In the News

What a week! In a flood of notable news here are just a few of the stories that made headlines in the Middle Kingdom in recent days:

  • Twelve Japanese auto parts companies were fined a record $201 million for price fixing and monopolistic behavior.
  • While fines have yet to be announced, Audi, Mercedes, and Chrysler, a division of Fiat, were likewise found guilty of illegal monopolistic business practices related to pricing.
  • Three executives of a company in Kunshan that polishes wheel hubs for General Motors were arrested for severe safety violations after an explosion at their plant resulted in the death of 75 employees and injured 180 more.
  • President Xi Jinping publicly praised Deng Xiaoping on the eve of the 110th anniversary of his birth, emphasizing not the opening of China to foreign investment, but the creation of socialism with Chinese characteristics.
  • Excerpts from the eagerly anticipated translation of Thomas Piketty’s book, Capital in the Twenty-First Century, were released this week amidst vigorous debate among Chinese academics.
  • The preliminary HSBC Purchasing Managers Index, a key indicator of the health of China’s manufacturing sector, fell to 50.3 in August, indicating a slight expansion, but well below the consensus estimate of 51.5 and July’s final reading of 51.7.
  • The government announced dramatic reforms in the compensation of executives at the gigantic State-Owned-Enterprises (SOE’s) that control the most sensitive and lucrative segments of the Chinese economy. (e.g. banking) Some executives could see their compensation reduced by as much as half.

Random coincidence? Of course not. The Chinese are holisticals. Everything is inter-connected. There are no random coincidences in the Western sense of the phrase.

Signs of an orchestrated effort to disadvantage foreign companies against their domestic competitors? I am a lone voice on this one, but I say not. The investigation into monopolistic practices, in the end, is all about setting prices at unjustifiable levels. Western business is margin-centric. The whole objective of Western business is to maximize the return on investment and that, to a large degree, is a pricing game. Chinese companies, in contrast, play a cash game. They worry about scale and less about margins. It is no surprise, therefore, that if the government has found pricing practices that it considers to be unfair, foreign companies would be at the top of the list.

The economy is slowing. It has to. The government has been very clear in its desire to pivot the economy away from the export-manufacturing model that rocketed the economy to number two in the world to a household consumption model more consistent with a developed, mature economy. It has no choice if it wants to renew its environment and improve the quality of life for all Chinese.

It is an arduous task to say the least. Household consumption only accounts for roughly 1/3 of China’s GDP at the moment. In the U.S. it accounts for 70% of all economic activity. The pivot to a consumption economy, therefore, will be an enormous change that will undoubtedly come with a fair amount of economic pain along the way.

And how does Thomas Piketty’s book fit in? Piketty, an economist and professor at the Paris School of Economics, argues that the Western liberal democracies are essentially recreating the patrimonial, feudal societies of 18th and 19th Century Europe, when the vast majority of wealth was held by a small economic elite and their offspring. In France, of course, this ultimately led to revolution. (In a delightfully insightful TED talk, self-described American plutocrat, Nick Hanauer, predicts a future in which people with pitchforks take the to streets unless the continued polarization of wealth in the U.S. is abated.)

The avoidance of that fate, of course, ties into the reform of executive compensation for China’s wealthiest State-Owned Enterprises, which create their wealth through government support and in no small part on the backs of the average Chinese citizen. (Whose safety is clearly a priority for the populist-Marxist Xi.)

The most significant news of all, however, is the speech President Xi gave at a symposium honoring Deng Xiaoping, the man behind the opening of China, in Beijing this week attended by all seven members of the Political Bureau Standing Committee of the Central Committee of the Communist Party of China. In his remarks Xi promised, “We will try our best to reform areas that are weak and unsound and learn from the good experience of the international community.” (China Daily August 21, 2014)

In his most telling peek into the CPC’s plans for the future, however, he went on to note, “But we will never blindly copy the experience of other countries, let alone absorb bad things from them.” Deng’s true genius, Xi suggests, was in his understanding of China’s “own reality”, the Chinese characteristics universally used to describe Chinese socialism that emerged from Deng’s policies.

And what does that mean for China?

Economic development requires capital formation and access. That is the most fundamental law of every economic system.

China's currency, the renminbi, literally means 'The People's Money.'
China’s currency, the renminbi, literally means ‘The People’s Money.’

In the United States that capital has been concentrated in the hands of private individuals. In 1980 the top 1% of Americans held 8% of the country’s wealth, while the bottom 50% held 18%. Thirty-years later, however, the top 1% hold 20% of America’s wealth while the bottom 50% hold only 13%. Simply put, the return on invested capital has far outpaced overall economic growth.

Europe took a slightly different path simply because it put capital formation in the hands of its banks and financial institutions. While this resulted in a broader sharing of the bounty of economic growth, however, the same polarization is occurring there. It is just less personal and more corporate in nature.

China, I suspect, and more specifically, the CPC, intends to keep capital formation in the hands of the people, with the Party acting as their trustees. (The Chinese currency, the renminbi , literally stands for ‘the people’s money’.)

President Xi Jinping is doing more than weeding out corruption.  He is re-defining government service.
President Xi Jinping is doing more than weeding out corruption. He is re-defining government service.

For that to be successful, however, two things will have to happen. The first is that the Party must maintain legitimacy in the eyes of the people. Which is precisely why President Xi Jinping is weeding out corruption and inequity with unprecedented vigor. (He is, with equal enthusiasm, trying to convince government officials that their role is to serve the people, not lord over them.)

It will also require incredible self-restraint on behalf of the business community where the rubber ultimately hits the road in terms of economic activity and growth.   Companies cannot, or cannot be allowed, to do things, like raising prices, just because they can.

Even if you believe that capitalist markets are ultimately efficient, the defining logic of Adam Smith’s ‘invisible hand’, efficiency doesn’t always play out in real time. It’s a journey. Which is where government regulation comes into play as both an expedient and, ultimately, a necessity; human nature being personal, as Freud would say.

Can the Chinese pull it off? I, for one, dearly hope so. Not just for the benefit of the Chinese people, but for the rest of us, who so desperately need the reassurance that global geo-politics doesn’t need to be digital. It doesn’t have to be ‘us’ or ‘them’. There is plenty of room in this landscape we call life for infinite shades of gray.

For the CPC to succeed, however, two ingredients must be present. There must be inspired leadership who can articulate and define a collective aspiration for the people of China. And it must be an aspiration that reflects the unique history and culture of China; what Xi refers to as China’s “own reality.”

President Xi, I believe, is such a leader. China, however, no longer exists in a vacuum. The real question, in my humble glassmaker’s opinion, will be whether or not the rest of the world that defines the context within which China now advances, will allow China to pursue its ‘characteristics’ without imposing its own values and agenda.

Will China be given the chance to develop according to its "own reality"?
Will China be given the chance to develop according to its “own reality”?

Copyright © 2014 Glassmaker in China

Notice:  The views expressed in this post are strictly those of the writer acting in a personal capacity.  They are not in any way endorsed or sanctioned by his employer or any other individual with which he may be personally or professionally affiliated.