You will excuse me for writing two serious posts in a row. It’s been ages we don’t do anything on the Crisis, and these days there’s been a series of articles on the subject that I couldn’t just let pass.

Two of them have to do with the growth projections for 2009. Yawn. We’ve been seeing new projections and discussions thereof almost every week, and after the holidays break it looks like here it is all over again. It is mostly fruitless, because there’s not enough new information between one projection and the next, and so most of the times the changes reflect the mood of the expert more than anything else.

It was however interesting to read this PD article Sunday where one CPC “renowned economist” worried that “China is likely to lose 3.9 million jobs in 2009″ if GDP growth slows to 8 percent. Well, he need not worry anymore, according to other top CPC officials quoted here the very next day, “China Risks Missing 8% Growth Target”, which will be “extremely arduous” to achieve. They are starting to change their tune, again.

And this brings us to a more interesting subject which, although it is as difficult to predict, at least it is more telling than the empty statistical artifice of GDP. I am speaking of Unemployment.

There has been two contradicting articles over the weekend, by Wang Tao from UBS and by Victor Shih. They hold different positions as to what will be the unemployment figures in 2009 and what will be their social impact. In any case, it is worth noting that both of them, with their 15 Million (Tao) and 35-50 Million (Victor) figures, are way above any calculation by the “renowned economist” of the People’s Daily, who gives 1 Million for every % of GDP lost.

Needless to say, I am with the relatively pessimistic predictions of Victor on this issue. Partly because I deeply distrust socio-economic projections issued by banks (you can hardly blame me on that). But mostly because the arguments that Victor puts forward are more solid than Tao’s. Based on his deeper knowledge of Chinese politics,  Victor goes on to analyze the possible consequences of his prediction in a worse-case scenario.

Noting that, even if the government has the capacity (as he calculated here) to subsidize the unemployed families for an extended period,

the current wave of layoffs affects a young and vibrant cohort most capable of carrying violent collective action against the state. Without any systematic triggers, we at least will see a spike in localized riots which necessitate the mobilization of People’s Armed Police (PAP) units all over China. The central government would also be compelled to (and they are doing so already) roll out generous unemployment benefits for migrant workers and college graduates (to the tune of 300-400 billion RMB). If a systematic trigger occurs and instability spreads to a sizable city, we will see the large scale mobilization of both PAP and army units and possibly substantial bloodshed. In most scenarios, the CCP regime would still survive a large scale, cross regional rebellion. However, “overall investor confidence” will be lost.

What is the “systematic trigger” which I refer to? I don’t know exactly what it would be. However, if we look back in history, it can be a wide range of events, including the death of a popular leader, a serious natural disaster, the spread of a deathly infectious disease, a small student demonstration turned violent, religious groups…

This idea of the “trigger” (I called it the “Spark” on my previous post) is right on. It is exactly the element that is missing and the one that will make all the difference: when we have social tension to get the people in action, and intellectuals to draft the road map, the mix is an unstable equilibrium waiting to get in contact with a spark. Of course, Victor doesn’t know what exactly this spark would be, and neither do I because its own nature makes it unpredictable. But I would add to his hypothesis one of my own:

The emergence of a massive wave of protest on the internet that extends to all the forums and BBS simultaneously, with new sites being created faster than the government can block the old, which could create a cascade effect that would force the government to commit its worst mistake: close down the internet altogether. This would add to the protesters millions of online game addicts released from their cybercafes, constituting a serious army of instability.

Check out today’s post by Imagethief on the subject, showing with 2 nice graphs that we have an unprecedented situation in China. Also,  yesterday Jeremiah of the Granite Studio did an interesting comparison of the present situation and the one in 1919 during the May 4th movement. In those times, there was a clear “trigger”: the humiliating treatment of China by the Western powers in the Treaty of Versailles after the First World War, including the unforgivable transfer of territories to Japan.

One last note for the optimists: this weekend I learnt of a reputable economics professor living in Shanghai who recently bought 3 months advance of canned food to store in case the situation gets rapidly unmanageable. In a city like Shanghai, if the logistic networks are disrupted we can run out of food in a matter of days. I am still not quite there myself, but I must admit that, since I heard this, the idea hasn’t quite left my head and I tend to go more generous on every visit to Lawson’s.

