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Crisis seen from the Sinosphere (II)

Wednesday, May 13th, 2009

From the post left unfinished last week. Some of the main arguments read (or heard) in China Crisis discussions:

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. Click to continue »

The Crisis seen from the Sinosphere

Friday, May 8th, 2009

It’s been half a year since the first announcement of the Chinese stimulus package, and the time has come to look back and ask ourselves: how is the Crisis doing to-day? Well, we don’t need to surf very far to find some hints. Judging by the attention she gets  in the media, the Crisis is still in tip top form, barely upstaged by a drove of sneezing pigs, and plotting her next move in the People’s Republic.

And in the meantime, we have read so much about her that the debate gets old, the initial guessing game we merrily joined some months ago giving way to a phase of weary expectation.

So, finally, is there going to be trouble in China or not - Will the Wall Fall? I have my own opinions about this, but I’ll keep them clear off this post. Instead, I want to  summarize some ideas appeared in the sinosphere, list the main arguments from each side, and let the reader choose which make sense.  Luckily, this is the kind of discussion where the same arguments are fluently used to support all views, so the list can be made manageable.

But first of all, let’s examine the parties. In this business of Chinese Crisis Watching there are 3 main schools of thought,  which can be roughly classified as follows:

A. The Optimistic Executives:  Old China hands with long memories, bullish consultants with short ones. Optimistic people with or without a stake in the optimism of their clients. Just to list some recent ones.

B. The Academics of Doom:  Everybody knows the highest fulfilment of a dismal scientist is to announce doom and then have doom come. On the other hand, there might be something in what they say…  some examples.

C. The Rosy Men of the Republic: This 3rd group is endemic to China. It consists of a set of highly prepared bureaucrats who resolutely believe in the Feelings of the Motherland, in Santa Claus and in the Theory of Scientific Development. You can see here some of their latest achievements.

The English-speaking sinosphere is a little world, and we rarely see the big names that populate other provinces of the internet. But we do have a great advantage: debate here is relatively free from partisan politics.  There is not much in the way of left-wing China blogs, for instance, and American republicans don’t go about throwing  green tea parties just because grandpa Wen announced a healthcare plan. 

In fact, the left and the right in China are conveniently concealed behind the red walls of Zhongnanhai. There are few leaks, and the real data which analysts use is pretty much available to anyone with an internet connection and some notions of mandarin. This is a level field where you can browse around, draw your own conclusions, and enjoy your tea leave reading with Armstrong’s great cover of  ”La vie en rosy“.

But enough if the rosy chit-chat. Here’s the points.

Crisis and Opportunity in the President’s speech

Tuesday, January 20th, 2009

I can’t wait to see the speech tonight. I have spent the whole midday lunch hour (and a bit more) tinkering with the NYT and others speech analysis sites. I have learnt more about the speeches of previous American presidents that I ever knew before. And in particular I have learnt one surprising detail.

Those who have been following this blog from the beginning might remember that initial article I wrote about the Crisis and the Great Wall of China, which was published/linked by a few of the big guys and helped put my English blog in orbit. Well, that post contained the old gag of Crisis and Opportunity -both words sharing one character in Chinese- which was at the core of its reasoning.

The detail I found with some embarrassment today is that this is a widely used rhetorical device in American politics, probably first included by JFK in a few of his speeches. Of course I never pretended I’d invented it myself,  I guess I just heard it somewhere, but I had no clue it was so well known. Following my internet search for the origin of the expression, I ended up in a very popular blog which is an authority in Language use, the Language Log. There I read that my wordplay was just is “a misperception”:  危机 (weiji) doesn’t really originate from “Dangerous opportunity”. Etymologically, that is.

I don’t mind some experts contesting the origin of the expression. Actually I hold my own opinion that, even if the strict etymology of the word is not “dangerous opportunity”, it is obvious to all Chinese that the character 机 of Crisis is part of the very common word 机会 (opportunity). Knowing how Chinese love playing with their language, it is certain that millions of times this parallel Crisis-Opportunity must have been drawn in China. A more interesting question is to know if this expression actually describes the Chinese character, which I hope is properly settled in that old post of mine.

