake relief” car, or a rant against some older writer who sold his soul (some of his feuds with artists and critics are legendary).

By my own estimate, Han Han’s blog must be the most read personal blog in the World. The numbers are baffling. Each of his posts has hits in the hundreds of thousands, and comments are counted in the thousands. According to the stats on sina.com.cn, he is long past the 200 million hits. Impressive, even if we discount the part driven by returning low-value commentators. Typically, the 100 first comments on a post are whining about not being the first (the “sofa!”). Then it quickly degenerates into a series of ecstatic “chichis” and “jiayous”, which is the way Chinese express their cheering approval.

The lack of explicit political involvement is what makes many foreign readers ignore Han Han and turn to other -smaller- bloggers who write in tune with their expectations. This probably also explains why Han Han has managed to get away with so much, while being censored so little. The Censors have barely touched his blog, only once in a while blocking the occasional post.  Like the thousands of tolerated protests organised in the countryside, most of the times he is just writing  against a case of local injustice, and he rarely crosses the line of attacking Beijing.

But westerners and officials alike might be underestimating Han Han’s influence. His fans  belong to defined and very concentrated sectors of the population, including one that has been identified as potentially conflictive in times of crisis: the young graduates from university that are unable to find a job. Looking further down the line, the post 80-s will start entering their 30s next year, and gradually they will gain some power and cease to be ciphers. Han Han is in a strategic position.

It has been said that his writing lacks a message, or that he is just a student fad, perhaps because he doesn’t fit our mould of a”chinese intellectual”.  But he never was meant to be an intellectual. He is a man of action, who hops from high school to the race cars and on the way home plots his next witty line. He is the kind of man that makes change happen, rather than theorising it. The following extract of his magazine announcement can give a taste of what I mean.

The magazine

This is the bold announcement posted on the 1st May, approximatively translated and abridged by Uln:

The magazine I edit is calling for manuscripts. Any kind of documents, including novels, short stories, news, essays, commentary, etc. For this magazine, I have decided to give the highest salaries in the field. 2000RMB/ 1000 characters for original cover stories. 1000RMB for other original stories, etc. These prices are around 10 to 40 times higher than average of the industry.

The magazine will also have a section for the points of view we completely oppose. The magazine considers the author is mentally disabled. These will include articles against humanity, against common sense, against justice and freedom. We will publish these articles and remunerate them  250*RMB/1000 characters. And this is also a high standard, for 250s don’t fall from heaven, and there is also a cost for the 250s to be born.

(*NOTE:  For some reason, the number 250 in Chinese means “stupid”)

That is already a promising declaration of intentions. Fighting injustice with irony, that is very much the style of Han Han. In a country like China this kind of writing can go a long way. Until, of course, one of the 250s is powerful enough to take away their publishing licence.

The texts will only be paid 15 days after publication, to give enough time to the readers to find any plagiarism. If this is the case, a note will be published in the cover and compensation of 1000RMB/character given to the original writer, and 500RMB/character to the one who finds it. The magazine will not admit original authors that plagiarize themselves under a different name to claim both payments.

The salaries for the staff editors will be of 6500RMB/month, which will increase if we manage to keep the business afloat.

Some people advised me against this kind announcement, but  I didn’t listen to them. When I asked some guys in other publications what was their monthly budget for writers, they said it was negligible. I am fed up of the situation in this country and I want to help improve it. I am a well known writer and a champion driver and with my income I can hardly buy a flat in Shanghai. In other countries these professions are more respected and you earn enough to buy Ferraris, etc.  I want to ensure in my magazine that writers receive the proper compensation for their work.

Remarkable announcement, and, as I said, very hanhan. Also very Chinese, showing the money straight from the first paragraph. The likes of Han Han are not ashamed of  what  they are, and I can’t see a better way of getting his hordes of fans feverishly updating their CVs. I wonder how he is going to deal with the avalanche of manuscripts.

A funny paragraph is the one about plagiarism. It is a recurrent theme in Han Han’s posts, as he has been himself a major victim. The whole system of low wages for creative jobs is partly due to traditionally low awareness of intellectual property. To understand the extent of the problem, just consider that Han Han’s novels are plagiarized before they are even written: some crook commissions a writer to put together a novel with the bits of information that leak about Han’s next work, and in a week it is on the tricycle market.  In these conditions, original books in libraries rarely sell for more than 15RMB (2$). Any increase would get the tricycles flocking to your doorstep.

But finally, one might ask, what is the magazine about? In the world of Han Han, the particular theme doesn’t seem to matter so much. As we saw above, humanity, freedom, justice and common sense are the principles that will guide it. Principles without capital letters, because there are none in Chinese. Perhaps the following phrase, which sounds better in the original, can give some more hints:

We don’t have a standpoint, we just discern right and wrong. Too many people around us have standpoints, they don’t discern right and wrong.