UPDATE: Oops, I completely missed this one. All Roads has been doing the same comparison and drawing his own conclusions. You can see it here.

This week David Dollar has a very informative post: On exchange rates, think multilaterally. It is an analysis of the RMB exchange rates and their change over time. Using one of those useful trade-weighted indexes that the World Bank likes so much, David goes over the history of RMB exchange rates from the 90s to now, drawing conclusions on the policies of the Chinese government and their consequences at each stage.

After some retrospective paragraphs that I absolutely recommend to read to anyone who wants to understand past Chinese currency policy, he goes on to speak of the future:

There is a lot of potential for misunderstanding in this area. China feels that it has had a rapid effective appreciation and now wants to see what the real effects are before going further.The U.S. is probably looking at a substantial devaluation of the dollar against other major currencies, as the immediate financial crisis wanes and the U.S. needs to rein in its consumption and save more. If that happens, it is not in China’s interest to follow the dollar down. It will take good coordination between China and the U.S. to resolve their large imbalances in a smooth manner.

And I have the same objection that I always make to the World Bank Chinese publications: they stick to strictly economic terms, and avoid Chinese politics as much as possible. OK, I can understand being part of the WB he is not as free as this anonymous blog,  and he prefers to not stick his nose into sensitive matters. The trouble is, looking at the economy without the politics around it leaves you completely blind to see the immediate future.

I am not even close to having the experience of David Dollar or the number crunching capabilities of the World Bank, but I have eyes to see that something very big is missing in his picture. Multilateralism? Misunderstanding? Before any misunderstanding can actually happen, there has to be a will to understand. And this is far from sure at this point.

I just copy here part of the comment I wrote on his blog to show what I mean:

Still, as you imply yourself in the post, economists are always better at explaining things in retrospect. I am not sure at all that Chinese authorities will do the right thing in 2009.

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We need to keep in mind that Chinese politics always give priority to internal issues over external image or foreign affairs in general. Examples of this abound in recent times, such as their attitude towards protesters during the Olympics, or their cancellation of latest EU Summit because of DL, etc.

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If it comes to a point where unemployment gets even slightly out of control I have no doubt that Beijing will do what it takes to avoid internal problems. Including playing with the RMB, engaging in trade wars, and all the while siding with the “people” against the “Western menace”.

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We should keep an eye on Unemployment and Currency.

Hm, no comments. I wonder what the readers are thinking of all this. I can picture some scratching their heads and trying to type in lines of zeros in their office calculator. “RMBs to the Moon? Rubbish! Show me the money!”

Here’s my little math for the non believers:

4,000,000,000,000RMB * (0.015m/10,000RMB)  =  6,000,000 m = 6,000 km
… Idem times 100 …  = 600,000km

The Mean Radius of the Earth is : 6,371 km
The Average distance to the Moon is : 384,403 km

If you are very picky you might say now that my stack of RMB notes doesn’t quite make it all the way back from the Moon. But that is only because you didn’t take into account the crumpling factor.

My base observation was made on a stack of clean, freshly baked 100RMB notes. Now try to pile up those crumpled oily RMBs that taxis hand you as change, and see if you can not come back from the Moon and probably go all the way around again.

I was thinking last night of the stimulus package and of how, since the beginning of the crisis, economy has invaded every conversation, and we all go about speaking of Billions and Trillions like nobody’s business.

And I have decided to write this little post to explain to my readers what is a Billion and what is a Trillion. Now, don’t get me wrong, I am not taking you for an idiot, we all know that a T is a thousand B and a B is a thousand M (this is the generally accepted convention in English today, and the one I will use).

But when we hear that the Chinese are going to spend 4 trillion RMB to stimulate their economy, or in general when we discuss such large quantities of money, do we really understand what they mean? Do we have even a notion of what they can do?

I am going to give you first a quite surprising calculation from an Engineer. Based on the empiric observation that a 万 (100notes of 100RMB) stacks up to about 15mm, and supposing that 1RMB notes are about as thick as 100RMBs, I have come to the following results for the 4T RMB stimulus:

• In 100RMB notes it would stack up as high as the Earth’s Radius.
• In 1RMB notes it would stack up to the Moon and back.
  

