The Problems With The West’s Understanding Of China

A continuing lack of investment analysis and research needs to be addressed 

Numerous discussions have been held concerning how the West deals with China and has been for much of the past 40 years. Questions are being asked how the extent and pace of Chinse modernization could have been missed, or mis-understood.

I recall the euphoric Western capitalist moments in the early 1990’s when Deng Xiaoping stated, ‘to get rich is glorious’ – and on his ‘Southern Tour’ to Shenzhen in 1992 embraced a form of ‘opening up’ and capitalist style reforms. (Dezan Shira & Associates began life in Shenzhen that very year based on what I could see and feel happening).

At that time, the Chinese economy was roughly the same size as Italy’s, and the long years of isolation had seen China come perilously close, because of incompetence and a fear of over-reliance on foreign imports of running out of energy, a situation that would have led to mass social unrest. That resulted in one of the first investment sectors opening up to foreign companies – the oil and gas industry. It also led directly to how China manages its tax base – with oilfields to be explored in the South China Sea, China incentivized international energy companies to set up their bases in Shenzhen, which while remaining closed off from the rest of the Chinese mainland, was provided with a 15% profits tax break – some 10% less than the rest of China. Some of Dezan Shira & Associates’ earliest clients were in Shenzhen – while the big firms all headed for Beijing and to some extent Shanghai – Dezan Shira slummed it in unfashionable, yet highly profitable Shekou. Following where the investment capital is being motivated to go became an early lesson.

Almost at that same time, other investors began appearing. By the time of the handover of Hong Kong to China, in 1997, the mainland Chinese population was 1.23 billion. But there was a curiosity – of all the international expats who had been working in Hong Kong at that time, very few bothered to explore China. They just melted away. Media and politics had had some impact: two years earlier, Fortune Magazine ran a headline “The Death Of Hong Kong”, followed by books such as Robert C. Cottrell’s “The End Of Hong Kong” in which Cotterell, a distinguished academic historian, manages to completely misunderstand the dynamics of contemporary China and what was happening. These statements were completely misleading.

It was the beginning of another lesson – never read too much into what other people – including academics and politicians – have to say. Always make up your own mind, be responsible for conducting your own research.

Dezan Shira & Associates meanwhile were in the right place at the right time (it is a habit born out of research and practical, not academic experience) and we soon began to understand China was not a market ‘of a billion consumers’ as many excited (and especially, I recall American) executives would often suggest. A China continued its policy of opening, other key industries began to develop, including auto. However, at one important event, possibly an Economist China conference, I recall hearing a loud, aggressive, and extremely sure of himself American senior executive with GM saying “The Chinese auto market will never overtake that of the United States!” But within three years, they had.

Flying into Xiamen for many years was a sobering experience as how not to run a business or understand geopolitics or new technologies – the aircraft would fly directly over the Kodak manufacturing plant making disposable cameras. Kodak’s executives, so consumed by their standing in the global film processing industry failed to notice where the market was heading. With just a few years, cameras were installed in mobile phones. Kodak have disappeared as a global business and now solely provide specialist film for Hollywood.

There is another lesson – executives – and politicians – can get so consumed by their own national or international hype that they end up believing it.

There have been many other examples of investment naivety or even stupidity. One British in-house counsel, fresh from negotiating a Joint Venture for his company in Chile, told me bluntly he ‘didn’t need our services in China’ because he ‘knew all about JV’s’. (the investment failed within three years).

But among all these war stories, a pattern emerges. It is not a pretty one. It is that very few Western based Governments actively feed proper analysis and long-term strategy into their thinking, and that this has a habit of filtering down into the corporate sector. I find this especially true at the MNC level – many rely on Government contacts to influence their own development strategies, and this can be a mistake. It is an astonishing and somewhat alarming fact that of all the thousands of investors into China and Asia I have met on a professional basis, the best prepared and most market knowledgeable have been the SME’s – entrepreneurs. That’s not to say that MNC’s are not, but by and large given their size – and the political nuances they tend to carry, investment strategies can become conflicted.

This may also be tied to the manner in which contemporary democratic and financial systems are structured. Democracy is an awkward system. Limited terms of power have de-evolved in todays polarized political environment to becoming either a nuisance – a constant swing back and forth between left and right with a longer-term effect of policy stagnation, or a personal invitation to make as much personal money while in office as possible, as another chance come the next election may not prove viable. Neither are helpful in developing longer term strategy, and neither are the financial markets, tending to look at corporate performance on a quarterly, rather than longer term basis. The Western system has developed a type of ‘short-termist’ democracy that can be highly damaging to longer term planning and market predictability.

