Sunday, May 31, 2009

Communism in China - A single party system

[Cross-posted from our WFU MBA China '09 blog]

While not everyone on the trip remembers the Cold War (Russia), or the falling of the Berlin Wall (Germany), or the beginning of the Cultural Revolution (China), you could definitely sense that everyone on the trip had a curiosity, or concern, about how the Communist Party might effect our trip. Having worked for Cisco for many years, I had heard all the accusations about how our products were used to censor the Internet for Chinese citizens.

So the question remained, how much would the Communist government effect our trip? How much would we be allowed to see? How much does it effect the ability to do business in China and with Chinese business partners.

By no means should this post be taken as a definite answer or viewpoint. We were only there for two weeks, and had limited visibility into any aspect of companies or the Chinese people. But we saw bits and pieces, and that is what I'll share today.

In Beijing, we met with the former Chief Economist of The CITIC Group. CITIC is a mulit-national conglomerate that serves as an investment arm of the Chinese government. With that connection, the views from CITIC and the Chnese Government are obviously fairly well aligned. The views from CITIC recognized some of the huge challenges facing China:
  1. An increasingly growing wealth gap between the richest and poorest people.
  2. Environmental problems (air & water) as a result of all the growth over the past 10-15 years.
  3. The challenge of finding enough natural resources to support their growth, as well as the search for alternative mechanisms (solar, wind) to substitute for those natural resources.
  4. The dependencies on exports to drive their economy (especially the US), and the need to drive consumerism within their country.
These challenges all have a long-term time horizon, and all of them have a direct impact on the overall quality of life for almost all Chinese citizens. They impact the government's primary goal of a harmonious society, and they impact the long-term viability of the country.

At other State Owned Entities, such as Bright Dairy or Xi'an Aircraft Corporation, we saw how the government had identified certain industries or economic areas as critical to the long-term success of the country and was providing them with favorable benefits (ie. limited or no corporate taxes) to help drive growth and employment of Chinese people. While these benefits may or may not have been extended to other competitors in these industries, they did highlight the levels that the govenment will go to create a type of "floor" under parts of the economy to avoid speculation or wild swings that could create broader social problems.

Extending this concept of a "floor" to the financial portion of the Chinese economy, we visited the Shanghai Stock Exchange. The most prominent exchange in mainland China, it employs very rules that attempt to ensure more order in their markets:
  1. No short selling of stocks.
  2. All stocks must be held for at least 1 full day prior to being resold (N+1 rule). This essentially eliminates day-trading.
  3. The variation in any one day can not exceed a +/- 10% band from the original price.
While some of these rules could be viewed as restrictive to efficient markets, especially from a US perspective, they could also be viewed as trying to force some amount of patience or "take a step back" into their markets to prevent extremes reactions to rumors, fear or greed. Whether or not this is a good thing for the SS Exchange or the overall Chinese marketplace will have to be determined long-term, but it does highlight another aspect of trying to maintain a level of harmonious society in various aspects of Chinese business.

As the trip progressed, I asked several of these questions to Professor Mike Lord, who has been leading this trip for 10 years and has extensive business accumine in the region. His response was that it probably makes more practical sense to view China as a single party capitalist country, instead of a Communist state that endorses capitalism. You still have to be aware of the guidelines needed to do business in China surrounding ownership, relationships and competition, but that their inclusion into the WTO had sparked a tremendous understanding that global economic powers can not control markets and that competition and innovation will ultimately determine their success or failure. This made a lot of sense. From an outsiders perspective, it was very hard to see China as being anything but a hyper-competitive capitalistic market. Just the pace of re-engineering of products and creation of companies to sell those would suggest that the government can only extend so much influence.

Don't get me wrong, I'm not trying to suggest that the government is not a prevalent part of daily life in China. I witnessed this first hand. YouTube is blocked. I heard people listening in on my phone calls. I saw soldiers outside of many buildings. I heard citizens tell us stories about their knowledge of Fallon Gong, and their fears of discussing the events of June 1989 in Tienanmen Square. But none of these things seemed to impede the flow of business (except maybe portions of Google's business).

So the conclusions I drew were primary about my mindset about this blend of Communism and Capitalism. For now, it seems to exist in a fairly harmonious state. Could this change in the future? Possibly. Those major challenges I listed above could get more difficult, or the citizens might become less tolerant. But there appear to be (at least surface level) signs that they are being addressed.

My advice to Americans looking at interacting with China is to view their economy as being similar to the US, except with the competition level turned up a few notches. Learn what you can about ownership and relationships with Chinese companies and the government, but don't let the fear of a single party system paralyze your ability to actively engage in the world's largest marketplace. Like anything else, keep expanding your knowledge of the region and it's culture.
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