Considering that a large part of the population spends not much more than 1RMB for a lunch in China, now perhaps you can visualize a bit better the significance of the money we are talking about.

Hospitals and Factories

For those serious business readers who are not impressed by the magic of numbers. As a blogger whose -attention, disclosure!- day job is advisor to direct investments in China,  I can use some figures to reposition our currency. I will not support these estimates here, but if you want you can easily find examples in many corporate websites on the announcements section.

These are my figures:

- One average city hospital, about 400 beds:              250 MRMB
- One average size factory,  2000 workers:                 400 MRMB

This is a fairly average state-of-the-art plant in capital intensive industries, not the toy sweatshops in the Pearl Delta River, nor the monsters like Foxconn Shenzen.

So now we can convert our currency to Hospitals and Factories and look back at some of the quantities that we have been speaking about these last days in the light of this conversion:

• The Stimulus plan is worth 16,000 Hospitals or 10,000 Factories.
• The Shanghai tower is worth 60 Hospitals or 40 Factories.

And speaking of the Shanghai Tower, I have some friends in Shanghai working for Gensler and I wish them the best for this beautiful building. But one can only hope that by 2014 the situation will have changed, because right now it looks like empty offices are flying in the sky.

Note:   Europeans: divide all numbers by 10 for Euro.  Americans: divide all by 7 for Dollar.

This week the international observers are observing us with renewed interest: China’s Annual Central Economic Work Conference is being held in Beijing Monday to Wednesday, where the country’s leaders will decide how to maintain a stable economic growth that will “improve people’s livelihood“.

Expectations are high on the meeting that will change the World. The trouble is, it will not. Xinhua has just published a first official explanation from NDRC, containing no news. The 40BRMB for “healthcare, education and cultural undertakings”, or the 280BRMB for housing projects were already announced before the meeting. If anything, note that now they have added the “cultural undertakings” for extra flavour.

What about all the rebalancing of the economy that we were supposed to see?

Wishful Thinking

What began as a series of advice by some economists has evolved into a streak of generalized optimism, as  more people started to believe that Chinese leaders will take the chance now to rebalance the economy. I suspect this very optimistic and profusely quoted World Bank report is partly responsible for this state of mind.

But the rebalancing of China’s economy, including a social safety net, health care, and all sorts of measures to bring into the economy the 900 milion rural residents that have been left out is not going to happen now.  Because it doesn’t make sense.

Here is why:

1- Hu Jintao hasn’t been able to implement his rebalancing policies during the first half of the 11 year plan. It is difficult to imagine that the development hawks in the CCP will allow him to implement them precisely now. Especially considering that things like a health care system are costly and someone needs to finance them. How much power do Hu and Wen really have to oppose the immediate interests of business?

2- Chinese like to save money, that is just the way they are, it is a trait of character. No amount of health care or land reform is going to make them spend more in 2009. How would it make sense that the same people who were saving during an economic boom decide to spend more now that there is fear of crisis?

3- All the social rebalancing and Scientific Development of Hu might be great for the long term, but they will not help China weather a difficult 2009. The real worries of the leaders now are: How well will the system resist the social and political tensions that will arise? And how well will Hu Jintao and an already fragile Social Wen resist them in the Party?

An emergency package

But there is a more fundamental objection to the notion that the stimulus package will implement any serious structural change: it is not its role. It is an effort to save an emergency situation and avoid the worst aspects of the crisis (notably unemployment) getting too serious.

And the sad fact is that great restructurings are not done in advance of crises, they are done afterwards. Hard times comes first, then reform. As an example, a quick look back at one of the historical cases that is most fashionable these days: FDR started his famous New Deal only in 1933, well after the crash of 29. In the meantime what was Hoover doing? Investing in infrastructure, like the Chinese now.

“Social” Stimulus

So will the package improve the livelihood of the peasants? Well, if you consider that buying a new color TV at a discount price is going to change their lifes, then yes. But otherwise, not.

The subsidies to buy home appliances that WSJ mentions here are clever measures, and they will probably be effective to boost the consumption of some farmers in the short term. Which makes sense, because the factories producing those TVs have to keep running, unless someone imagines that a legion of jobless manufacturing workers can be set to construct roads and railways overnight.