Beyond the political sphere lies the research and analysis. Again, this tends to be ignored when the political atmosphere is so transient. Western Governments themselves are now run largely by career politicians, with individuals in place who have studied political theory at University. As I pointed out in this article “Political Scientists vs. Engineers” there is a marked contrast in the educational system between East and West when it comes to choosing future leaders.

The Chinese leadership is packed full of engineers. Boris Johnson or Joe Biden couldn’t build a wall between them even if you did provide a ton of bricks, ready mix cement and an instruction book. China’s success with the Belt & Road Initiative is because the Chinese can build, and they have conducted the research to enable them to understand where, how and when to do so. The UK and United States has little idea, although one suspects the generally more pragmatic EU could – if they were not so consumed with expanding their own borders and seeking to become a Federation. The most recent US attempt at a wall has been along the Mexican border, a fine way of introducing the USMCA free trade agreement with a member state.

Education therefore plays a part in understanding where weaknesses lie, and especially within an awkward democratic system. ‘One Man One Vote’ has already been proven to have become subversive. There’s no point in giving the vote to the idiotic (30% of Sri Lanka’s Parliament have no formal education) or criminal (50% of India’s Lok Sabha Parliament have criminal records). According to the Indian Business Insider, about 159 Indian MP’s have cases pending which involve serious crimes such as rape, murder, attempt to murder, fraud or kidnapping. Yet the West fails to intervene. India is ‘democratic’, and that is all that matters.

Western career politician and diplomats often have a posting span of four-five years before being moved onto new positions. Successful businesspeople however have careers at the top lasting twenty, thirty or even forty years and beyond, yet must satisfy shareholders all through their tenancy. Here lies the gap between business and politics. Short-term planning versus long-term reliability and profitability. Many British and EU (but not US) politicians have forgotten that it is corporate revenues that fund the political exchequer.

That consequential political ideology has however ended up interfering with research and analysis. Government funded bodies such as the China-Britain Business Council and the US-China Business Council are fine bodies – but not sacrosanct nor aloof from political interference. Both are Government funded – yet these are business and trade entities, not political. The European Chamber of Commerce in China too is partially EU funded – meaning it contains an increasing political aspect. In recent times, the political aspect to these organizations has overtaken the business intent to an extent that is not entirely satisfactory from the business and investment perspective. Statements are being made from these entities that reflect political concerns about China and not the investment opportunity.

As a result, they often parrot official Government policy rather than seek to add any real corporate value other than drinks mixers at a bar or circulating (typically political) news views from media sources. There is very little original business content or thought analysis being provided. This is not an ideal situation for businesses, who must operate during different political eras. Being fed positive rhetoric from one, to then have a totally opposite approach within five years isn’t helpful. David Cameron, the British Prime Minister, ushered in a so-called ‘golden era’ of Sino-British relations, having a drink in a London pub with Xi Jinping. Today, the talk is almost total anti-Chinese rhetoric, a process that occurred within the same political party in just five years.

Donald Trump called Xi Jinping ‘his great friend’. He then instigated a trade war, with many resulting tariffs still in place today. Business investors understand that politics waxes and wanes. But the turnaround in just a few years has been immense. With Government Commercial institutions just mirroring these views there is very little left for businesses to be able to rely upon and use to plan beyond the current politics. This is unhelpful and something of a betrayal. Businesses do not vote. So why subject them to Government policy parroting when there are investment opportunities to consider?

I therefore have concerns about the contemporary relevance of the British, American and European Union commercial bodies. None of these entities – part tax-payer funded – provide or have significant analytical or research functions, broaching the question of what are they there for? While they do good basic work in part, a rethink on the business services – after all they are ‘Commerce’ organizations – would be in order. Where is their added value?

Doing business in China is complicated and increasingly sophisticated. Many businesses in China also now conduct business in ASEAN, India and beyond, yet there is no attempt to provide any links or business comparisons and assistance with similar Government (tax-payer) funded organizations such as the UK-India Business Council, the US-India Business Council or the EU-ASEAN Business Council. Yet cross-border comparative analysis is exactly what businesses need.

