While this is an interesting debate for economists, it is not the real debate for Chinese government officials and business people in China.

The real issue is that costs are getting high in China, and profits for many companies are wearing thin. In an unregulated company, this would mean that companies would lay off people in order to cut costs. But China’s economy is highly regulated, and the performance of Chinese officials is measured by the numbers of people they keep employed. Since China doesn’t have unemployment insurance, the costs are passed on to businesses. In recent years, this has been turned into legislation on the national level with the Labor Law, which makes it very expensive, especially for non-Chinese companies, to lay off personnel.

In late 2008, when the global financial crisis broke, local government tax offices in China routinely visited larger employers to find out about their employment situation. The implicit threat was that if they laid off people at this time they would be inviting a tax audit which obviously would not work in management’s favor. Employers struggled, but the economy recovered, and through 2009 and 2010, it looked like China’s economy had dodged the bullet.

This time, it’s different. China’s domestic growth and consumer spending have continued to grow. If there are significant layoffs though, it will hit Chinese consumer confidence hard, especially when people hear stories about other people being laid off from their jobs. Immediately, Chinese will go into savings mode again, which will put a damper on domestic economic growth.

Now, the real battle which is going on will be

• Between local companies and local governments
• Between local governments and Beijing

Now, local officials are again visiting local companies to make sure that they don’t lay off employees. But this strategy won’t work well for many factories which depend on export sales, which are anemic and where margins are razor-thin. They will not want to continuously pay the wages of workers who have nothing to do. Soon, they will turn to local governments to ask for “incentives” to keep these workers on their books. Where will these cash incentives come from?

Local governments will increasingly turn to Beijing for monetary and/or fiscal relief so that these companies can keep the workers on their books, forcing Beijing to decide between bailing out these companies, or letting them lay off workers. Local government debt levels are already high in China, can Beijing afford to “lend” more which most likely will never be repaid? Please keep in mind that many of these employers will be state-owned enterprises with huge payrolls, which have been hugely profitable while China’s economy is growing, but will quickly turn into big money losers when China’s economy slows down.

What will Beijing do?

At the same time, within the party, officials will press within the party to stop using employment statistics as a KPI (key performance indicator) for measuring the performance of local officials. If employment statistics are no longer used, then local governments will have to quickly switch over to local tax collection to fill in whatever holes have been created. This, in a society, which doesn’t have a strong tradition of paying taxes or even honestly reporting them.

When the China bulls and bears debate, they are just debating the rate of the slowdown, not the general trend direction. They agree on the trend, and it’s not good.

The questions are how investors, business persons, local governments and Beijing are going to resolve these issues? It won’t be easy for Xi Jinping when he becomes president later this year.


Follow Paul Denlinger on Quora


If there is a shortcoming, it’s that the data ends at 2006. In 2008, 2009 the western economies went through a major contraction, and China’s stimulus package helped Chinese factories to continue to operate at a high level of capacity while the OECD economies slowed. So what has happened to carbon emissions between 2006 and 2011, the time of writing for this article?

Fortunately for us, the folks managing the Datablog at The Guardian, have not only posted the information up till the end of 2009, but have also created a graphic.

A few interesting takeaways:

• China’s CO2 emissions at the end of 2009 were higher than the US, Canada combined.
• CO2 emissions are falling fast among the OECD countries, which have suffered slow to negative growth following September 2008
• The main CO2 culprit is China and other developing nations, not the OECD nations
• The big challenge for China’s leaders is how to maintain economic growth and social stability, while keeping CO2 emission within “acceptable parameters”
• Does the Chinese government have a definition of acceptable CO2 parameters? Or is this a slider parameter which changes according to social, political conditions?
• There are other factors at work, such as north China’s drought. Droughts put a strain on other resources, which means that CO2 emissions are likely to go up even faster.

This is all something to think about.

President Obama has said that he intends to draw a harder line with China on human rights, and recently invited some China human rights experts to discuss the issue with him.