But nobody should be fooled: these are no social measures. They are measures to help the manufacturing companies to find a substitution market for the failing exports.

Another related “social” measure which might be hidden in the stimulus budget is an emergency fund to cover the possible cases of layoff riots. Victor Shih estimates it in his blog to be around 120BRMB in the worst of cases. I don’t think the government would be announcing this fund publicly, as it is a signal for disaster. But if 120B are missing in the 4Trillion package, now you know were to look.

Conclusions

It is all very healthy to dream, but I am afraid the largest part of China’s money in 2009 will go to help the companies resist the crisis and to mitigate the effects of it. The leaders are nervous, and the time is not for experiments.

But enough of stimulus already. Too much has been said, and I have the feeling that there are more important things to watch right now. Namely: Unemployement and Currency.

I have done enough tea leaf reading in my posts as of late, so I will leave these two subjects for next time. But if you want to know what 2009 is going to bring us in China, make sure keep an eye on them.

Now that inflation seems under control, unemployment has been identified by most as the real threat to Chinese stability in 2009. The risk of massive layoffs and social unrest is so obvious that you hardly need an economist to identify it. My blue taxi driver was telling me about it only a minute ago.

In the media and the specialized blogosphere we’ve seen many articles lately discussing the problem of closing factories. Mostly wondering how bad the situation really is, or how the government will be able to deal with it. Interestingly, opinions come in waves, one week exaggerating the damage, the week after dismissing it as seasonal closings.

Which just comes to show that, in times of crisis, bloggers and economists are all equally clueless.

The World Bank, Economists and Chinese Characteristics

The other day I commented the latest World Bank Quarterly Report, and I raised the issue that it does not take into account some obvious non-economic factors. Today, after reading the latest post on All Roads I went back to the WB report and performed a search for “unemployment”.

The number of results for this search in the 23 pages report is: 0.

Fair enough, there are 5 instances of “employment” (think positive), but most of them are explaining how the Magic Stimulus Plan is going to solve all the problems. The more I read it, the more I see this Report as loaded with Chinese Characteristics. It has been done in Beijing, by a mostly Chinese team… and like I said, it carries a highly suspicious 7.5% projection.

In spite of this, the WB report is an informative read, and one can hardly be surprised that an international institution tries to avoid conflict with one of its member governments. But what I did find quite surprising is that econoblogger Brad Setser’s analysis of the report doesn’t even mention unemployment either.

This is what made me think that we are going to need something more than economists if we want to see clear in the China 2009 scene.

Recommended Reads for the Fall

So, with all due respect, I have to desagree with Mr. Setser’s advice: If you only read one thing on China this Autumn, do NOT read the World Bank Report.

But then, what to read? Who knows really what’s going on in China?

Let’s analyze the root of the problem: China is not a transparent System. Even worse, unlike other non-transparent countries that we are used to deal with, China is a highly influential country. And it is in a position to not only hide the facts behind a painted veil, but also actively manipulate information and have hundreds of experts around the world scratching their heads.

So the answer to the question “Who knows China?” is:  A bunch of old men that are sitting in Zhongnanhai.

Now, forget your google, you will not find the Politburo Standing Comitee Blog, they will not take your phone calls to arrange an interview or explain their actions.

But what they actually DO every day is leave lots of traces, from the articles on the Chinese press to their announcements in economic policy. And these traces we can track down to the real intentions and the real information that they’re handling.  So it is by reading between the lines of People’s Daily, Xinhua and the likes that you can get a clue of what is going on here.

In conclusion, to understand China, economics is not enough: we also need politics.

Political Economics

So if you are only going to read one thing on China, I suggest you look for a political economist.  For example the blog of Victor Sish, which I discovered recently. He is a professor of political science at Northwestern University specializing in Chinese politics, and he also writes on Nourini’s monitor. He has a keen eye for interpreting the news from a Chinese government perspective. Don’t miss his last post on unemployment. For my part, I’m adding him to my Roll.

In fact, I am opening a new section on my Blogroll for Chinese politics and economy, and I would be grateful if you can recommend some other Crisis Watching sites, in English or Chinese. I am looking for sites that focus on making sense of the Chinese government’s moves.

