The China Track 与中国接轨

Getting Government-Business Relations Right

How can government-business relations be structured to most likely generate good economic policies? A huge question with perhaps no good answer. In the late fall I gave an interview to a reporter from the China Enterprise News (CEN) on this question. My answer, published a couple days ago, borrowed from Peter Evans' 1995 book, Embedded Autonomy. In a nutshell, businesses need to have access to government to collect information and provide ideas, but at the same time not be too closely enmeshed with their regulators and politicians. 

CEN was kind of enough to publish an extensive transcript of the interview in which I compared governmen-business relations in the United States and China. America certainly has huge problems with powerful lobbyists, but more and more Chinese I meet are confounded by the increasingly unbreakable ties that bind business and the state in China. And it's not just SOEs. Private companies, in order to survive economically have had to come to terms with the system politically. In most cases, they now go along to get along. China appears to be moving further and further away from the reasonable ideal that Peter Evans described. 

The Leadership Transition and SOEs

Conventional wisdom has it that we are unlikely to see a highly aggressive economic reform agenda adopted by the new leadership that comes to power in a couple weeks. One of the main reasons given is the lobbying power of state-owned enterprises (SOE). Commentators highlight the strong ties between the leadership and SOEs, for example, highlighting that Zhou Yongkang spent so much time at China National Petroleum Corp. that he is essentially the oil industry's advocate on the Politburo Standing Committee. And once he retires, he could be replaced on the Politburo by Su Shulin, formerly a general manager at Sinopec and now governor of Fujian.

Certainly these ties are not insignificant, but we ought not make too much of them. The trend, in fact, is a decline in direct ties between leaders and SOEs. I collected data on all of the Politburo members for the 15th Central Committee (1997-2002), 16th (2002-2007), and 17th (2007-2012), and then made my best guess on the likely composition of the upcoming Politburo. I then culled their bios for work experience in SOEs. The data are surprising:

The biggest reason for the decline in SOE experience is the larger number of Politburo members who have worked their entire careers in the Communist Party and government. This is particularly true for those who have worked their way up through the Communist Youth League. They, of course, owe their rise to Hu Jintao. 

SOEs are not well represented anywhere in the official political system. Here is how things break down on the current National People's Congress, China's legislature: 

SOEs are certainly over-represented relative to private companies, of which there are far more, but a 9% share of seats is quite small. The NPC is dominated by government and Communist Party officials, not SOE executives. 

The Central Committee data show the same results. There are a very small number (less than 10) of SOE managers who are alternate members of the Central Committee, but none are regular members. 

This situation may change, but those looking for SOE influence don't make that argument. 

So where does SOE power likely come from? 

1) The government's ownership and control of SOEs, which gives offiicaldom a stake in making sure SOEs do well. If the financial sector is liberalized and administrative monopolies shrunk, that will hurt SOEs. 

2) The above data only focuses on officials themselves and not their family members. It is likely that just about every single member of the Politburo and Politburo Standing Committee has at least one family member who works in an SOE. 

3) Even if officials don't overly care about SOEs or have family members in SOEs, it is likely they have friends and colleagues who work in SOEs. Officials are socialized to believe that SOEs are natural and important parts of China's social fabric, and they shouldn't be penalized. 

4) SOE senior executives share the same administrative rank or have an even high rank than many of the bureaucrats who are supposed to regulate them. That makes SOEs difficult to control. 

The above discussion shows reasons why we shouldn't overstate SOE influence but why we should expect them to still have significant power. My own view is that despite being highly influential in a variety of ways, if the leadership wants to institute substantial reforms that hurt SOE interests, they could, and they would not pay a steep political price for doing so. There are a variety of ways the leadership could manage this kind of opposition, including rotating or firing SOE managers, implementing changes gradually, and compensating SOEs with other kinds of benefits. The question is, does the leadership want to do this? We'll find out soon.

 

The US-China Business Council and AmCham: Love vs. Tough Love

Yesterday the American Chamber of Commerce in China, located in Beijing, released its annual White Paper on the business environment in China. This lengthy document analyzes the evolution of Chinese policies across a range of issue areas and regions and the economic environment for American firms operating in China. AmCham uses a detailed survey of its members as well as information from additional research and interacting with the Chinese government. The White Paper contains both analysis and specific policy recommendations.

The US-China Business Council serves mainly as a business association representing a wide swath of international companies that do business in China, but it also provides customized consulting for individual members. Most of the Council's members are also AmCham members. Although the Council does not issue an annual white paper, it does release occasional reports and its staff testifies before Congress and privately offers advice to the US executive branch and the Chinese government.