But what I do find a bit embarrassing is to realize that half the World was already aware of my little Chinese wordplay that I thought so clever. To the point that even Homer Simpson knew:

Lisa:  Look on the bright side, Dad. Did you know that the Chinese use
       the same word for "crisis" as they do for "opportunity"?
Homer: Yes! Cris-atunity.
From chapter "fear of flying", 1994

And now, back to the Inaugural speech. I have to be off in a minute to our own inaugural party in Shanghai, but let me briefly comment that there is a slight chance that the Crisis-Opportunity gag will make it into the speech. After all, the time is exactly right, the Crisis is there, China as well, and many are speculating that Obama might echo Kennedy’s famous speeches.

Although, to tell you the truth, I very much doubt it. Obama is a better speaker than that, and beyond those old formulas. I am sure he is going to coin something big instead, one of those phrases that tomorrow people will be muttering in the office, and which for generations to come will be copied by lesser speechwriters (and bloggers) in search of inspiration…

Let’s see what happens.

Chаrter 08: Why it should be called Wang

Sunday, January 11th, 2009

When I started my article about the Chrter 08 last month I couldn’t help wondering if it was well worth the effort. Most of the English speaking blogs and media had been very quiet about this issue, and in China nobody seemed to know anything about it.  Two weeks after the Charter’s publication, I thought perhaps that was all we were going to hear of it.

I am pleased to see after all that the Chrter 08, in spite of the weaknesses I noted, is indeed slowly “flying into 2009″. From the English language blogs, it has since got more attention, with featured posts by Xujun Eberlein, Peking Duck, FM, and now also ESWN. Most importantly, in the Chinese speaking circles it is slowly gaining momentum, as is proven by the fact that the government is getting nervous and has closed down the whole site bullog.

ESWN and the CSM have written about this rather optimistically in my opinion. CSM quotes :

Zhang says more than 300,000 websites now link to the charter, and it’s being discussed on blogs, QQ groups, and other chat rooms. “It’s impossible to block information in society now,” he says.

I am afraid this statement has yet to be proved. Like ESWN’s Roland Soong notes, this number 300,000 is taken from the number of Google.com results. It is a relatively large number and it indicates that the subject has become popular in the Chinese internet forums.  But little more than that. Of these results, only 1/3 come from mainland China, and 100,000 is attained easily by many of the hot topics coming up regularly on Chinese BBS (see ChinaSMACK).

The fact is that Chrter 08 is still an unknown movement in mainland China. Out of 5 local friends I asked, all with university degrees and fluent English, even today only one of them had heard the term (but knew no details). As for the majority of Chinese who live out of the cities and don’t use the internet, there is no way they can have heard about it. I don’t know who is the “peasant” that CSM mentions as a signer, but until I get  some tangible evidence otherwise, I maintain that China doesn’t know about the Charter.

This is a very important point because, of the difficult path that Chrter 08 will need to run to achieve its goals, the first unavoidable condition is to become known to the public by beating the censors at their own game. As I said in my previous posts, the government has done an impressive job of silencing Chrter 08, but it is a sign of hope to see it little by little creeping back into the mainstream.

As I see it, the 3 phases and 3 main difficulties that the Charter will have to face to grow into a real mass movement are, in this order:

1-To be Known vs.  internet censorship and lack of freedom of speech

2-To be Trusted vs. weaknesses that make it easy to manipulate against

3-To be Loved vs.   lack of a spark, a leader, a name: the material of which Change is made

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Charter Step 1 and the Internet Underworld

We will leave point 3 for a post in the future, supposing we ever get there. For the moment we are still stuck in phase 1, and it is far from clear that the Charter will make it past this point. We know  that the Chinese government  has developed a very sophisticated system to control information on the internet. But how does it work? What are its strengths and weaknesses to oppose the Charter? Following ESWN, I have conducted some research on Google and found the curious results below.

First, as Roland points out, if you search for Chrter 08 in Chinese, Google.cn is sending back this message:

“Some results are not displayed according to local laws, regulations and policies.”

This has made me think that indeed, when it comes to fighting censorship, the Charter has an insurmountable flaw: it is a document. Therefore, its title and content are fixed and it is extremely easy to locate by a bot. Worse even, in this era of internet search engines, nobody has still given the  Charter a better nickname than that easily searchable title 08宪章. Any internet conversation where the Charter comes up, even if the contents are not copied, is sure to attract the Censor’s eye.

