There are almost always three masters to serve when a company is formulating business plans, strategies and decisions:

*The political agenda
*The social and cultural agenda
*and then, the business and profit making agenda.

At the same time the Central government serves three masters

*The political agenda
*The social and cultural agenda
*and then the business of business and making profits

The story behind China’s “banning” of some super large ships from its ports has many layers, many vested interests and many manifestations of the above dynamics at play.

Especially intriguing to me is the move is a thinly veiled attack on one company, an assertion of Chinese national interests, a message to the people that the Government is looking out for them, a warning shot more than a broadside with the hope for a negotiated and face-saving outcome, and to top it all off the company they want to block is also the company Chinese shipyards are building for.

Read it, it’s a great place to look for answers to modern China’s State/Market version of capitalism at work.

China mega ships ban aimed at helping own shippers

One of these Valemaxes, the Berge Everest, docked at China’s Dalian port in December for the first time, and unloaded its iron ore cargo.

http://www.reuters.com/article/2012/02/01/us-china-vale-idUSTRE8100VO20120201

China’s president, Hu Jintao, greeted 2012 with an important essay warning that China was being battered by Western culture: “We must clearly see that international hostile forces are intensifying the strategic plot of Westernizing and dividing China, and ideological and cultural fields are the focal areas of their long-term infiltration,” he wrote, adding that “the international culture of the West is strong while we are weak.”

Essentially, Hu was saying that China was under assault by Western soft power — the ability to produce outcomes through persuasion and attraction rather than coercion or payment — and needed to fight back.

Over the past decade, China’s economic and military might has grown impressively, and this has frightened its neighbors into looking for allies to balance rising Chinese hard power. But if a country can also increase its soft power, its neighbors feel less need to seek balancing alliances. For example, Canada and Mexico do not seek alliances with China to balance American power the way Asian countries seek an American presence to balance China.

Already in 2007, Hu told the 17th Congress of the Chinese Communist Party that China needed to invest more in its soft power resources. Accordingly, China is spending billions of dollars on a charm offensive.

The Chinese style emphasizes high-profile gestures, such as rebuilding the Cambodian Parliament or Mozambique’s Foreign Affairs Ministry. The elaborately staged 2008 Beijing Olympics enhanced China’s reputation, and the 2010 Shanghai Expo attracted more than 70 million visitors. The Boao Forum for Asia on Hainan Island attracts nearly 2,000 Asian politicians and business leaders to what is billed as an “Asian Davos.” And Chinese aid programs to Africa and Latin America are not limited by the institutional or human rights concerns that constrain Western aid.

China has always had an attractive traditional culture, and now it has created several hundred Confucius Institutes around the world to teach its language and culture. The enrollment of foreign students in China has increased from 36,000 a decade ago to at least 240,000 in 2010, and while the Voice of America was cutting its Chinese broadcasts, China Radio International was increasing its broadcasts in English to 24 hours a day.

In 2009, Beijing announced plans to spend billions of dollars to develop global media giants to compete with Bloomberg, Time Warner and Viacom. China invested $8.9 billion in external publicity work, including a 24-hour Xinhua cable news channel designed to imitate Al Jazeera.

Beijing has also raised defenses. It limits foreign films to only 20 per year, subsidizes Chinese companies creating cultural products, and has restricted Chinese television shows that are imitations of Western entertainment programs.

But for all its efforts, China has had a limited return on its investment. A recent BBC poll shows that opinions of China’s influence are positive in much of Africa and Latin America, but predominantly negative in the United States and Europe, as well as in India, Japan and South Korea. A poll taken in Asia after the Beijing Olympics found that China’s charm offensive had been ineffective.

What China seems not to appreciate is that using culture and narrative to create soft power is not easy when they are inconsistent with domestic realities.

The 2008 Olympics were a success, but shortly afterwards, China’s domestic crackdown in Tibet and Xianjiang, and on human rights activists, undercut its soft power gains. The Shanghai Expo was also a great success, but was followed by the jailing of the Nobel peace laureate Liu Xiaobo and the artist Ai Weiwei. And for all the efforts to turn Xinhua and China Central Television into competitors for CNN and the BBC, there is little international audience for brittle propaganda.

Now, in the aftermath of the Middle East revolutions, China is clamping down on the Internet and jailing human rights lawyers, once again torpedoing its soft power campaign.

As Han Han, a novelist and popular blogger, argued in December, “the restriction on cultural activities makes it impossible for China to influence literature and cinema on a global basis or for us culturati to raise our heads up proud.”

The development of soft power need not be a zero sum game. All countries can gain from finding attraction in one anothers’ cultures. But for China to succeed, it will need to unleash the talents of its civil society. Unfortunately, that does not seem about to happen soon.