Given their overlapping constituencies, it is somewhat surprising that the two organizations recently have struck different notes on China. Both organizations identify positive and worrying trends, but their emphasis differs. AmCham's phrasing is: Our companies are doing well, but the policy environment is worsening. By contrast, the Council's consistent message is: There are some worrying signs about the policy environment, but overall things are going in the right direction in China. AmCham seems to be ringing alarm bells, while the Council is tooting a small bicycle horn. 

The White Paper shows that American companies are still doing extremely well in China. 78% of respondents said they are profitable or very profitable, compared to only 71% in last year's survey. Most firms say their incomes have gone up subtantially. However, arrayed against these positive macro trends are worrying policy developments that are presenting severe challenges to their members. Over a quarter of respondents say that "Indigenous Innovation" policies are negatively impacting their business. Many believe that the protection of intellectual property rights is not improving, and opportunities for government procurement are threatened by various buy-local incentives or even orders.

Given these challenges, AmCham makes a case for more forcefully raising these issues with Chinese officials and offers a long list of suggested reforms.

The US-China Business Council comments about worrisome trends in China's business climate, including reports on Indigenous Innovation. Many of these have extensive details about policies that may be harmful to US interests, but these reports do not strike a worrying tone. They appear to be intentionally dry, fact-based descriptions of the current scene and avoid preaching as much as possible. At most, they mention "international best practices" China should seek to follow. But otherwise, they are highly respectful and avoid being seen as emotional or critical.

A good example is a paragraph from the executive summary of a recent report on indigenous innovation policies:

The Council also appears to believe that the key to responding to the challenge of China's policies are not pressuring China to change but rather having the US government adopt policies that promote innovation and the competitiveness of US industry at home and abroad. The Council also released this month a 28-page report, "China and the US Economy: Advancing a Winning Trade Agenda, A Guide for the 112th Congress." No where in the report is there a mention of Indigenous Innovation or many of the other concerns that appear in AmCham's White Paper. The report highlights the continued prominence of American manufacturing, the small percentage of American manufacturing that has moved to China, and China's much lower per capita income.

The tone from AmCham now sounds more similar to that of the U.S. Chamber of Commerce, based in Washington, D.C. The US Chamber represents a wide variety of corporate interests, including firms that doing well in China and those that see China as a competitor. For many years, AmCham sounded more sympathetic to official China, but that phase seems to have passed. It is now the Council that looks distinctive among this group.

None of the above is meant to pass judgment on either position, just to note the apparent differences in approach. Given that AmCham and the Council have overlapping membership, one wonders what is the source of the difference. Perhaps it is that the Council is headquartered in Washington, DC (but with offices in Beijing and Shanghai) and needs to interact more with Congress. Or perhaps this difference reflects the contrasting styles of their leaders, John Frisbee in the case of the Council and Chris Murck in the case of AmCham. Or perhaps we have a game of good cop-bad cop being played.

I have no idea which it is, but look forward to continuing to engage in chamber-ology -- searching for clues in their respective statements -- in the years ahead.

Neat Reading: From smart phones to Huntsman's farewell address

I've been trying to catch up on reading and lately came across some interesting stuff:

1) David Wolf, writing in Silicon Hutong, has a nice piece analyzing the burgeoning standards war for smart-phone operating systems. Baidu just announced it will soon offer its own version in an already crowded field. There are at least seven globally relevant smart phone operating systems, and there are three others available in China, offered by China Mobile, China Unicom, and Kai-fu Lee's Innovation Works. Wolf notes that all this competition creates consumer confusion, but he points out that only 7% of mobile subscribers in China have a smart phone, and hence, in the Chinese context it makes sense for there to be a period of operating system competition.This contest over smart phones is similar to the old conflict over video player formats -- SVCD, CVD, EVD, etc. And at least from what we know, the initiative for the contest appears entirely commercial; there may be government subsidies lurking somewhere, but the inspiration seems to originate in the creative minds of business executives, not bureaucrats.

2) The US-China Economic and Security Review Commission (USCC) held a hearing on trends in Chinese foreign policy on April 8. The most interesting panel from my perspective was on "New Interest Groups in Chinese Foreign Policy." Although there's some debate about what constitutes a "real" interest group" as opposed to a branch of the Chinese regime, the three panelists collectively demonstrate that Chinese companies, banks, and bloggers are playing both a direct and indirect role in the policy process. This trend is driven by globalization, the spreading interests of Chinese industry around the world, and technological trends that make it easier for all of us to join the public sphere (my word, not theirs).