It might sound ridiculous at this point, but I’m serious: The Chrter 08 should be named Wang.  Or Zhang or Liu, any other term that is not exclusively related to it and therefore cannot be banned. Two centuries ago, the first Spanish constitution of 1812 was nicknamed by the people “La Pepa”, a popular name for a girl that many intellectuals scorned at the time. Two years later, during the reign of autocrat Fernando VII, this name became extremely useful to dissidents to acclaim the Constitution without risk to their lifes, with the famous slogan “Viva la Pepa!!”

Do you still think this is not relevant? Well, follow me with the next google experiment. If you are in China, try to search Google.cn for sensitive political terms like: Falungong, Tiananmen 89 massacre, Liu Xiaobo, you name it. You might be surprised to find not the message above, but rather a reset connection, which only affects viewers from mainland China and which is easily bypassable with a proxy or VPN.  It looks like this:

So what is that first message that Roland Soong and myself have been obtaining? It is not the political censorship message, but another one with which many Chinese men are acquainted. It is the notice you get when you look for some well defined  terms, like those found in pornography. As an example, I suggest you try a search for the word  “口交”. I will not translate it directly here, but let’s just say it is not a blog job. Run the search, surprised? Try any other “vulgar” word and you will end up with Google’s  Chrter 08 message. This is the first and most basic level of defense in the Great Wall, the porn block !

Pretty annoying for the drafters, I guess. But above all, it is very negative for the transmission of Chrter 08, because by calling it this name, the supporters are giving themselves away directly to the  Censors. And this is before phase  2- direct manipulation- has even kicked in.

So we are back to the basics. Like I already said, this Charter is lacking the popular element, the leadership that succesful movements have had in the past, the brand and name and life that would make a whole people roar “Viva la Pepa!”, or the one that years ago inspired a man to dance with the tanks on Changan Avenue. As it stands, it is the cold work of the intellectuals, and nobody has felt the urge to call it Wang.

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Note on Censorship

Finally, one more thing I cannot leave unmentioned. It is not news for anyone that Google have a deal with the Chinese government to collaborate in the repression of the internet. What is news to me is that Google is so openly censoring the principles by which all decent democratic countries abide, including the most basic of Human Rights. Google should be careful, they are entering a dangerous area, one which can backfire in a not very far future.

One more final test for the shame of the censors: when you run the Charter o8 search on Google.cn and you get the message screen, go to the number 4 item on the list of results. I just did that tonight and I believe I found out the essence of Google’s repression algorithm: “Ban all except the People’s Daily”. Indeed, this is the only way I can imagine that a People’s Daily article comes up as the single result for the search 零八宪章. It is a random PD article that coincidentially contains separate instances of 宪章 and 零八.

What a shame, Google, what a shame. Watch your steps today, lest you might find tomorrow that the people does not forget.

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UPDATE: The results on Google change with time, and this last People’s daily result is not on page 4 anymore. In any case, the search for 零八宪章 on Google.cn gives results that have always one thing in common: they are all from websites controlled by the government, like china.com, cctv, etc.  No results from the thousands of forums and blogs that discussed the issue.

UPDATE2: See this post for a more clear explanation of how the internet censorship works in China and this one for the ways in which Google -and many other search engines- collaborate with the Chinese government. I have learned a lot in the year since I wrote this article, and I know now some of the info contained is not technically correct. I am not updating the text above anymore, so if you are interested in the technical part you should absolutely visit these two posts.

Projections, predictions, oracles

Monday, December 1st, 2008

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.

G20 dinner in Washington

Sunday, November 16th, 2008

This weekend the leaders of the most powerful countries in the world met up in Washington to discuss how they are going to pull us out of the big economic mess where we are stuck deeper day after day. After a refreshing dinner in the white house including quail, lamb and Vermont brie, the leaders were in a position to promise “vigorous efforts” to fight against the crisis.

Looking at the the reactions from within and without the Summit, it is surprising how peaceful it has been compared to others in the past. No protesters on the streets, no colourful accusations of irresponsibility, nobody even remembered to mention Irak or bash the French. The leaders of the world have understood that the time is not for funny gags. The financial crisis is looming on each of our countries, and we have to stand united. Are we turning the page into a new phase of collaboration in the international community?