Joseph S. Nye Jr. is a professor at Harvard and the author, most recently, of “The Future of Power.”

You will find a culture that is progressive and regressive. You will find a government that is amazingly effective and horrifically ineffective. China is at once virile and impotent. Chinese people can be incredibly honest and incredibly opaque. China is moving fast into the future and clinging tightly to the past. China is a great business opportunity and it is also a place where the wreckage of many companies and ideas meet their doom on rocky shoals.

In other words, China is no one thing. It is neither an unstoppable force that will dominate the world, nor is it a paper tiger on the verge of collapse.

After a long, long time living and working in China, studying China and engaging China, the only thing that is clear to me is that China, no matter where you look, IS and IS NOT. The land that gave us the concept of Ying and Yang exemplifies it best.

Yet, we are often confronted by those who want to paint China as one thing and one thing only.

Some say it is the land of virtue, opportunity and equality where fortunes are to be made and the government and people can do no wrong and the glorious new benevolent authoritarian Empire will rise and rule for a thousand years. Please read anything that Shaun Rein of China Market Research Group has written in the past few years.

or

It is an evil government intent on world domination presiding over dishonest, craven, materialistic drones who happily trade freedoms for money. A country whose amazing progress over 30 years was an illusion about to be exposed. Read Gordon Chang.

The smartest writers, pundits, business people and academics I know all see that China can be all of the above, none of the above and everything in between.

Read James Fallows of The Atlantic, Stan at China Hearsay, Andrew Hupert, Ian Bremmer, Ann Lee, Janet Carmosky, Malcom Riddell, Bill Russo, Richard McGregor, Avery Booker, Bill Dodson, Charles at China Geeks, James McGregor, Peter Hessler, Kent Kedl, Tom Lassiter, Ben Shobert or Dan Harris at China Law Blog for starters. All voices who I owe a great debt to for having taught me so much about China and who consistently provide balanced views.

But if you allow yourself to believe the version of China presented by either the Gordon Changs or Shaun Reins of the world then you will never really understand the promise and peril that is China.

I did not post a review of China in 2011 because so many others did it so well. I did not post any predictions for 2012 a. because others did it so well and b. predicting anything regarding China 12 months out is extremely hard to do and I am in awe of those who do it for me

I fell in love with China when I started working there. I have a deep love of the people, the culture, the history, the food and yes, the business opportunities. Some of my longest lasting and deepest friendships were formed and continue to flourish in China. I have been inspired an amazed by the progress the country has made on almost every front over the last 30 years.

But, that does not blind me to the problems and obstacles the country is facing, it does not innure me from feeling sick when I see the ways in which the government fails, the way corruption and poverty persist, the way the environment is becoming poisonous and the possibility for chaos.

Gordon Chang has doubled down on his 10 year old prognostication and predicated the complete collapse of the CCP in 2012 and the crash of the Chinese economy. Well, he has been wrong 10 years in a row, so he might as well keep going until he’s right. Right?

Shaun Rein continues to take an apologist’s, see, hear, speak no evil view of China. Maybe that’s good for getting along in China but it does NOT present clients and the wider world with the full picture.

If you have a business, product or investment you want to make in China, I can only hope that you will seek out the middle ground of understanding regarding what China is and is not.

So, going against my inclination to not make predictions I will offer two for China in 2012.

The CCP and the Economy will not collapse but the Chang, Chanos, view of China will continue to find a credulous audience.

Shaun Rein’s upcoming book “The End of Cheap China” will be a big success and his rose-colored view of China will continue to find credulous audience.

What do you think?

Thanks for reading this blog in 2011 and I hope to continue to see and engage with you all in 2012.

Happy New Year everyone.

Read James Fallows.

Impossible right? Not in China. Loretta Chao of the Wall Street Journal has a story out today detailing how Beijing has summoned China’s top internet CEOs for a “policy training session.”

To wit:

By LORETTA CHAO

BEIJING—Executives from China’s top Internet companies have been summoned for an unusual policy-training session by the Communist Party’s propaganda department, according to people familiar with the matter, the latest move in the government’s campaign to increase oversight of the nation’s fast-growing Internet sector.

The executives are participating in a multiple-day policy-training event held on the outskirts of Beijing this week, similar to training sessions often held for government officials to review new regulations, the people said. Among those in attendance are representatives from Baidu Inc., Tencent Holdings Ltd. and several other social media and online video companies, the people said. It’s unclear when the event ends.

The meeting comes as social media websites, particularly popular Twitter-like microblogging services run by Sina Corp. and Tencent, have become platforms for freewheeling, real-time discussion, including on controversial topics ranging from a train accident in Wenzhou that Internet users accused the government of mishandling to the recent news that a toddler killed in a double hit-and-run accident had been ignored by more than a dozen passersby.