3) The USCC also just issued a report with its take on China's Indigenous Innovation policies. Although there are worries about China using a variety of policy levers to ply technology knowhow from foreign hands, the most interesting thing about the report is that it is quite skeptical that China's policies will lead to extensive innovation. If so, foreign firms need to grab hold tight of their IPR now, but this policy initiative is not the long-term threat many worry about.

This reminds me of an interview a few years ago. An executive from an American telecom firm told me that despite the headaches, some in his firm want China to continue its top-down policies to promote innovation because they are so unlikely to succeed; if the Chinese government were to actually be a much greater promoter of genuine innovation, through reducing barriers to market entry, encouraging non-state financing of product development, reforming the education system, etc., then Chinese industry would present a much greater challenge to his company.

4) Two different takes on Huawei and Chinese telecoms abroad: One is from Bloomberg, highlighting the importance of China Development Bank's $30 billion line of credit to Huawei. The second is a piece on the presence of Huawei and ZTE in the Middle East written by William Foster and Hannah Thoreson. Foster and Thoreson see Huawei and ZTE as commercially driven companies, but they highlight how their Internet filtering technology has been widely adopted across the Middle East. "Taking advantage of security tools and techniques developed in the Chinese market," they write, "Huawei and ZTE help their overseas partner telecom companies fashion networks that meet the information control needs of their domestic governments." Not surprisingly, the companies haven't run into the same kind of scrutiny they have faced in the United States and India.

5) On April 6th, American Ambassador to China Jon Huntsman gave what was billed as a "farewell speech" in Shanghai. It stands out for both his commitment to cooperative solutions to address thorny problems in the relationship, but also his frustration with the limits on civil liberties in China that has made it harder to have an open conversation between the two countries, which he suggests helps explain the continuing misunderstanding and distrust. I came across a thoughtful Chinese response to the speech in Wen Hui Pao penned by Guo Xuetang, a professor at the Shanghai University of Political Science and Law. Although Guo also wants the two countries to reduce misperceptions and find ways to peacefully co-exist and cooperation, he sees the burden for change as on the American side. Americans need to remember, he says, that China is recovering from over a century of mistreatment from the outside world; moreover, China is a larger powerful country that deserves America's respect, but it is still developing, and hence, its international responsibilities must remain limited. This certainly sounds self-serving from an American perspective, but it is not an uncommon view in China. The question is whether there is space for imagination in both countries to find common group: Can Chinese recognize that an American call for great liberalization in China is not part of a conspiracy to contain China but is actually suggested with China's interests at heart? And can Americans recognize that given China's history and American deep intervention in many countries around the globe that Chinese understandably might see the various elements of American policy toward China as part of a self-interested plan to keep the US on top?

USITO job openings

The US Information Technology Office (USITO) in Beijing is looking to expand their staff by hiring a Policy Manager (Download Policy Manager JD) and Senior Policy Director (Download Senior Policy Director JD). I've followed USITO since its very early days in the 1990's, and the organization has become an integral part of the policy process in China for information technology.

Robert Putnam of Harvard is famous for his theory about "two-level games," in which negotiations between national governments are affected the internal negotiations each side has with their own domestic industry. USITO is a living, breathing example that shows how outdated Putnam's two-level games are. Although representing primarily American industry, USITO is in direct contact with the Chinese government and local industry on a regular basis.

Just fyi, this post is meant as a public service announcement and not as an endorsement.

Pssh, China Has a Civil Society

Apparently the Communist Party's Propaganda Department has issued an order banning domestic media from using the term "civil society" in their reporting. David Bandurski, writing for the China Media Project, shows that this order is being obeyed by the most official of official media, such as People's Daily, but is not by more independent outlets, such as the 21st Century Economic Herald. Scholars are also still using the term in academic papers.

One interesting aspect of this apparent ban is that it has focused on only one of the three different ways one can say civil society in Chinese, "gongmin shehui" (公民社会). Gongmin shehui could be translated as "citizen" society or, better, civic society. It refers to those members of society who are publicly engaged, often in the political process itself. But there are two other ways to say civil society in Chinese that haven't been banned. "Shimin shehui" (市民社会) literally means "urbanite society" (I'm sure there is a better translation that escapes me right now), and is most consistent with the notion of civil society being the product of capitalists and urban dwellers to create horizontal social ties and cooperative organizations to protect their interests, either against competitors or the state. Think industry associations, chambers of commerce, etc. Finally there is "minjian shehui" (民间社会), which most literally translates as "civilian society," that is, members of society collaborating with each other to form all types of organizations that are independent of state control. This would include anything from industry bodies to non-governmental organizations (NGO's) aimed to help those HIV or other marginalized groups.