So be it.

This article is dedicated to my friend Ting.  I really wish you can make it into the Han magazine

Two different ways of seeing the world

I was in Europe for the last time the week that Lehman Brothers declared bankruptcy – some call it already “Meltdown Monday”. Pretty scary, but the news didn’t seem surprising for anyone there.  Ever since the beginning of the year most people had seen the crisis coming. On the Spanish beaches, there were less tourists to be seen this summer, and the variable rate mortgages were getting stiffer for all. The governments that were not in electoral campaign had profusely announced what was to come.

That same week, during a congress in Lyon, the American guest from the marketing consultancy came out to the stand and presented the prospects of our industry up to 2010. He had a very professional looking PowerPoint with some colourful graphs that vaguely reminded me of the slides in a waterpark. The delegates from the rest of the countries looked bored, and only we – New Delhi, Kuala, Shanghai – were hurriedly taking notes. Nobody had shown us that back home.

The whole atmosphere I encountered in Europe was in stark contrast with what I had seen and what I am living still today in China. The crisis has not yet touched this country. The taxi drivers at the airport, who usually know a good deal of economics, don’t even mention the word crisis. On the corporate side, the contrast is even bigger. Most of my local clients, who take a WSJ for breakfast every morning, are not only not worried, but they actually look at the future with renewed optimism. They know that a big crisis (危机) is also a big opportunity(机会). In an intuitive language like Chinese, the two words share one single character.

The Great Wall of China

The prevailing thought here seems to be that of the Great Wall of China: Confident and proud of their financial system which has resisted the negative western influence, Chinese at all levels are convinced that the crisis will not hit them hard. To reassure them, there is the precedent of the 1997 Asian financial crisis, which devastated the Asian tigers’ economies and left China, the only country strong enough to ignore the  western blunderer IMF, mostly unscathed.

The media here have already been speaking about the crisis for a while, but always as an external problem, and with a generally positive outlook. The official Chinese press is prudent as usual, but the general idea still seems to be that China shall be the word’s bastion of stability against the irresponsible western financial devices. Thus the official discourse goes: Growth to slow down mildy, there will be some  restructuring to boost the domestic markets, and we will come out stronger in the end. And in everyone’s mind is the opportunity for Chinese companies to go out shopping for deals in capital thirsty western counterparts.

Of course, Chinese are aware that international markets are the weak link, as a large part of the GDP is made up of exports to western countries and FDI. But they count on two factors  to ensure the minimum of vital growth required by the system. On one hand, the massive ongoing investments in infrastructure that expand their tentacles day after day to each end of the country. On the other hand, they bet on the development of Asian markets to counter the descent in Western demand.

In view of all this, the new priorities of the technocrats, as they explained last week in our industry briefing in Beijing, are: 1- Develop the markets to find a way out for Chinese production, and 2- Take advantage at the worst of the crisis to go out and acquire foreign companies, and achieve through these means the creation of truly global corporations, with an access to know-how and technology which is much more direct than that obtained from FDI.

The Great Wall of China, the myth that for millennia has defined the Chinese people, is born again in the realm of finance. And, shielded behind it, the sons of the Dragon hope to regain the glory of past times.

A weak point in the Wall

There are however some signs indicating that Beijing’s plans might not work out so cleanly. In the first place, although the Chinese financial system, entirely controlled by the government, has indeed remained more conservative than the western one, this does not make it in itself an efficient system. A series of failed investments in the near past, such as Blackstone or Bear Sterns are good examples. And the opacity typical of the large Chinese banks, heavily influenced by the Communist Party, is not precisely the best guarantee of success.

It should be noted as well that the very foundations of the Great Wall, the massive reserves of foreign-currency held by the Chinese government, may not be the solution for every problem. Most people in China fail to understand that the foreign-exchange reserves are not free assets, and cannot be used freely by the government without seriously affecting its monetary policy, or rather, as professor Michael Pettis calls it, its currency regime. Indeed, until the domestic market is strong enough, China will be forced to keep the RMB as low as possible to keep up with the exports, which will completely condition the freedom of its policies.

Looking at the markets, already several observers have started to note the fall in sales of Chinese companies. It is very doubtful that the Asian Markets can grow sufficiently quickly to absorb the growing Chinese manufacturing output. In the end of the day, Asian markets mean India and Russia, the only two countries with a critical mass to match Chinese needs. They are both strangled by serious structural problems to be able to respond quickly enough to China’s needs. And the hesitating actions taken for land reform to increase the consumption of peasants might be a good idea in the long term, but it sounds very optimistic to bet on domestic consumption in the short term.