China has more than 500 million Internet users, according to government statistics, which would total the most of any nation.

High-level officials in Beijing have increasingly shown interest in further regulating the Internet sector, a booming business shaped by nongovernment-owned companies, beyond existing requirements for the companies to take down what the government deems to be “harmful” content. This ranges from pornography to political topics such as Tibetan independence and the Falun Gong spiritual group.

It’s also a time for us all to get back to the business of business. For me that means the next 12 days in Shanghai, Hangzhou and Saigon. I plan on some frequent posting during this trip. But for today I want to share a great article from The Economist.

It is a great look-in regarding the State vs. Corporation discussion we have had here over the last two weeks. They also seem to think MNC’s have reason for concern.

“IN 1992 two Chinese cities, one just south of Beijing, the other just north of Hong Kong, were in desperate shape even by the standards of a desperately poor country. Their municipally run companies were in danger of bankrupting not only themselves but the cities too. Zhucheng, near Beijing, was best known as the birthplace of Jiang Qing, Mao Zedong’s despotic, doctrinaire fourth wife, who died in jail in 1991. Two-thirds of its revenues were being eaten by corporate losses. Shunde, a small city in Guangdong, was buried in debt.

Meanwhile, the authorities in Beijing were becoming concerned that the state banking system, already creaking under the weight of bad debt, would be unable to bear even more. With the quiet acquiescence of the central government, Zhucheng and Shunde ignored doctrine, old laws and 40 years of failed policies in search of a better approach.
in a carefully constructed phrase subsequently endorsed, in 1993, by the all-powerful State Council, the two cities engaged in gaizhi, which means “changing the system” and implies the diversification of ownership. Put more simply, in words that even now the Chinese government cannot bring itself to utter, they started to privatise many of their companies. They thus began one of the Chinese state’s first attempts to change its relationship with its enterprises. Jiang Qing would not have approved.

I had the pleasure of listening to Former US Secretary of State, Dr. Henry Kissinger speak this week. He reflected on his new book On China and the 40 years of relationship building with China, some refer to this as the ultimate in Guanxi. OK, I buy that, and it’s a high standard set by a man who has dined with generations of Chinese leaders, influenced policies in both countries and, through his work, enlighten the societies that were so vastly different when he first set foot in China to secretly meet with officials in July 1971,

At Technomic Asia we try to steer clear of politics, but the realities are that opportunities for business are more clearly visible by understanding politics. That was the case 40 years ago as the Chinese and Soviets were at odds, a situation that the US bet provided an opening to plant the seeds of US values. Among those values, the benefits of a capitalist economic model and the opportunities it provides to the society that embraces those values.

In retrospect, the first 30 years of this US China relationship was about understanding these benefits and working them into a unique political and economic system in China. The last 10 years was in some ways the dynamic growth of the seeds planted in the 1970s by the dialogue with the United States across several political administrations. I’ve seen companies struggle with the decision to establish a presence in China because their senior leaders’ ability to envision the future was cloudy. That is less the case today.

I’ve painted the picture for company managers of what could be in China more than a decade ago when the roots of economic growth, joint venture ownership, and consumer spending where just taking hold. Today, as I engage in a dialogue with business leaders, the ability to predict their future may be just a daunting as in the past, but the landscape in which their future will unfold is not. The GDP per capita has increased several fold in China since 1970. The middle class is equal to the entire population of the United Sates. Make no mistake I tell them, the taste of consumption, the attention of the world, and the increasing expectations of China’s citizens support a landscape of growth.

The question for US business is how they will participate. An American Chamber of Commerce in Shanghai survey of executives of US companies doing business in China in 2010 revealed their success. Among the results, 87 percent of US companies reported revenue growth in 2010 up from 47% in 2009 and 61 percent of US companies said they gained market share in 2010 up from 40$ in 2009. These are snapshots of a larger picture that beckons strategic business leaders to China in a way that even Dr. Kissinger didn’t envision forty years ago.

The visit represents the first time the US and China will be meeting as the two largest economies in the world.
For the better part of three decades this honor was reserved for the US and Japan, but the first decade of this century has seen a new economic order develop and no two countries are more important to the growth of that economic order than the Eagle and the Dragon (apologies to India for the moment).

In order to get things off on the right foot we can only hope that the under-managed nature of Hu’s visit in 2006 to then President Bush (no State dinner, introduced as the “President of the Republic of China”, hecklers in the Rose Garden) and the opposite, over-managed, nature of Obama’s China trip in 2009 (a “town hall” meeting packed with Communist Youth League ringers, no straying from scripted events) are dispensed with and the business of the day is business.