If the reports are correct, this is a glass half-empty/half-full story. Propaganda officials are most worried about groups that are inherently politically oriented -- no duh -- but they are less concerned about business-related groups and other types of NGO's geared to address practical problems. If so, this effort at word control would actually imply some progress in terms of being more accommodating to the wide swath of NGO's that are the least politically threatening. Originally, it seemed the Party's view was that any group, even marble clubs and qigong groups, could potentially be threatening; but perhaps now there is a greater willingness to differentiate amongst organizations.

Reading between the lines more, this may mean China is getting ready to move on adopting new regulations related to at least industry associations and perhaps even to a broader group of NGO's. Now in the works for several years, a new set of regulations would be quite welcome and most likely represent a significant improvement over the current regulatory environment.

We'll just have to see whether the word games now being played are part of a larger policy shift, and if so, in which direction.

The Exchange Rate and Interest Groups

As someone who has argued that interest groups, domestic and foreign, have an effect on China's economic policies, I was at first glance happy to see Sewell Chan's article, "The U.S.-China Exchange Rate Squeeze," in Sunday's New York Times.

He argues that the conflict is difficult to resolve because of a stand-off of different interest groups in the US and China. In China exporters along the Southeast coast and state-owned enterprises (SOEs) which need to keep up exports appear to have the upper hand over those who would benefit from cheaper imports.

I buy part of this argument but not all of it. Yes, exporters favor a weaker RMB, and it is likely that the Ministry of Commerce is speaking up on their behalf in internal government debates. MOFCOM release the results of "stress tests" earlier in the year which showed that a small rise in the RMB would devastate exports. They're likely joined by the People's Bank of China whose leadership in principle believes that a stronger RMB and a floating rate would be beneficial for China's economy and give them more power to adopt monetary policies.

I think the article is on weaker ground when it talks about state-owned enterprises. Although everyone wants to be competitive selling abroad, in gross terms SOEs import much more than they export, since they primarily sell to the domestic market. In the year 2000 SOEs accounted for just under 50% of all Chinese exports; by 2009 their share dropped to under 20%. It should be in SOEs' collective interest to have a stronger RMB. But SOEs as a group are not making this case.

Why? It appears that they are either all just keeping their mouths shut out of habit of political discipline, or that interests amongst SOEs are sufficiently divided, with some favoring a weak RMB and others a stronger RMB. It is also possible that those who'd favor a stronger RMB are being compensated in several other ways, such as with export tax credits, low-interest loans, and other benefits, such that they don't need to whine, or at least do so publicly, about the exchange rate.

If Chan or others know of SOEs actively lobbying in either direction on this issue, I'd love to hear about it, online or offline.

RMB X-Rate: The Power of China's Export Lobby

The standard story line of the controversy over China's exchange rate pits a unified Chinese leadership defending China's economic growth rate against foreign governments who are demanding that China play fair and stop manipulating their currency at the expense of the rest of the world. Yes, that is how the fight is playing out on TV and in government press releases. But the reality is that both the US and Chinese governments are being subjected to immense pressure from domestic interest groups, and their official positions reflect the views of those groups and not necessarily the national interest. That seems like a no-brainer in the American context, but it's also true in the Chinese case -- and even on an issue as critical as this one.

How do we know China's leadership is feeling the pressure? Not by reading the American media coverage of China, which makes it sound as if Beijing is at liberty to do whatever it wants as long as the US doesn't go nuclear with sanctions. But luckily, Victor Shih, one of our country's foremost authorities on Chinese policymaking, has written an incredible paper with one of his former students, David Steinberg, now a postdoc at UPenn, on the power of China's export lobby. They document how over the past 15-20 years Chinese exporters have mobilized to lobby their local governments and central government agencies to keep the RMB from appreciating, or at least rising too quickly. In periods when the RMB did appreciate, exporters were given other benefits -- access to cheap credit and expanded domestic consumption -- as compensation. Since the summer of 2008, Shih and Steinberg report, Beijing has been getting an earful from exporters and their local government backers. Hence, Beijing's reticence to cave.

Unfortunately, I cannot provide a copy of their paper, but feel free to contact Victor at [email protected].