Any more missing Links? Tips welcome. Thanks.

Picture credit: The shade of Zhongnanhai by Zhongnanhai 10毫克.

Yesterday I read the World Bank’s Quarterly Update on China. It is the report where they forecast the 7.5% annual growth for 2009.

First of all, I should thank chinalawblog for showing me the way to it, and also the World Bank itself for doing a very useful report that can be understood by dummies. This makes sense too, since we are paying for it through our taxes.

There has been some discussion on the net about the last 7.5% forecast given by the World Bank. The subject is so hot, and China is so overpopulated by pundits that any kind of statement about the economy can easily get you in trouble.

That was the case of China Herald publishing an 8.94% forecast. It was obviously a joke, but in the heat of the moment it was misunderstood by some readers. The actual message was simple: after many years seeing many crisis forecasted for China, Fons has learnt to be skeptical. Experience makes as good a prediction as anything these days, so at CYR the point is well noted.

Now, back to the WB report. This might sound obvious to many people, but it is just as well to say it: to issue a deterministic prediction of economic developments in China 1 year ahead is only second in difficulty to predicting next’s year weather. Just to give a little insight, the forecast for 2009 is based on dozens of graphs like the one below, where particular aspects of the economy are projected into the future. A single one of these factors that deviates from the projection can completely change the whole picture.

But the comment above could apply to any economic forecast. For the China report in particular we can add the following important points:

• It assumes that the Chinese government will continue to make good choices in fiscal and monetary policy, as it has done up to now.
• It assumes that Chinese authorities are transparent, and that they do what they announce. For example, implement the mysterious land reform announced last October, or the famous list of 10 points for the stimulus plan.
• It assumes no big change in non-economic variables, such as social and political impact of the crisis, i.e. unemployment, social unrest, rise of nationalism and protectionism,  etc.

In the end, a 7.5% or even a 6% during 2009 is only a little break in the race, and in itself is not at all catastrophic. In fact it can be positive for China to allow her to implement the much needed “rebalancing” policies, as David Dollar explains here.

But the question that remains is not whether the growth will be 6, 8 or 9. The question is whether China’s government is clever and flexible enough to adapt to the new situations that will arise, and whether the delicate social and political balance that has been working in China for the last 30 years will resist the impact of a global crisis. Or, as I like to say and link in all my posts, whether the Wall will resist.

The China blogosphere brought us some disturbing news again today. This time it’s about Foxconn, aka the Hon Hai Precision Industry, based in Taiwan. The rumour has it that it’s planning to lay off 100,000.

You might remember Foxconn from the funny episode of the IphoneGirl that became world famous for a day. It might also ring familiar because this is the company that manufactures the new iPhones and iPods.

What you might not know is that Foxconn is:

• • The largest exporter in China, according to their website.
  • The biggest electronics manufacturer in the World.
  • Employing close to half a million people only in PRC.

Now, I don’t want to come across as a rumourmonger, but I think it is worth to have a closer look at this. Because if it is true the social and economic impact in China will be seriously felt this time.

First, what is the source of this info? Mostly a rumour among the workers in the Shenzen megafactory, reported by local press. To be noted also the Hong Kong stock market sharp fall of Hon Hai shares earlier in November (and those guys in HK know a lot about Shenzen).

Second, how likely is it to be true? Well, I guess we will know soon enough, but there is something in this rumour that sounds very real for anyone that has been following Chinese affairs.

It follows the typical pattern: Local press report, buzz on the internet, Xinhua press ignore and downplay.  It is very suspicious that English Xinhua hasn’t witten a single word about Foxconn (the biggest exporter!) since these good news they reported in July. This is scary, because it’s exactly what the Chinese PR geniuses do when they see trouble coming.

Like I said yesterday, fasten your seatbelts, it looks like we are going to live in interesting times.

I am quite excited about the new 2009 Growth Forecast for China issued by the World Bank, because it gives exactly the same figure  I estimated 2 months ago on my Crisis Page.

OK, granted there is a bit of luck in there. But, if you think of it, it was an obvious number to come up with. It is exactly the Yearly Growth marked as an objective in the 11th 5 year plan. Don’t forget that China is still a planned economy and that the objectives of the 5 Year Plans are very present in everyday business life and in the minds of all politicians.