There are dozens of important issues that the US and China must continue to address bilaterally, including foreign policy and defense, sovereignty (Taiwan, Xinjiang and Tibet) shipping lane security etc. Too many to cover here. From a business perspective here are four to keep an eye on:

• The revaluation of the RMB. It’s hard to talk US/China relations without the currency valuation issue taking front and center. As usual opinions on the relative merits and problems of a market valued RMB range from “Let it float” to “Keep it Low” and everything in between. Whatever your opinion there is no doubt that China is looking to rebalance its economy and the US wants better balance between the two economies. Continued progress on the RMB will serve both goals. We feel that the likely result of the summit will be an agreement to continue the slow appreciation but with an end point in sight. This will benefit the long-term prospects of US companies looking to sell their products in China and will help create the “consumer culture” that China seeks to sustain its growth.
• Energy. As I type this, the US and China are consuming 50% of the world’s daily oil output, right now, today. That is unsustainable. One country is seeking to regain its footing economically and the other is looking to keep up 10% annual growth. Any infringement on the use of fossil fuels is a roadblock for both, right? At the same time, if 1.3 billion Chinese consume energy the way 300 million Americans do that is unsustainable, right? But who are we to tell the Chinese they can’t develop the way we did (including messy energy and environmental issues) for China and the world, right? Hopefully the two leaders will look to get clean/green energy cooperation back on track after a lull this past year. This has big implications for American companies in the solar, wind, hydrogen, hydro and other alternative energy industries.
• Indigenous Innovation and Intellectual Property Rights – These two subjects are usually spoken of separately but they are interdependent. China wants domestic companies to have the best, first chance at developing key products, components and technologies (for both domestic use and for eventual sale in markets around the world) and, some say, is giving such companies preference over foreign companies with perhaps more advanced solutions. Also, Chinese companies are seeking the fastest path to indigenous innovation and still prefer the acquisition, legal or otherwise, of foreign IP as the best route. These tensions need to be further addressed as they will have a huge impact on how US and other foreign companies deal with their Chinese counterparts going forward. A move away from state selected products and companies and a move toward respect for IPR will move China closer to the culture of innovation it sees as its future.

US GDP still hovers around 13 trillion dollars and China’s is a third of that and growing. China is in the first month of implementing its twelfth Five Year Plan, a foundation for achieving its economic objectives. There is no escaping the fact that this is the most important bi-lateral economic relationship in the world today. Dialogue and understanding are the key to good politics…and business. With that in mind we wish you a productive few days Presidents Obama and Hu.

Today, modern businessmen can look to China’s January 1 implementation of its 12th Five Year Plan to guide them in important cross-border business matters. The five year plans have been a staple of the People’s Republic of China since its founding in 1949. Each plan outlines the most important issues and projects to be addressed in the coming half decade. This year’s version is pretty clear about what China views as vital to its continued growth but reading between the lines and finding the right guide is key to making it work for your business. CCTV interview shares perspectives on the plan.

Here are some key elements that business people from around the world should be paying close attention to:

Green Means A Cleaner, Richer China – China sees alternative energy development and a cleaner environment as integral to the growth and health of its society and economy. It’s well known that China’s water, air and land are polluted almost beyond compare. The Central Government in Beijing knows that for China’s growth to be sustainable a nationwide effort to combat existing pollution and to prevent future pollution is a matter of national interest. Beijing also realizes that in a world beset by expensive and diminishing fossil fuels green and clean tech will be a future moneymaker as well.

The plan calls for an increase in wind energy to produce 90 Gigawatts (GW) of power for the country by 2016. For comparison, the United States, the world leader in wind power production, currently produces 35 GW of power from wind energy. The plan projects seven major new 10 GW wind power construction sites to help achieve the targets in the five-year plan according to China’s National Energy Administration.

Takeway: If you are a foreign company focused on or with ties to Green and Clean tech China is likely to be your fastest growing market over the next five years.

Health Care Reform with Chinese Characteristics – The Five Year plan continues its focus on the health and well being of the Chinese people. A major objective is building a modern healthcare infrastructure which will benefit the health of the country’s people and China’s financial health as well.

The modern health care industry is still in its adolescence in China, the population is aging and people are demanding better and more comprehensive care. All this means that China is a top destination for pharma, bio-tech, medical equipment and device makers, elder-care specialists and health care companies across a wide array of fields.

The Government will also be focusing on improving the social safety net so that Chinese consumers do not have to save as much for health care costs and can open their wallets wider to consumer goods. In other words, the investment in healthcare has a three-fold positive effect: A healthier populace, the chance to become a world leader in health and life sciences and to help with the transition to a more consumer and less export oriented economy.