Another sign of the pressure is a New Peoples Net (新民网) story from last week. Trade associations affiliated with the the Ministry of Commerce (MOFCOM) just completed "stress tests" (人民币压力测试) of manufacturers that show profits will dive off a cliff with any appreciation. Makers of home appliances, autos, and cell phones found that only a 3% appreciation in the RMB would drive down their profits a whopping 50%! Textile producers are in somewhat better, but still precarious shape -- a 1%-point appreciation would cause a 1% drop in profits.

Reports like these do not reflect MOFCOM's independent opinion but rather the exporters' views aired through a MOFCOM mouthpiece.

If you want to know when Beijing will be ready to relent and allow the RMB to appreciate, the initial signs will come with the announcement of other compensatory policies that benefit exporters and help them find alternative -- domestic -- markets for their goods. Look for new subsidy programs, even higher VAT rebates, even lower interest loans, and weaker enforcement of the costly labor contract law.

China, Inc. Myth Exposed Yet Again

Welcome to The China Track, where you will find commentary about the political economy of China's engagement with the world. One of the most well-worn phrases of contemporary China is, "get on the international track" (与国际接轨), which implores China and individual Chinese to adapt to global norms and international best practices. But all tracks run in two directions, and the world is also grappling with adjusting to China in ways big and small. Those who live and work in China must adjust to the amazing pace of life, cab drivers, Chinese food, and rules and procedures that vary dramatically from those at home. Companies and societies the world over are affected by China as the world's fasting growing consumer and producer. As someone who has lived in China off and on for 5 of the past 20+ years and who does research on these issues, it's an honor and challenge to contribute to this conversation. I welcome your comments, feedback, tips -- and sympathy.

This week two stories have reached a stage that shows the complexity of China's policymaking process and challenges the myth of "China, Inc." -- a well-oiled centrally controlled, hierarchical policy process.

Case #1: Green Dam. From seemingly out of no where, the Chinese in early June announced all Windows-based PCs sold from July 1 had to come with the anti-porn Green Dam software pre-installed. It took about 10 seconds for the Chinese Internet community to essentially unleash an electronic riot in opposition. Rebecca MacKinnon's RConversation has captured much of the conflict. If there was more time to quietly engage the Chinese government, foreign industry could have let the Netizens take the entire lead, but with time running short, the international business community organized quickly and loudly, bringing out the big guns in the form of the US Trade Representative and Secretary of Commerce threatening China with a WTO case if they didn't back down. Low and behold, China did just that, and the dam burst.

The story challenges the China, Inc. picture in several ways: 1) The Internet allowed Chinese society into the policy debate; 2) Chinese industry showed through their actions (not installing Green Dam) that they opposed the policy. Too bad for Sony and Acer; they read their cards wrong and apparently were obediently intstaling Green Dam. Oops! 3) A Chinese software company played on the Chinese government's vulnerabilities and used the "protect our children" slogan to sell MIIT a defective product. One hopes MIIT included a clause in the contract: "If you sell us pirated software and a firestorm erupts, we get our RMB 40 million back." 4) From my own observations, MIIT internally was not fully unified behind Green Dam.; and 5) Most assuredly, the firestorm attracted the attention of senior officials, and they put the cabash on Green Dam for the time being.

Case #2: The deadline for concluding negotiations over annual iron ore benchmark prices came and went on July 1 without a deal. The Chinese side was "led" by the China Iron and Steel Industry Association, but CISA never was able to exercise any discipline over those it claimed to represent. By contrast, the oligopoly of the Big 3 iron ore producers (Rio Tinto, BHP Billton, and Vale) held together amazingly well. Small and medium-sized Chinese steel producers and traders went behind CISA and negotiated private deals to buy iron ore on the spot market. The Big 3 had previously not sold to the smaller producers since they had enough contract business with the larger Chinese mills via the benchmark contract system. Going around them was pure genius -- actually, it's a simple and effective strategy. What is also amazing is that despite the economic importance of the industry and the political connections of the largest steel firms, they could not get the Chinese government to throw them a bone and offer them any sort of regulatory support that might have given them a fighting chance at the negotiating table.

That China is more pluralistic and the process more complex and subject to innumerable forces is overall a positive development. China is less likely to go hell-bent down a crazy path because internal opposition will mobilize to tamper down such desires. China is having a difficult time manipulating international prices despite its size because fragmentation trumps size any day of the week. 5-6 Japanese steel companies could sit and decide prices for steel in Japan because they controlled 80% of the market; China's top 70 firms don't control that much.

China's growing pluralism has consequences across the many areas in which China engages the world, and I look forward to discussing those issues in future entries.