Of course, I am not suggesting that World Bank economists draw their forecasts from 5 year plans. But in times like these, predicting the future is a sticky business, and one 5Y Plan can be about as accurate as applied statistics. And then, rounding up a 7.2% to a 7.5% will harm nobody, and will keep Wen and Hu happy for a while.

Michael Pettis writes that this is only the beginning, and that we’ll see the forecasts slide every time as the crisis spreads to every aspect of China’s economy over 2009. He bases his prediction on the method that is used to calculate these forecasts, which does not take into account the passive side of the balance sheet.

He is surely right on that, but I think there are also non-economical reasons. China’s political influence is rising very fast with the Crisis, and nobody wants to upset her now that she is going to save the World. Least of all the World Bank, which is very likely to end up with a Chinese boss pretty soon, after what was agreed in the Washington G20s meeting.

Nobody cares (some actually take pleasure) when some terrible macro figures are posted about failing economies in times of crisis. But few serious institutions today will be willing to publish a face-losing digit for the Chinese government, and all will measure their steps cautiously. As a result, official predictions will lag behind the actual knowledge.

So that’s it, we are here. We’ve reached the 7.5%  psychological barrier. There will be no more psychological barriers until the 3.8% growth of 1990. We are touching the Wall.

Ladies and Gentlemen fasten your safety belts, we are getting ready to land.

Last night I was out for a little dance with one of my Shanghai friends. My performance must have been pretty good, because as we were leaving she invited me to join Kaixinwang, and added that she would buy me straight away if I bought her.

Now, I didn’t know what to make of all this. But I was quite curious, as I had read about all these Chinese Facebooks recently on Danwei. So, as soon as I got home I thought I might as well open an account and let myself be bought. A bit of a hassle to deal with all those Chinese characters on a Sunday night, but anyway, it’s not like you can say no to a Shanghai girl.

So I went and googled Kaixinwang and opened an account and tried to find my friend there, only to find out that I was in the WRONG kaixinwang. And I had to start the whole process again. Further googling confirmed that there are 3 different kaixinwangs, apparently unrelated except that they bear the same name: kaixinwang, kaixinwang and kaixinwang. In the same time, I also found out that there are at least 2 other Facebooks: Xiaonei and Zhanzuo

So, what is up with all these Chinese Facebooks?

There seems to be a fierce struggle for power among them. Like the links above show, they are all almost exact copies of the original Facebook, but over time they have been introducing some Chinese characteristics to appeal the local users. Still not the Chinese “Wall of Characters” format, but definitely doing their best to cover up the blank spaces that Chinese users seem to hate so much. See above my (wrong) kaixinwang account.

I remember when I was in Business School, one of my classmates did a Business Plan with the title: “How to beat Ikea in 3 years”. It was a good laugh for the teacher, and my friend got extra points for “audacity”. But it is amazing to think that now for any random Chinese entrepreneur it is possible to do “Beat Facebook in 3 years”, and they don’t even need a BPlan. Is this the land of opportunity or not?

In case you think I am exaggerating, see what I got from Alexa global, with 2 of the kaixinwangs taking a huge leap in less than 6 months:

OK, probably Facebook will stay at the top because of its worldwide support. But in the Chinese market it doesn’t stand a chance. The Kaixinwangs have started and will continue to adapt the concept to Chinese preferences, and Facebook, unlike other global companies, has not moved in this direction. Perhaps Mark Zuckerberg might have had a chance if he thought of selling  “sweet and sour Facebook” before.

To be fair, it is true that the Chinese censors are doing a good job at slowing down Facebook here, while not affording any protection of Intellectual Property. And the same rumours that spread in the West about the Book – giving data to the CIA, etc- are very present among the young and nationalistic Chinese internet users, and surely not discouraged by the local competition.