Takeaway: China realizes that sustainable growth requires not only a healthy environment, but a healthy population as well. Foreign companies stand to realize huge gains by strategically entering or expanding in China.

Rising Wages and Inflation – This is the area where much of the media has focused its attention and we would be remiss not to mention it here, albeit with some context. The five-year plan clearly seeks to increase people’s income across China’s population, especially for low-income earners. The plan seeks to create a “balanced economy” where the growing disparity between the elites and the average wage earner is addressed. China cannot sustain itself on a “rich coast – poor interior” paradigm.

This is a double-edged sword for China in that as it increases the wages of workers, it will be in jeopardy of losing its “low-cost” manufacturing base. This is a trade-off China must and wants to make.

As it moves up the value chain and derives more of its wealth from innovation, R&D, marketing and sales the low margin manufacturing that built the new China will move offshore.

Takeaway: Increasing disposable income, a fast growing elite class and a middle-class population approaching that of the total population of the United States is the growth many companies are banking on for their near and long term growth. The tenets of the Plan should increase these opportunities.

The Technomic Asia Take

In our general analysis of China’s 12th Five-Year Plan, we believe the following sectors will see the greatest gains:

1. Healthcare/Pharma/Bio/Life Sciences
2. Alternative Energy/Green Tech
3. Brand/luxury retail
4. High-end, high marging manufacturing and sourcing
5. Leisure/Sports
6. Automotive and automotive after market
7. Construction

Over the next several weeks we will expand on these sectors in the China Business Podcast and on this blog.

U.S. President Barack Obama is in Shanghai and will be coming to Beijing today. He spoke to a “town hall meeting” with young students in Shanghai and Obama took the high road on issues ranging from universal rights to trade to climate change. He also offered to open the U.S. educational system to 100,000 Chinese students, telling the students that “I see China’s future in you.” He pointed out that U.S.-China trade, which totaled just $5 billion in 1979, now exceeds $400 billion a year and constitutes a pillar of the global economy.

Obama’s first China trip is very much focused on “rebalancing the relationship in a thoughtful way” – just as the Obama administration vowed to “push the re-start button” on the relationship with Russia. The “rebalancing” will occur in three arenas of cooperation – climate change, economic recovery, and nuclear proliferation (read North Korea). There is a sense that the U.S.-China agenda is broadening out again from the myopic focus of the George W. Bush administration on terrorism, although terrorism and the Middle East (read Iran) remain very much on the agenda as areas of strategic dialog, but not necessarily consensus between the two countries.

US Commerce Secretary Gary Locke (left) and USTR Ron Kirk (right)

Obama’s economic surrogates are also very much in evidence. I today attended a luncheon of the American Chamber of Commerce in Beijing that featured comments and another highly scripted “town hall meeting” with Commerce Secretary Gary Locke and U.S. Trade Representative Ron Kirk. For me, the highlight of the meeting was Locke’s comment on what he called the “moral imperative for the U.S. and China to work closely together to address climate change.” Locke spoke with evident personal passion as he pointed out that 100 years from now, nobody will remember or care which country was developed and which country was developing, but everyone will care whether or not the problem of climate change was addressed by our generation of Chinese and Americans working together. This problem cannot be resolved without joint global leadership between China and the United States. Climate change is at the top of the agenda for the Obama visit, not a footnote.

Trade Rep Kirk injected a sense of humor into the proceedings by announcing that he was accompanying “President Clinton and Secretary of State… oh oh – that was my You-Tube moment…” But he and Locke worked together to dispel the notion that the U.S. was engaged in increased protectionism through the anti-dumping actions on tires and steel tubes. Locke pointed out that in 2009, anti-dumping cases by the U.S. against China involved just 3.6% of total Chinese exports to the U.S. and Chinese anti-dumping cases against the U.S. involved a matching 4% of U.S. exports to China. The implication – trade is 96% free and open between the two countries. So not to worry – that whiff of gunpowder ain’t a trade war, not just yet.

On another interesting point, Locke and Kirk revealed that in response to Chinese complaints that the U.S. has unnecessarily limited U.S. exports of high-technology products through the export control system, President Obama has ordered a comprehensive interagency review of U.S. export controls. Locke stated flatly that, “the current export control system is broken,” controlling technologies that are not critical to U.S. national security and that are readily available from Europe, Japan, and other global competitors. So perhaps we will see some rationalization and loosening of the U.S. export control regime in coming years.

Where do we come out on all of this? As Kirk pointed out, much too much global trade over the past couple of decades has been contributed by the propensity of the American consumer to over-indulge at the global trough. Oink! Oink! This has led to trade and financial imbalances that are not sustainable – formerly long term unsustainable, now short term unsustainable. “Chimerica” is the relationship that is at the heart of this problem. Time to “rebalance” the relationship in a “thoughtful way.” Well said. Now, as for well done – let’s wait and see.