At the same time, former vice president Cheney said that the Obama administration had come around to its hardline point of view on the war on terror, and was now following closely in the Bush administration’s footsteps.

The problem here is that the policies that the US has done in the Bush version of the global war on terror have made the Chinese government’s human rights violations look small in comparison. Many Americans would contest this view, but the better part of diplomacy is about being able to understand how others view issues in our globalized world.

If this is indeed the case, then Obama is at a distinct disadvantage in even bringing up the issue with the Chinese president, and should even consider not broaching the subject. Bringing it up would get a quick rebuttal from the Chinese president for its own human rights violations, and helping him to win points with Chinese, and the current and future Chinese leadership, for standing up to the US’s interference in domestic affairs.

• The Chinese tend to be nationalist, resisting outside interference, and different Chinese governments have used that to their advantage.
• The westerners often pick the wrong horse to back, choosing the horse they like and communicates with the west better, but who is often held in disdain, even contempt, by the Chinese.
• Especially in the US, legislators and media pundits who don’t understand China try to set the agenda on China, even though they have no understanding of China. Their own PR needs outweigh the need for real understanding.
• The west emphasizes the power of the individual, while the Chinese tend to weigh the interests of the whole.

On the eve of President Hu Jintao’s visit to the US, this is made clear by Senator Charles Schumer’s promise to start a trade war with China. If Congress jumps on this bandwagon, things will get tough.

In my next article, I will talk about how the Chinese make things tough for the interlocutors.

I was invited to Quora (you need an email invite) in June, and started posting questions and answers. Since then, it has started to grow on me. It’s more than a Q&A site, it’s a knowledge network, and has managed to attract some serious and interesting China observers. If I can make a small claim, it was that I felt that the quality of discussion on China was not good on the Internet; the general media took a generally hostile attitude to China, then there are those in China who have had to filter their opinions because, well, they are working in China for Chinese employers, supporting them and their families. There wasn’t much of a middle ground, and there was little room for nuance. For this reason, I made some contributions to the discussions in the form of questions and answers, just to get the conversation going.

I am happy to say that I now feel some of the best discussion of China on the Internet is now on Quora, and it draws a very knowledgeable crowd, including people living inside and outside China. From reading the discussion, I think that you will find that there is a wide variety of opinions, but they do agree on some key issues.

I have pulled out three discussions which give you some idea of the level of conversation:

• What do Chinese consumer tech companies need to do to be innovative enough to compete in developed markets like the US?
• What will be the best entry strategy for a foreign-owned Internet company to succeed in China?
• Is Amy Chua right when she explains “Why Chinese Mothers Are Superior” in an op/ed in the Wall Street Journal?

The last topic of Amy Chua’s has been particularly active and attracted a very interesting array of opinions.

The two founders of the company, Charlie Cheever and Adam d’Angelo, come from Facebook and the company is backed by Benchmark. The current buzz is that the company has a valuation of US$200M.

To join Quora, you will need an email invite. If you are interested and would like one, let me know.


]]> http://www.chinavortex.com/2011/01/discussing-china-on-quora/feed/ 0 http://www.chinavortex.com/2011/01/discussing-china-on-quora/ http://feedproxy.google.com/~r/chinavortex/mKwn/~3/pcdbKhi9JMI/ http://www.chinavortex.com/2010/10/another-look-at-iphone-versus-android/#comments Tue, 19 Oct 2010 16:22:27 +0000 admin http://www.chinavortex.com/?p=612 Lately there has been much discussion about how Apple’s iPhone is not open, as opposed to Google’s Android which claims to be open. Throughout the conversation, one thing has gone missing, and that is what’s good for users and their data privacy.

Which would you prefer, an app which charges you a small amount of money, say $5 or $10, for a one-time download, and keeps your data securely only on your iPhone, and then alerts you when it shares it with another app or website? Or do you prefer an app which is free, but then freely shares your personal data with other apps and websites in order so that the publisher can make his initial investment back?

I would prefer the app which charges me money upfront and keeps my data private.

