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Who gets Rich in China? and the Expat Trap

Saturday, May 23rd, 2009

Last year I wrote a post about foreign entrepreneurs in Shanghai that included a Big Question with a link:  Who gets rich in China? The page attracted a ridiculous amount of search engine hits considering its dumb content, which proves that it was indeed a hot question. Time passed and I never got around to writing more, but my intention was just to echo the phrase I so often hear from disgruntled expats:

“Who gets rich in China? The Chinese!”

I am afraid I don’t have a better answer now than I had then, but recently I’ve been talking business with some entrepreneurial friends, and one problem has come up so many times that I think it is worth a post. And I hope this is useful for foreign start-ups in China to avoid making a bad decision from day zero and ending up, a few years down the line, mumbling the bitter phrase. The problem I refer to is the market dilemma, otherwise called the expat trap. Click to continue »

Chinese Gods

Thursday, May 21st, 2009

I was a bit reluctant to read “Chinese Gods”.  I never had much of a taste for the mystical, and the rows of whiskered statues staring in the temples fail to arouse in me more than a cautious curiosity. But when I received the latest publications of Blacksmith, the promise of a book that “makes sense” of China’s religions caught my eye, and I thought perhaps this was my chance to jump into it and cover a gap in my education.

You might be familiar by now with Blacksmith books of Hong Kong -  the same Blacksmith that did the Asian edition of Apologies and other gems like King Hui and Business Republic. I am, and I have come to expect good surprises from them;  many things can be said of their books, but surely not “hackneyed” or “banal”. Pete Spurrier, the man behind the company, is not afraid to go with first-time authors, and he seems to have a knack to find intriguing writers with original points of view. Jonathan Chamberlain is perhaps his best find.

Indeed, in terms of surprises, this book delivers from the preface.  First, you discover it was actually written and self-published by Chamberlain 30 years ago, inspired by a series of painted glass figures he collected from local markets. It goes on to describe an unusual interview in Bangkok with British mystical writer John Blofeld, a reference in Asian religions, who agreed to give the book a prologue in articulo mortis. And then suddenly, before you realize it, you are swimming in the thick soup of China’s beliefs, following the author in his daring quest to make sense of  all the Gods. Click to continue »

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 »

Capitalism with Chinese Characteristics

Monday, March 2nd, 2009

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Today I am starting my review section with one of the books on Chinese economy that has impressed me most in the last year, “Capitalism with Chinese characteristics”, by MIT professor Huang Yasheng. It is a book that clearly stands out from the recent China books, and it might be destined to become one of the big references in the field.

There is no shortage of good China books in the last years. Many are written from a business perspective, by people with first hand experience who will tell you exactly how things are done here. Others look at the available economic data and build interesting theories to explain them. Few go deeper than this, to look into the heart of the matter: the politics behind the Chinese economy.

The problem is:  it is so difficult to obtain reliable information on Chinese policy that most efforts in this field turn into circular arguments over the same limited data. Professor Huang breaks the circle by going back to the sources and questioning directly all the mainstream assumptions, leaving many of them upside down. The situation in China requires this approach, as he says in the preface:

In studies of American economy, scholars may debate about the effects of, say, “Reagan tax cuts”. In studies of the Chinese economy, the more relevant question would be, “Did the government cut taxes in the first place?

By going back to the archives of what, in his own words is “some of the world’s most medieval record keeping”, Huang Yasheng is able to come up with a whole new picture of Chinese economic policy in the last three decades. This book is the result of painstaking archival research into rarely examined files, such as a “22 volumes compilation of internal bank documents” or the archives of the Ministry of Agriculture.

A qualitative leap from the classic tea leave reading, and one that deserves some careful consideration, even if the conclusions drawn will not be to the taste of every reader. Click to continue »

3 Reasons why we might be sitting on a 鞭炮

Friday, February 6th, 2009

More bad news about the Crisis. Yesterday All Roads had another of those worrying posts: 3 Announcements and 2 Rumours, and not one of them good.