But that was yesterday; this is today and all seems clear now.  President Obama will arrive in Shanghai on Monday.  Or maybe it is Sunday.  And he will have a town hall meeting here.  Or maybe he won’t.  He might also visit the new Disney site.  But maybe not.

I’m surprised that he could get a flight at this late date.  Usually I have to make a reservation a year in advance for my trips back to the U.S. to keep from getting stuck in the seat where the guy in front of you leans so far back you could do dental work on him.  But maybe the President has a better travel agent than I do.

Now that the trip is on, I want answers to the really important questions.  Ones like “Will Mr. Obama shoot some hoops while he is here?”  The Chinese LOVE basketball and not just because Yao Ming is their John Lennon minus the guitar and annoying wife.  His O-ness has got some game, or so they say.  Maybe he and President Hu can play a game of H-O-R-S-E to see who gets the comfy chair at the U.S. Security Council.  Or a gimmee on higher emission standards at the Copenhagen conference.  I’ve heard Mr. Hu has a mean skyhook so Mr. Obama should definitely take it downtown on a crucial point.  It looks like Hu has no vertical.

Another question: “Can the President use chopsticks?”  I am not trying to be smarmy here (its natural, I don’t have to try) but if he bellies up to the banquet table and is presented with a slimy plate of sea cucumber or duck tongue, he’s got to bring game there too.  And even more so … a sea cucumber splotch on a nice white shirt will be treated like a Rorshach test by the international media.  Glen Beck will see Elvis telling us to roll back health care reform.  Like The King could even benefit from it now (Elvis would have a hard time too).

But maybe the biggest question is: “What does President Obama’s China trip really mean?”  I’ve been polling my local staff and friends here in Shanghai and the general (yet non statistically-significant) opinion seems to be “so what?”  20 years ago, the President of a Super Power showing up in China gave Chinese leaders the vapors.  Heck, even Gorbachev stopped traffic back in the day, and not just because he was a natty dresser.  Now these trips are more like a weekend event between the Olympics and the Expo.  Most people here just complain that is going to further snarl traffic in a system that already looks like the Indy 500…if bicycles and pedestrians could cross the track at will.

When I ask locals how they think it will impact business, some have quoted the old Chinese saying, 天高皇帝远 (tian1 gao1 huang2 di4 yuan3), “Heaven is high and the Emperor is far away.”  Or “what happens at the seat of power has nothing to do with me down here.”  I would paraphrase (badly) Tip O’Neill, “All business is local” – if you are doing business here, you need to figure out how the game is played in your ‘hood, wherever that happens to be.  What happens in Beijing, stays in Beijing.

So while the China watchers will be analyzing to the nanosecond differences in handshake durations and depth of eye contact to interpret just what is “really going on”, I will continue to advocate that Western businesses spend their time finding out more about the activities of their competitors in China than their political leaders in same.  I am going to choose not read too much into this trip.  As Freud said, “sometimes a cigar is just a cigar.”  Now if Obama and Hu sit down over a Montecristo No. 4 and talk shop, we might have something to analyze!

At the very top of the Party’s honey-do list is to insure that China’s growth continues on through the airsickness bag that is the global economy.  But in order to do that, they need to assure their people that they are on the job and have the situation well under control.  Like every politician worth their earmarks, there is a certain amount of sounds-good-if-you-say-it-fast in the Party’s communication about the economic state of things and the plans they have to fix it.  Premier Wen Jia-bao’s Congress-opening speech – of Castro-like duration minus the spiffy fatigues – was pretty much simply a restatement of what we have heard before: that China plans to invest RMB 4,000,000,000,000 (that’s “trillion” for those of you still counting zeros) back into the Chinese economy and it will go to both physical infrastructure (bridges, roads, obscenely tall buildings) as well as social infrastructure (hospitals, clinics, schools that won’t fall down in an earthquake).  Bully for them.

Mr. Wen did take an extended solo around the riff that the Chinese people should spend more to support their own economy, but it seems that such exonerations are going to fall short of their goal.  He might want to take a page from G.W. Bush when he encouraged Americans to continue spending at the onset of the Iraq War, for fear that the terrorists might win … the fact that it worked and, eventually the economy tanked, might seem to beg the question of who really won, but those are issues for other blogs.  Seriously, as we’ve said before in these pages, consumer spending in China won’t move much until the social safety network is repaired – once Chinese citizens feel that there is help for their parents and themselves in their old age, they will start to spend in their youth.