Add to this that Chinese economy, in spite of being in the middle of a development miracle, has severe structural problems, partly derived from its political system, as commenter Will Hutton brilliantly puts forward in his book “The Writing on the Wall”.The lack of a “soft” infrastructure, as he calls the ensemble of characteristics of a civil society that are necessary for the proper functioning of a market economy, makes China a very vulnerable system. It is symptomatic, for example, the total lack of internationally recognized brands, or the many cases of mismanagement, such as the recent case of baby milk contamination.

Beijing taken

But there is a much more worrying aspect, which derives precisely from the Great Wall effect. Historically, the Great Wall of China has not been effective to prevent barbarian invasions, and in a way it has often had the opposite effect. The Han people, protected by their Wall, had a tendency to feel invulnerable and live with their back to the North. In 1644, when the Manchus crossed Shanhaiguan, they took the Chinese by surprise. Beijing fell very quickly (to internal rebels in the frst place), and the last of the Han emperors was left with no choice but to hang himself from a Pagoda tree at the Jingshan Hill, right behind his forbidden city. This is History. But it is a story that has too often repeated itself in China, and which can revive under a new shape in the XXI century.

It is well known, and the economic miracle of the last 30 years is a proof of it, that Chinese economy is guided by a corps of well trained technocrats who know very well their subject. And undoubtedly Zhongnanhai must have a Plan B readily prepared for contingencies. But it seems clear that, as much as they might want to prepare, if the crisis hits hard in China, the scope of reaction of the system is very limited by its own structure and its own people.

Indeed, the great majority of Chinese workers, unlike their western counterparts, are ill prepared to face a crisis, let alone to understand it. Ever since the end of the Cultural Revolution, they have only known 30 years straight of growth. The Chinese people has kept silence since the summer of 89, when Deng and the Red Army made them understand that getting rich comes first. Since then they have accepted injustice, inequality and corruption in exchange for national pride and a notable increase in material conditions. The day the system fails to deliver, due to unemployment, inflation, or other crisis effects, the pact of silence shall be broken.

Unlike our governments, the Chinese Communist Party will be unable to shield itself behind an international economic situation that its own people do not understand. And all its legitimacy,  based on economic development and on the dubious legacy of Mao, can vanish overnight. China needs a minimum annual growth to employ the massive wave of peasants that are migrating to its cities, the biggest migration in the history of humanity, as the topic usually goes in China comment books. The leaders know this very well, and the 7.5% of annual growth that they set as a goal in the 11^th Five Year Plan is probably about the minimum they estimate for the whole formula to add up.

It the Wall falls in these circumstances, as in the Ming period, the psychological effect could be devastating. And when the forces of the hundreds of millions are unleashed, the bureaucrats in Beijing might have no other way left than the one of the (political) Jingshan hill.

Possible outcomes

We might be right now at a turning point in the process of development of modern China, which will seriously impact the course of history in the XXI century. This year 2008, the one of the 30 anniversary of the beginning of Deng’s reform, marked by a series of disasters, and rounded off by the spectacular success of the Olympic Games, might well be the year in which everything changes. In the Chinese tradition, natural disasters, and earthquakes in particular, have long been omen of political change. The last serious earthquake was, precisely, in 1976.

Whatever happens, whether the Chinese Wall resists or not, the international crisis shall precipitate many changes in China, and in the rest of  the world we shall do well to keep a watchful eye on these events, because they shall have a major impact on our own lives.

If the Wall resists, Westerners will be forced to admit the validity of the Chinese economic system. Chinese capital shall go out to the world. Taking advantage of the opportunities provided by the crisis, Chinese economy may take in a very short period of time a decisive leap, and under the solid supervision of a regime legitimized by its success, it can spectacularly accelerate its progression to become a superpower. In a very short period of time, the most optimistic of predictions for China can become true.

If the Wall should collapse, on the other hand, Chinese economy may suffer a rapid decline, with almost immediate social and political consequences that may drag the rest of the world into a crisis that could go beyond the purely economic. The outcome in this case is much less predictable, and only mutual understanding and tolerance among the peoples of the world will avoid disastrous results.

So is the crisis hitting us or not?

The greatest economists have historically failed to predict crises, and are rather better at analyzing the problem “a posteriori”, finding out that it was all very clear after all. Crises are by definition unpredictable, so the point of this blog is not to guess whether or not the Great Wall of China shall resist this time the barbarians.

Instead, the conclusion is that, whatever the outcome, the role of China in the world is going to change radically as a result of this crisis. In the meantime, CHINAYOUREN will be here to inform you and keep a watchful eye on the Crisis and the Wall.

EDIT1: Deleted little rant against Western Media. Added shameless promotion of CHINAYOUREN.