But most people have chosen the free apps which don’t charge money, then sell data to other 3rd party websites and companies without their knowledge. Then they act upset when they find out that their data has been sold, and that their privacy is not private at all.

My reaction is “What did you expect?”

When you pay for an app, there is an implicit agreement that it will work, and the publisher feels the need to protect the interests of the user who paid him/her. If the app was given away for free, there is no such implicit agreement and obligation. Because Google’s Marketplace is largely offering free apps in order to gain marketshare, there is little desire to vet the applications to check if they have backdoors which will violate user privacy.

Caveat emptor.

But the Android camp doesn’t tell you this, since the vast majority of Android apps are given away for free. It’s like promiscuous unprotected sex for users. In contrast, iPhone apps are usually sold.

So yes, Android is open, but not exactly the way I’d like it to be. I would rather live with the rules Steve Jobs and Apple set.


]]> http://www.chinavortex.com/2010/10/another-look-at-iphone-versus-android/feed/ 2 http://www.chinavortex.com/2010/10/another-look-at-iphone-versus-android/ http://feedproxy.google.com/~r/chinavortex/mKwn/~3/yEkSKE2AYlQ/ http://www.chinavortex.com/2010/08/chinas-misreading-of-the-global-economy/#comments Tue, 31 Aug 2010 12:52:53 +0000 admin http://www.chinavortex.com/?p=607 More stories come out every day about how China is favoring state-owned enterprises (SOEs) at the expense of China’s private sector. Every day there are stories about SOEs advancing and the private sector in retreat or 国进民退 as it is called in Chinese。Seemingly, the Chinese leadership has embraced the view that China was able to save its own economy in the fall of 2008 by rapidly injecting a stimulus package into the Chinese economy, which meant state-owned enterprises through its own state-owned banks. By doing this when the US government was not able to react so quickly, China was able to fire up its own economy and maintain production and employment when the rest of the world was left on life support.

It sounds good as a story, but is it really true? Certainly the Chinese government is doing some of the right things by getting foreign manufacturers to raise wages, but is the conclusion that SOEs are the right way to go for the Chinese economy the right one?

My argument is that it’s not; it’s actually a return to a corrupt version of Gosplan which the Soviet Union had in the 1980s, and led to economic stagnation.

But first, let’s talk about the Chinese government reaction to the Wall Street financial crisis of 2008. The conclusion which the leadership has drawn is that some companies should be “too big to fail” because they employ such huge numbers of people. Since the single overriding issue for the Chinese government is social harmony (low unemployment + less social incidents), then yes, SOEs do prevent this. But this comes at the price of business efficiency for the whole economy, since, for the most part, they are large inefficient behemoths. And because they receive money from the state-owned banks on a policy basis, as opposed to business criteria, they can continue to do so. The price China pays for this inefficient allocation of capital is high; it means that Chinese consumers have less money to spend on discretionary items, which means that consumer spending is kept artificially low. All because the government is subsidizing its own kind in the name of social harmony.

The greatest single misreading of the situation is that the Chinese government believes that they were able to act quickly and decisively, when in fact, it had more to do with the US’s decision to bail out the financial industry, and then presented the bill to not only today’s Americans, but future generations of Americans. Up until this crisis, the US had the reputation for practicing the most efficient form of capitalism, sometimes with harsh social results. More than Europe, the US has allowed new industries to replace older outdated industries. For the first time this time, the US stepped in to bail out the banking industry at the cost of the whole country. This time, the US government decided that the unadulterated version of capitalism was too much.

China didn’t come out better because of its stimulus package; it looked better because the US betrayed its own economic values and policies.

The right conclusion for the Chinese leadership to draw from the crisis would have been that the 2008 stimulus package was a necessary one-time fix to save China’s economy during a global crisis. But then expanding that to say state capitalism is the best form of capitalism for China’s situation is exactly the wrong conclusion.

Now Beijing has ended up with a bunch of state-owned enterprises at the trough talking about how brilliant the Chinese version of state capitalism is, while Chinese private-sector companies are starved of capital and cannot compete against larger SOEs. Not only that, but the Chinese leadership has bought the line, and is reselling it as some magic fix for turbulent economic times.