Two points are worth mentioning, however, regarding the 4 trillion RMB stimulus package.  First of all, that is not going to be the total sum of relief spending in China; it is likely to be far more.  The rumor on the street and among my staff is that the final tally could be double that amount.  In fact, the rest of Asia seemed to think so too because the Japanese and Korean stock markets went up significantly following Wen’s speech.  Their economies – like all of ours – are tied so closely to China’s that, when the dragon looks like it will flap its wings, we all try to get aerodynamic for the expected blast of air.  Of course, as the U.S. is proving with its multi-squillion dollar relief package, “more” is not necessarily “better” so just because China is going to spend more doesn’t mean it is going to be better.

What DOES make China’s relief plan potentially more effective than the U.S. plan is because of how the money will be applied in China.  In the U.S., so much of the relief money will go to relieving pressure on companies’ balance sheets … many U.S. companies are so far in a hole that they need significant help just to get back to ground level (most U.S. banks and car companies are in this condition).  In China – where most companies are not so deeply in debt – any relief is going to go directly to benefitting the P&L … juicing the topline and/or helping companies invest in improving their bottom lines.  Therefore, if the China relief program works at all, we can expect to see a more rapid uplift here than in the U.S. (where the key measurement of impact immediacy is in calculating the number of “shovel ready” projects available).

Where are we going to see the biggest hits?  Our money is on anything in the medical sector – medical devices, pharmaceuticals and healthcare – and in higher value-added manufacturing (systems integration, design engineering, etc.).  Listen for the Perotvian “giant sucking sound” as money and resources are poured into these sectors (and look particularly for consolidation of smaller players to form larger ones).  And remember, RMB-for-RMB, the lift in China should be more immediate and more – perish the use of the word – “impactful” than anywhere else in the world.  Chinese companies are, in many cases, well-positioned to take advantage of the boost and will be quick to respond.  The question remains is whether the rest of us will be too.

March is when things start to heat up in China – both literally and metaphorically – and there are a couple of things we are going to want to keep an eye on in the coming weeks.  The biggie, of course, is the annual meeting of the National People’s Congress that starts this Thursday.  Signs have been up for some weeks now around Shanghai, touting the accomplishments of the Party and the advances of the nation and the Chinese people under their leadership.  If you didn’t know any better, you’d think they were running for something.

Well, in fact, they are.  You see, just because there are no elections, doesn’t mean that the government is not, to some extent, “of the people, by the people and for the people”.  As I have said in these pages before, the Chinese government and the Party – one in the same thing – know that, in today’s modern tell-all era of instant electronic communication, there are plenty of ways that they can be embarrassed in the eyes of the world.  And that is a BIG no-no as far as they are concerned.

So besides the herd of 60+ year old men in bad suits and comb-overs rubber-stamping as if their life depended on it (and it does), we can also monitor the NPC meeting for some other details.  The biggest issue will be how focused the Party will be on “social investment” in their economic stimulus program.  In the past, most of the government’s investment has been in “big iron” projects – infrastructure (highways and railways) and energy (the Yangzi river dam, big mining projects).  But now that China can claim more roads and rail than the U.S., it is time to move on to the next Big Thing.  And that is investing in people: hospitals, healthcare, schools, job re-training and the like.

The current investment proposal allocates 1% of the stimulus to health care and education spending and 7% to public housing … not exactly numbers to warm the potentially frigid feelings of the populace.  So I am looking for some other announcements to come out; some big Hallmark card of a program to send out the love.

The Party has been doing a decent job of maintaining their street cred: from the Olympics to a pretty rapid response to the tragic earthquakes last year when Wen Jia-bao showed up to provide a much-appreciated compassionate face to an otherwise distant bureaucracy.  But it is difficult to send Grandpa Wen to every displaced worker to insure them that everything is being done to help them find another job; to visit every white collar worker to show them that its OK to spend some of their savings now because a social safety net is being built to help care for them and their parents in their old age.

Just like any other country in the world, China is going to need to speak words of comfort to their own people in these troubled times.  The NPC meeting this week and the subsequent economic stimulus package will be the next voice we hear.

So the fact that the China Politburo – made up now entirely of men since the effervescent negotiator Ms. Wu has departed the scene – are in agitated preparation for a big anniversary in 2009, makes me think that there are some of the XY chromosomal pattern that do NOT have problems remembering anniversaries.  The event is, of course, the 60 year anniversary of the founding of the People’s Republic of China coming up October 1 of this year.  Let me tell you boys and girls, we are going to party like its 1949!

Ever-worried about the state of the Party before the party, the government is doing some major PR work.  Just announced: the deployment of the nearly two-million-strong police force out to do community work.  While I doubt that we are going to see Mayberry-like police work – only so many cats in China can get stuck in trees – this move is an interesting one.  It indicates that the government knows that, no matter the political system, their people do have a voice and that this voice counts.