Now, let’s see the key points for future developments:

1. The lack of IP protection in China means that all these startups can just copy the essential from Facebook, and concentrate instead on adding some extra games and gadgets that appeal the Chinese. In fact, for this very reason it doesn’t make sense for Kaixinwangs to innovate. Wasting resources in coming up with a new platform is a loser move, when any newcomer can just copy.
2. This seems to be an unregulated network market, which usually evolves into a Winner-Take-All situation. So it is to be expected that pretty soon one of the Kaixinwangs will take the whole pie.
3. Only at that point, with the local market secured, the winning Kaixinwang will find a reason to start developing some really new stuff.
4. This is a phenomenon that applies to many industries in China. They are in a race to capture markets while the economy grows, and can’t afford to stop and rethink right now. This is what I mean when I say the fast pace of Chinese economy for the last 30 years has left many holes behind.

From the selfish point of view of an expat in Shanghai: I can’t wait for all this kaixinwang competition to get  settled and every Chinese to get an account in the Champion of the KaixinWangs. (开心网王）

For many Westerners here Facebook has become part of our social reflexes. When we meet someone new – which happens everyday in Shanghai- it is the easiest way to keep track. With the Chinese, the simple social question: “what is your Facebook?”  results in a complicated discussion, often involving the CIA, James Bond and Her whole Majesty’s Secret Service. In the end, you always end up stuck with another fancy visit card that quickly gets lost in the overflowing 名片drawer.

UPDATE: I found another 2 kaixinwangs just now: kaixinwang and kaixinwang. There must be dozens of them out there if I can find these 5 so easily on the first page of google results. What a mess! It reminds me of the times when WangDonalds flourished right next to the real place. Perhaps the Chinese Net Nanny should spend her time trying to sort this out instead of wasting it with us.

I was writing just yesterday my latest Crisis article when I realized that in Shanghai we have our own economic weak link, with quite a lot of companies that are suffering as much as the Pearl River Delta workshops. I am speaking of foreign startups in Shanghai.

One of the things that makes Shanghai such an interesting place to live is her magnetic properties that attract all sorts of enrepreneurial metal from around the world. One can read a lot about succesful startups in well informed China blogs dealing with business, but that is just the tip of the iceberg. Unless you live here, you can not even start to imagine the thousands of starting business ventures swarming the city. Even in the most modest of social events you will meet a good handful of CEOs in their 20s, always rich with ideas, and typically trying to figure out how to monetize them.

Most of these adventuruos foreigners struggle for a long time before eventually giving up and moving to new horizons. Others manage to run a sustainable business. Very few ever become rich.

But an unusually large number of them are actually going bust right now as a consequence of the Crisis. In the last few months since the summer, already three acquaintances have said farewell to me and to Shanghai, with their dreams broken and their companies bankrupt.

Now, it is probable that for Chinese economy, these bankrupcies won’t have the same impact as the ones on the Pearl River, but they do provide some colourful and very typically Shanghainese tales:

For example. I think of my friend who went to work one Monday to find out that there was no computer, and no chair and table, and no company at all, because the struggling Dutch owner and founder of the startup had been busy over the weekend trying to get the best value off the remaining assets before he disappeared out of the country. Fortunately, this girl was only doing an internship in Shanghai and, as last survivor of the company, she had the difficult task of assessing her own performance and grading herself before taking 2 extra free months to travel in China.

Some recent developments of this new trend can be seen also in this article by CER, which warns us against company-sponsored trips and team builidng events. Does your boss sound suddenly generous in the midst of financial turmoil?  Does it seem a bit odd that you have been invited to this expensive Team Building week up on the pastures of Heilongjiang? Don’t go. Chances are when you are back to Shanghai there is no accounting department left to submit your expenses claims. Or to pay your 2 months due of salary for that matter.

And all this makes me wonder: are we coming back to the good old times of the concessions? The times when only in Shanghai there were dozens of different national jurisdictions where crooks and adventurers of all sorts found the folds where they could flourish; when thousands of foreigners flowed into Shanghai with the most diverse schemes to get rich, usually involving, as Carl Crow would put it: “mixing other peoples money with their own”. Perhaps we never really left that period.

And this leads me straight to the Big Question, which foreigners in Shanghai have been asking themselves for the last hundred years, and which is still a recurrent subject of conversation here: Is it possible to get rich in China?