Pushed to its logical conclusion, China will end up with:

• Large companies which are less efficient and less innovative, just when Chinese companies need to move up the value chain;
• The most talented young Chinese will continue to emigrate because they know that China does not reward innovation and individual initiative;
• Chinese entrepreneurs will stay in China only long enough to get experience and develop their ideas, then will emigrate because they want their child to enjoy a brighter future;
• The rich/poor gap, already large, will worsen because of widespread power abuse;
• The SOEs will get fatter and dumber because they enjoy a monopoly;
• By showing that they have so much sway over government policy, they risk becoming a target for government and policy criticism, and the Chinese government will largely be seen as a shill for the SOEs;
• Needed political reforms, such as those recently mentioned by Premier Wen Jiabao, may be pushed back even further into the future;

Judging from the debate going on in China, it looks like the supporters of state capitalism want this to become a stated policy goal. If this were to happen, it would be a betrayal of Deng Xiaoping’s economic policies, which were about putting pragmatism over ideology. Putting state capitalism on a pedestal as if it were the single answer to all of the world’s economic problems would not have been a policy which he would have approved of.

If this were to happen, it would be a tragedy for China, its people and its aspirations. And for the rest of the world.


]]> http://www.chinavortex.com/2010/08/chinas-misreading-of-the-global-economy/feed/ 5 http://www.chinavortex.com/2010/08/chinas-misreading-of-the-global-economy/ http://feedproxy.google.com/~r/chinavortex/mKwn/~3/VARxHSFaREE/ http://www.chinavortex.com/2010/08/tencent-makes-thailand-investment-with-sanook-com/#comments Mon, 30 Aug 2010 05:22:51 +0000 admin http://www.chinavortex.com/?p=605 Tencent recently bought 49.92% of Sanook.com, a Thailand portal, for HKD$81.7 million. The 2,496 shares were purchased from Cape Town-based MIH, which owns Sanook.com and also holds 35% of Tencent. Tencent will get two seats on Sanook’s board, and will also have the right to nominate candidates for the company’s executive president.

Sanook was launched in January 2000 and provides information, entertainment, business and community sectors to Thai customers.

Tencent, which listed in 2004 on the Hong Kong Stock Exchange, has been expanding aggressively recently, making deals with Russia’s DST (Digital Sky Technologies) to expand into new markets all over the world, including investments in Facebook and Zynga, two of the fastest growing social network companies in the US. With a market cap of US$33.2 billion, it is one of the largest Internet software companies in the world, and has been under the radar of most US investors. Now though, it appears that the company is beginning to make its moves.

While the Sanook investment is small, it appears that Tencent will play a hands-on role in the management of the Thai company. Tencent started with a community tool, OICQ, which was based on ICQ. Later, it changed the name to QQ. Now, QQ has more than 600 million users in China, and is used on PCs and mobile phones.


]]> http://www.chinavortex.com/2010/08/tencent-makes-thailand-investment-with-sanook-com/feed/ 0 http://www.chinavortex.com/2010/08/tencent-makes-thailand-investment-with-sanook-com/ http://feedproxy.google.com/~r/chinavortex/mKwn/~3/m5Sf3nv2nyQ/ http://www.chinavortex.com/2010/08/useful-skills-for-remote-workers/#comments Tue, 24 Aug 2010 00:01:17 +0000 admin http://www.chinavortex.com/?p=601 In my previous article, I brushed on the issue of how more work is being done remotely, by people working on their own.

The problem with the field of remote working is that there aren’t many people who do a good job of it, even though there are many software tools designed to help the remote worker. Basically, there is no good mentoring process for how to become a good remote worker for a team, which is why many criticize it, saying that it falls short.

I just came up this article The 7 Hats Of A Successful Team Member which gives a very good overview, and meaningful suggestions about what is needed, and how to become a good contributor for a virtual team.

Hope you find it useful.


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