The more cynical among us view this, at best, as merely a PR ploy to generate some warm-and-fuzzies for the Party; at worst, this deployment among the 老百姓 (lao bai xing: the “common people”) engenders feelings of dread, that the Party’s monitoring of people’s everyday activity is getting stronger.   The cynics will – and already have started to – wail that this is the first step on the slippery slope to the bad old days.  They worry about partying like the Party is still in 1949.

However, cynical as I am, I don’t view it this way – I actually see this as a good thing.  I am a firm believer that when people start to communicate, good things can happen.  So when the Chinese government starts sending their police force into the community, the police are – wondrously – going to actually start talking with members of that community.  They are going to hear complaints – some trivial, certainly, but many that are not.  And while there are certainly uncaring members of the police force – as there are in ANY country’s police force – there are also some who do care and who will respond.  We must understand the state of electronic communications in China these days where even the smallest transgression can be filmed and sent out for the world’s consumption (see here for a great example!).  The government knows that they are in a very different environment from 60 years ago and they have to do something to start seeing the problems before they become PR nightmares.

So the run-up to the anniversary should be an interesting one.  Don’t think for a moment that the powers-that-be here are typical males who will cobble together a gift the night before the anniversary by going to an airport gift shop or 7-Eleven (trust me, it doesn’t work, as a now-divorced friend of mine proved on his 5th and final anniversary!).  These next months will be very scripted and very purposeful.  But that doesn’t necessarily mean that some good things cannot come of it.

For those interested in reading the report (and the reports on the reports), you can look here. As our friends at the China Law Blog have so pithily observed, we are all commenting on the report without having actually read the dang thing. To me, this says as much about the author as it does the reader: If they would write in a more exciting manner, I wouldn’t have to be hopped up on Red Bull Espressos to get through it in some state of consciousness.

My only comment at this point revolves around the places in the report that say “The Chinese Government has made a commitment to do such-and-such…” or “The Chinese Government will begin to regulate this-and-that more strictly…”

The “Chinese Government”? Who dat?? Despite what it might seem – and a reputation that proceeds me – I am not trying to be difficult here. I mean, I know they mean “the Chinese authorities” and, at some level, “the Party” and that saying “the Government” is a shorthand way of including all such powers here. But using such shorthand is mighty misleading because the “Chinese Government” can’t do anything here because IT DOESN’T EXIST!

The Chinese governing structure is – like Shrek’s onion – comprised of layers; and layers of layers. There are many points at which the Party’s rule is administrated: National, provincial, county, township/city, district and neighborhood (and I am missing some in there, I am sure). Often, administrative positions and people are repeated; for example, there will be a Party secretary at each level; a person in charge of land administration; someone in charge of communications (it is still called the Ministry of Propaganda here, a shout-out to less P.C. days in China). Each level is somewhat responsible to the one above it but each, in its own way, runs its own kingdom and has its own royalty.

To get anything done in China requires the cooperation – or at least the benign neglect – of many levels of the “Government”. Major props to the late Tip O’Neil’s universal observation that “all politics is local” – because, at some point, you will need to know who the local authorities are in your particular situation and you will need them on your side. Or at least get them to not say “no.”

A client of ours is very proud of their “connections” in the Central government in Beijing. They have spent a lot of time developing relationships (read “drinking like a sailor on shore leave”) with various departments and leaders. Given the opportunity, our client’s management (none of whom live here) will talk endlessly about the “great discussions” they have been having with said Central government leaders and bragging about their latest bai-jiu bacchanal.

However, four weeks ago our client was having a terrible time getting some of their product produced and shipped out of a manufacturer here in East China. They tried to get the assistance of their drinking buddies in Beijing and, despite many promises of “immediate action,” nothing happened at their East China supplier. Our client called us in to help. One of our senior guys, Daniel, went to the factory and spent a day or two there getting to know the local leaders – it was a state-owned factory, so their management were also local government leaders as well. Daniel listened to their grievances about our client (many of which were valid), broke bread and bottle with them, and got most of the issues solved … with the promise to solve the rest once the products were manufactured and shipped. What our clients “friends in the Chinese Government” could not do in months, a simple visit and many follow up phone calls accomplished in a week.

So when a report like this comes out touting what the “Chinese Government” is going to do, we should be encouraged that this is being discussed, but we should not start laying money on the fact that something is going to be done right away (or, if it is, that it will be done consistently across all of China). If you are involved in a situation with regulatory implications, I would encourage you to step back and assess just who you know and who you don’t know. If you don’t know people at the various local levels where your business is located, that’s where you should start working. The illusive “Chinese Government” is not going to help you out; they are not listed in the phone book because they don’t exist.