In 1961, Deng Xiaoping cited an old Chinese saying which literally translates as: “It doesn’t matter if a cat is black or white, as long as it can catch mice, it’s a good cat.
It was Deng’s response to critics who believed he was advocating capitalist (free market) ideas. For Deng it was a measured response to the failures of “The Great Leap Forward” (1958-61), which had resulted in massive hardships, deaths and economic devastation.
In hindsight, the statement is seen as the beginning of a new era of pragmatism, which has propelled China to its present position as the world’s number two economy. The system has two tenets: the central and guiding role of the Communist Party and the economic progress of China. This hybrid approach to what had been deemed incompatible ideologies, capitalism and communism, has become the hallmark of “State Capitalism.” A model which is increasingly scrutinized by under-developed and emerging economies, who look at both China and Singapore’s development as an alternative to democratic capitalism, which has had its bumps in the United States, Europe, South Africa and India.
So why the heavy dose of history and ideology in a column about doing business in China? A number of reasons.
China is at a new juncture in its development, reflected in its changing political and economic status and the accession of Xi Jinping and a new generation of leaders. Xi’s invocation to define the “Chinese Dream” is in essence a call for a new definition of societal expectations and responsibilities. Given that societal expectations and responsibilities are also primary influences in economic development and behavior, it is something you have to keep an eye on.
For proof, you need to look no further than the 60-percent decline in spending at luxury restaurants, which has occurred in the last eight months – the result of a new party edict to moderate behavior. Restaurants and luxury clubs which used to host hundreds now cater to a few. The result has had a domino effect on millions of suppliers, both domestically and internationally. The flip side of the coin has been a growth in mid-market dining revenues.
The next generation
China’s changing political and economic clout is affecting its regional and international relationships. On one hand, it is involved in an economic charm offensive with its Asian neighbors that offers trade and prosperity agreements cemented with multi-billion dollar trade deals. On the other hand, it is involved in more aggressive territorial stances, which lays claim to almost 80 percent of the South China Sea. Both factors are bringing China into more direct competition with the United States in the Pacific. In the rest of the world, China’s search for resources and its non-interference policies are a Yin and Yang approach, which will have different long-term consequences.
The accession of Xi Jinping, and the next generation of leaders, is likewise bringing change, as the leadership draws new boundaries about what is acceptable behavior within the party and society as a whole.
The trials of “tigers” and “flies” like Bo Xilai and “Brother Watch” (who was photographed with far too many expensive watches for a moderately paid government employee) are defining party behavior.
The “Chinese Dream” debate is aimed at defining societal expectations and aspirations.
Both initiatives are aimed at maintaining the central and guiding role of the party while creating a collective set of goals and expectations
Without going into a political discussion of the merits, it is clear that China is girding itself for the next stage of its development, moving 350 million more people from subsistence to moderate affluence.
From the government’s point of view, this cannot happen if the party loses its leadership mandate or the people are divided.
To push its agenda, the government is moving quickly on a number of fronts, including the ones mentioned above, and more technical areas such as banking and manufacturing.
In terms of the banking structure, the government is pushing banks to get rid of their predatory lending structures, which have been cannibalizing China’s SME’s, by taking lending rate restrictions off the table, allowing more financial products and controlling liquidity.
In terms of manufacturing, the government is moving to reduce excess capacity by requiring companies, mostly State Owned Enterprises (SOE’s) to reduce production by the end of the year. The drum beat started in July when 1,400 companies were specifically ordered to cut production, since July 127 additional companies have been added to the list.
Against the backdrop of a slowing economy, China’s new leadership has been at pains to balance production. Premier Li Keqiang has on many occasions vowed to curb blind expansion and improve capital efficiency, along with energy and resource use to restructure the economy.
More changes on way
More policies are in the pipeline. A plan to systematically address the issue is in the making.
According to Zheng Xinli, executive deputy director of China Center for International Economic Exchanges, the government is looking to boost domestic demand, encourage producers to go global, push mergers and acquisitions, as well as setting a higher environment threshold to reduce overcapacity.
Even though the central government has been pushing for the elimination and closure of outdated capacity, analysts warn that the move will meet resistance from GDP-oriented local governments accustomed to chasing jobs and economic growth by investing in the often high-cost, low-tech capacities.
“The administrative orders are short-term cures, the key to a balanced economy is to allow the market play a larger role,” urged Gary Liu, executive director of CEIBS Lujiazui Institute of International Finance in Shanghai.
In the absence of robust overseas demand, China needs to reform its income distribution system to absorb overcapacity and make production costs more market-oriented, Liu suggested.
“Real demand and supply can guide resource distribution, and the job of the government is to eliminate policies that disturb market order and remove improper protection and subsidies,” he said, adding he expects more detailed reform plans at the upcoming Third Plenary Session of the 18th Communist Party of China Central Committee in November.
Returning to white cat, black cat, perhaps it is time others embrace a more practical approach to the challenges facing us, beginning with defining the roles of government, the shared goals of a society which can go forward and then moving on to take the steps necessary to make both a work in progress, if not a reality. No, this is not a call to embrace communism, rather to not be left behind by it.
Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.