For the moment,  these are the main points agreed upon:

  • Stabilize banks and boost growth - This includes bailouts and Economic “stimulus”. There is no more than a general statement in this Area, no commitment by any of the States.
  • Better Regulation of Financial Markets - Supervision of banks and credit-rating agencies, scrutinize executive pay, tighten controls on complex derivatives, etc. This one was pretty obvious.
  • IMF Reform - This is were China and the other developing countries put pressure to have a voice in the exclusive US-EU club. It is likely that they will succeed, and IMF will gain some credibility from that (but gain in efficacity does not not necessarily follow)
  • Commitment to an open global economy  - Free market, no barriers to trade or investment. A point that all countries big and small have agreed upon. Hopefully their policies will remain consistent with this statement.

In conclusion, nothing to write home about. What with all the Bretton Woods II measures that where going to change the economy of the XXI Century? Not yet. There will be a follow-up meeting in April 09, and by then some specific plans may be ready for discussion. There hasn’t been time to mature any serious ideas. And anyway, he who shall be in charge of leading the effort could not join the party this weekend.

Indeed, together with the Brie cheese and the lamb, there was a hot potato served for dinner last Friday. And one that nobody is eager to open up, but rather roll on swiftly from plate to plate until it gets to its final destination, president elect Obama. The minute he steps into his office in January it will be there waiting for him, wrapped up in Christmas paper.

In this sport of potato rolling, the Chinese have long been masters. Their words are measured and dictated by wisdom. Thus spake President Hu Jin Tao:

  • Reform [of the international financial system] should be conducted in a comprehensive, balanced, incremental and result-oriented manner.
  • A comprehensive reform is one that has a general design and includes measures to improve not only the international financial system, monetary system and financial institutions, but also international financial rules and procedures.
  • A balanced reform is one that is based on overall consideration and seeks a balance among the interests of all parties
  • An incremental reform is one that seeks gradual progress
  • A result-oriented reform is one that lays emphasis on practical results.

This sounds very much like Deng’s “Groping stones to cross the river”, an approach which was very effecive to tackle a delicate process of transition like China’s, but not necessarily to avert a crisis. Some famous analysts have long been speaking against this kind of solution.

And then, one wonders how this fits with the aggresive stimulus package that was supposedly launched last week. That was certainly not an incremental announcement. But who knows, it is not for us mortal bloggers to understand the ways of the Popular Repubic.

China Aircraft Industry: Fly COMAC

Tuesday, November 4th, 2008

Today was the opening ceremony of the 7th China International Aviation and Aerospace Exhibition of Zhuhai, the main fair of the industry in China. These last days, my Xinhua reader at the bottom of the page has been spitting some interesting news for the occasion, and international media have been quick to follow.

Everybody in China seems to be speaking this year about the development of a Chinese aircraft industry, that is, when we are not busy speaking of baby milk, olympics and taikonauts. Rumours abound of some brand new A320s bought by chinese companies which mysteriously disappeared from the market, and reverse engineering is in everybody’s mind.

In any case, the clear aim of the chinese government is to enter by 2015 the exclusive club of large commercial aircraft manufacturers, adding a third leg to the industry dominated by Airbus and Boeing, and trying to take a slice of the $3.2 trillion market expected over the next 2 decades.

The big news of the day is the signature of a contract for the supply of 5 ARJ21 medium size regional aircrafts to GE, one of the world largest lessors of commercial airplanes, with an option to acquire another 20 units under unspecified conditions. Xinhua highlights the headline China to sell 25 regional jets to U.S. market, but in fact GE will be leasing the 5 acquired units to chinese airlines, so the planes will be flying locally.

In case someone is surprised by the daring move of GE, it might be useful to explain that GE is also one of the largest airplane engine manufacturers, and China one of their most promising markets. Sure enough, China is making use of its market power, in a similar way as EU and US have used theirs in the past to support their flag aviation companies.

It is just as well, of course. It is clear by now that only a company counting with the support of a world economic superpower can make it in the difficult industry of large commercial carriers. But even with this support, the road shall be long and difficult for the Chinese.

In the first place, they have a long way to go in R&D, and many have serious doubts that they will manage to have their jumbo jets in the market by 2015. However, I wouldn’t expect this to be the major obstacle. Chinese have proven to be extremely fast in re-developing complex technologies, especially when they are already existing in the market. Some planned acquisitions of undisclosed foreign companies by the end of this year will grant even faster access.

The main objection from my point of view has to do not with technology, but with the tricky world of free consumer choice. A field which has typically proven more elusive to chinese reverse engineering than  advanced rocket science.