Still, on our return from the double New Year’s season, many of us are suprised to see the sky is not falling on our heads, and the dire predictions we did before the holidays have not quite turned true. Indeed, the Crisis in China seems to have a very annoying quality for bloggers: it is not happening. Yes, we’ve had bad news coming every week for the last months, we’ve seen experts we respect telling us how bad the unemployment is, how many factories are closing. And all of them are right, if we look at the numbers. Yet, on the street, no Crisis to be seen.

What is going on here? Who is taking our Crisis away, depriving the dismal scientists of their fair share of joy and fulfilment? And more importantly: is it not time to deem the whole affair a bluff, and go join the ranks of the optimistic, together with the guys at the World Bank and the CPC?

Where are all the Crises Gone, long time passing?

You might remember that post I wrote where I started out wondering about the different perceptions of the Crisis in China and in the West. 3 months have passed and this contrast is, if anything, sharper than before, as I have seen during my New Year’s travels. Right now Europe is bleeding, there is no question about this. China, on the other hand, looks to the casual observer like a normal, almost healthy economy. One cannot sense the Crisis.

In Shanghai, Zhejiang, Fujian, three of the engines of China’s economy, I have seen nothing going on but normal everyday life. The shops are full of people, “we hire” signs are on the windows, and taxi drivers remain for the most part optimistic - at least those who didn’t buy shares. One of them even told me: “Riots only happen in Guangdong, in Shanghai we are civilized”

Back to the office, in my work with industrial investors in China I see the same picture: while some Western clients have cancelled or postponed their 2009 FDI projects, not a single project has been stopped by our Chinese clients, which are all large SOEs.

The time’s for the Ox and don’t give me no Bull

Here are 3 reasons that might explain this strange gap between theory and observation: delay, transparency and inertia.

  • Delayed effect: The crisis comes to China in a very different way than to the West. In our case it was a bursting financial bubble,  hitting us all with the speed of sound. In China, it is different. They didn’t have the “complex financial instruments”,  their financial system was relatively isolated. In China the Crisis is caused by exports and FDI, which is a far less explosive mix. Look at FDIs, for example: a typical project cycle to build a factory is 3 years, and there’s a point of no return somewhere in year 2, when the construction is mobilised and the equipment paid for. This introduces a long delay while the ongoing projects finish and until the absence of new projects cause panic in subcontractors. Same effect with the production of factories which had a large backlog in 08.
  • Inertia: China is a massive system that has been moving at high speeds for 30 years. This doesn’t stop in one day. It is not only the phisical momentum of the thousands of ongoing projects, it is also psycological inertia. in the minds of many Chinese the system is strong, and there is no reason to believe in a Crisis that has never happened in their working lifetime. Behaviours do not reflect fear, and many go about their New Year’s shopping like any other year. Worse still, some seem happy to believe that it is America’s fault and this is an American Crisis; and mind you, not all agree that smart China need lend the old brother a hand.
  • Transparency: This is the most important reason of the three, and the one that scares me most. For all the good things that one can say of CPC’s economic policy (yes, they did draw 300million out of poverty) there is one serious fault that nobody fails to notice: Lack of Transparency. With the largest part of the economy dominated by SOEs or following direct orders from the party, it is not unreasonable to think that there might be a bigger soup on the fire than we are led to believe.

I don’t want to cause alarm or instigate hoarding behaviours like that of our old professor, but this is not looking good. If there’s one single best way of making a Crisis more deadly, that is withholding information and letting it burst only when it is too late.

The two pillars of China’s growth in the 2000s were SOEs and FDIs. The FDI leg is seriously failing now, and the effects will be felt progressively. Even with all the financial might of the Chinese State, it is hard to imagine the SOEs taking the place left by the FDIs, let alone going out to take over the World. I cannot see the Chinese companies leading the effort, I can’t see their necessary creativity and initiative to open new markets to replace the lost export ones. All I can see is a bunch of Giant SOE’s which are better at leveraging their massive size and influence than at impressing us with their products.

There is something quite anomalous in this perceived calm of today, and this blogger thinks that he can smell a Rat. But the time is not for Rats anymore, it is for Ox.

Which is one 2 bits short of a Bull.

What’s up with all the Chinese FACEBOOKS?

Monday, November 24th, 2008

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.

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.

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.