This is definitely a subject I will be blogging about soon. In the meantime, I strongly recommend that you read this book: “Foreign Devils in the Flowery Kingdom”, by Carl Crow. Among many other things, you will see how little has changed, and how expats in Old Sahnghai answered to exactly the same questions as we ask ourselves today.

One last quote from the book that might help shed some light on the Question above:

Every foreigner went to China with a consciousness of his own [...] mental superiority and a smug satisfaction in the belief that there were many things he could teach the chinese.

To be fair, there are more and more foreigners, especially of the younger generations, coming in today with a serious disposition to learn what the chinese have to teach before they add their own grain of sand. But there are still too many left with the Old China Hand attitude who feel the need to enlighen the locals with their wisdom.

So, here is the first big clue to answer the Big Question: in 2008, just like in 1908, the (few) foreigners who get rich have taken the time first to learn from the country. See the Standard Oil back in the time, or Tudou’s Marc van Der Chijs today.

PS. If you are even slightly interested in China – and if you are reading this blog you probably are – do yourself a favour and get this book immediately from the Shanghai Foreign Language Library or from here.

PPS. If you are my personal friend or relative – and if you are reading this blog you probably are – then just give me a call and come over to my place, I will lend you the book.

One of the advantages of Crisis Watching in China is that there’s such a large community of observers dedicated to this country that you are never short of ideas. The downside is that with so many voices it is difficult to make sense of the whole thing. To the question in the title, for example, depending where you look you can find today the whole range of answers: yes, no, badly, take it easy!

What is most remarkable is how fast opinion is shifting towards the Yes side, when only 2 months ago most people still believed China’s system was immune to Financial Crises.

Especially interesting is the story of the closing factories on the Pearl River Delta, which has captured the imagination of western media in the past few days. Fortunately we have some sensible China bloggers to shed light on this mess. The guys at All Roads and the Law Blog are the first to question the significance of the events.

Factories are closing sure enough, and this picture I stole from the bbc website is not an evil western media setup. But take a closer look: do you see any difference between this “workshop” and any random car parking? Do you see any traces of heavy fixed equipment, hoisting devices, utilities? anything looking like proper working lights for the operators? It looks exactly like what it is, a precarious facility quickly improvised to catch some coming contract and quick to disappear the minute things start to look bad. It is probably in places like these that they put together the fakes sold at Qipulu.

So it is mostly the fat of the economy that is being lost for the moment. Business which probably would end up closing anyway in a normal economic system that didn’t have as many holes as the Chinese. The bread and meat of the economy are still producing, and doing quite well given the circumstances. The disappearing of these companies will make things easier for the ones remaining, eliminating the pressure of their (sometimes unfair) competition. It’s part of the good effects of a downcycle, really overdue in an economy that’s been racing nonstop for the last 30 years.

So from my point of view the Crisis has still not hit China in any significant way. The international economic slowdown is definitely starting to show, but for the moment we are still riding it better than most of the Western economies.The Wall is holding strong.

Now, what Crisis really means is what by now is in everybody’s mind. The New Republic calls it Crash and Burn. But many observers around the world got excited about the recent protests in the Delta, and failed to realize that those protests are essentially no different from the many other Crack and Burns that happen daily in China. If it is not a taxi strike, it is a drowned kid or citizens unhappy with relocations.  Each of them for their own reason, and usually with no intention to question the role of the central government, but rather trying to call its attention to help against local injustice.

Crack and Burn we have had for years, and it didn’t do much to unstabilize the system, because it was never meant to anyway.

But here is a method to estimate what might happen if some day the Crisis really hits China:

1. Google “Riots China”
2. Collect the first different 50 results
3. Add up the number of people violently protesting in those results
4. Add the thousands of people that are going to lose (or not find) jobs in the year to come.
5. To that reactive core you can add hundreds of millions of unhappy peasants, too isolated to organize protests on their own, but happy to ride along if there is any serious movement.
6. Now all those millions of chinese  put them together at the same time to protest against the same problem. Typically inflation, unemployment, corruption, injustice or inequality.

When there is a critical mass of unemployed and discontent rioting in a particular region, this could spark the chain reaction and spread to the whole country like gunpowder.

Looking at the economy today, I think we are still far from that situation. On the other hand, I also think that, if it ever happens, it will happen so suddenly that none of us will even smell it coming.