If there is a market where pristine reputation is essential, and especially in the areas of quality and safety, that is the market of commercial aircrafts. It is probable that by cutting into an oligopolic situation, and counting on some dumping practices, the chinese manufacturers can slash the current prices of Boeing and Airbus for similar airplanes. But who will be buying them? In other terms, who wants to fly in a chinese brand airplane, even at a discount fare?

The problems with safety of chinese products are very present in the world , with various scandals being uncovered every year. Made in China was already a synonym of cheap and unreliable, now it also means unsafe. It will take many years before this world spread perception can change and anyone feels comfortable enough to fly in a chinese airplane. Much longer than it will take to reverse engineer an A320.

Add to this that the major players in the industry, with strong lobbies in the 2 largest economies in the world, will make sure that everyone has a clear perception of the risks involved. And for all its political clout, China is still astoundingly hopeless at pulling the thin threads of international media to play her game, as James Fallows brilliantly explains in this much commented article.

In the field of image and communication, one First blunder can already be noted: on the day of the 7th Zhuhai fair, the Company (or companies) still doesn’t have a Name.  Indeed, the confusing conglomerate of state owned companies that develop the different models of airplane are completely unknown to the world, and even to most chinese. Note, for example, that the Xinhua article refers to the nascent jumbo aircraft company as COMAC, whereas the AP and Bloomberg reporters linked above call it CACC (!). Both are tentative efforts to simplify the original: Commercial Aircraft Company of China.

There is some serious branding work to do now, and it should be done as soon as possible. Hopefully China has learnt her lesson, and she will not be calling her new aircrafts “The Great Wall Aviation Company”, as in this hilarious old post that I found over at Imagethief.

Whatever they do, It seems clear that for a long time the airplanes will be limited to the chinese market, and only at a second stage they might manage to make it out of the country in any significant quantities.

It is a very long term bet, which is not based only on its uncertain economic returns. Clearly, political, strategic and military considerations enter the calculation of the chinese government. All things taken into account, the move can be a good one for China and for the rest of the world, ultimately improving the conditions for the final consumer.

It has been said many times that the large aircrafts market can only support two players in the world, justifying the near monopoly situation of Airbus and Boeing. It is very possible that in the long term China proves them all wrong, and many business books will need to be rewritten.

But before we get there, some things will really need to change in this country.

The Crisis

Tuesday, October 28th, 2008

One of the things I like to keep an eye on is the situation of China’s economy.

Not that I think anything is  wrong  with it. On the contrary, the country is resisting well the international crisis, and China has one of the best governments in the World when it comes to managing the economy. The results of the last 30 years speak for themselves. The Chinese have a strong confidence in their leaders, and this confidence seems to be spreading to the rest of the world, where some are already starting to believe that the Wall of the Han is going to save us all.

That is exactly why I am a bit worried.

La Muralla en Gansu

Wall at Gansu

The Great Wall of China has always functioned better as a national myth than as a defense system. This picture of the Wall bordering the Gobi desert can give an idea of what remains of the great myths once the barbarians have passed. The basis of my spectacular and sensationalistic theory of  the Great Wall of China are all explained here.  More entries on the topic in the category Crisis Watch, and in my blog in Spanish.

Following that entry, I have received quite a few comments saying that it is idle to issue predictions at this point (which is true), and that anyway the Wall is down and the crisis has already arrived to China (which, at the time of writing, is definitely false). Of course, we are seeing some impact on the exports and the GDP growth statistics have already been reviewed for 2008. Most probably growth will go further down in 09, perhaps around the area of GDP 7.5% per year, which is what Prime Mr. Wen considers sustainable anyway.

But that is not what I mean by the Collapse of the Wall.

Equilibrio inestable

Unstable equilibrium

What I have noted from my observations in China is that there are inefficiencies, structural, social, political problems, and too many people living off the fat of the system. Many of these problems come from the prolonged single-party authoritarian regime, and others simply from the fact that the engine has been running for the last 30 years without a stop for repairs. Downcycles also have their function in economy, after all.

All these problems that I am seeing, which I will try to post here once in a while, make me suspect that China is still not the stong, cohesive economy that many want to see in it. And that much of that stability that is attributed to China is but mere illusion, just like the one of the Red Ball on this illustration.

Crisis and The Great Wall of China

Tuesday, October 28th, 2008

During my travels these last weeks in Europe and Asia, and on my return to China, I have observed some rather striking contrasts. So much that they made me think a lot about the present state of Chinese economy, and here is a word about it.

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 11th 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.