Instead, these Government-funded business and trade organizations have become nationally insular, overly politicized, and their views should be taken with a degree of skepticism from the investor’s perspective when seeking an opportunistic approach.

The missed opportunity is that these organizations can do a lot of good and be legitimate and valuable G2B channels. Instead, this is currently being wasted, with a recruitment emphasis on their being used as depositories for ex-diplomats without a portfolio, eager to feel useful yet possessing no actual investment or business analytical corporate experience, together with the occasional businessman going the other way nursing political ambitions. Neither work, nor service the actual business community they claim to represent particularly well. A positional rethink of how they operate is required.

There are analysts and researchers at hand. Gordon Orr is a board member of the CBBC and quite capable of leading a move towards a more analytical rather than political approach within such a structure. There are numerous privately operating research individuals whose analysis of both the political and financial aspects of China make complete sense (and are often at odds with Western Government thinking). These include Henry Tillman at China Investment Research and Shirley Yu of China BIG Idea amongst others.

Our own firm, Dezan Shira & Associates, collaborates with these people and has our own research and analytical function, both internally (we need to interpret the business and investment implications of Asian regulatory changes) and via our Asia Briefing subsidiary, which employs investigative business journalists.

We increasingly need this function. This is partially to insulate us from the current political thinking in the West, which has become pre-occupied with its opinion that China, and to some extent Russia, now represent a risk in seeking to overturn Western ideologies. This has resulted for example in an on-going, almost hysterical political media campaign against the Belt and Road Initiative, which remains at its heart an infrastructure build. Bridges, roads, and railways don’t vote, they are transport mechanisms. As Kester Kenn Klomegah states in the Eurasia Review, “Unlike the West, Russia and China are led by brilliant strategists. The Russians and Chinese duped Western strategists into thinking that they want to challenge Western hegemony.” 

Western pundits have largely failed to recognize that Russia and China are harnessing their distinctiveness from the West to acquire political mileage overseas, unencumbered by colonial or cold war historical divisions elsewhere. Developing countries value the non-interference stance of Russia and China, meaning if Western countries were to affirm a less moralistic foreign policy, they could shift the balance of power back in their favor. Career diplomats and politicians don’t get that – yet the business community sees it all the time.

The West consequently believes that it is fighting a geopolitical war when in fact they are competing for ideological supremacy. Conversely, Russia and China acknowledge that war is not required to undermine the West, because Western countries no longer believe in themselves. Throughout the West, people are assaulting Western history, the toppling of statues, the changing regulatory aspects concerning definition of the sexes, and redefining history and moral standards. All are undermining the previous status quo without Chinese or Russian interference. Old conservative and religious views are being challenged by the likes of Brussels, who wishes to impose its liberal perspective, with the prospect of EU sanctions, upon Hungary, a fellow EU member whose public have marched in protest at this upset of traditional family values. These conflicts diminish the West and are leading to further fragmentation.

The upshot of all this is that political leaders – and in their current absence from business sense, are implicitly stating that as an alternative, corporate business leaders need to employ foreign policy strategists who understand ideas, history, finance, and research and can engage. Government-funded commercial research organizations need reform. Instead of the current steady drip, drip drip of politics creeping downwards into global investment and commerce geopolitical policy, analysis and research needs to feed back up the chain.

Corporate businesses have a responsibility here, not just towards themselves, and their shareholders, but also towards redressing the balance at the Governmental end. Analysis and research are the keys to better relations between East and West and to prevent the potential for the West to suffer the sort of head-in-the-sand demise that impacted so disastrously upon Kodak.

In the absence of Western political leadership as concerns global investment policy (the B3W concept is frankly ridiculous, possessing no Governmental financial structure), businesses need to invest in themselves as concerns having the correct decision-making investment tools. The good news is that this research is out there – and is largely beyond the cloying hands of a British Prime Minister far better suited to writing funny stories, or an American President in severe need of cognitive tests. It’s not the political top that is the problem – it’s the non-analytical civil servant middle ground that needs to be educated in the ways of the new geopolitical world and how to react to it. Businesses both large and small have analytical and research investment responsibilities to effect such change. The increasingly negative political statements made by the various Government funded China ‘commercial’ G2B organisations has reached the extent of nullifying any advantages of their operations, while required business and market analysis and research is proving beyond them.

MNC’s in China should be looking to identify non-politicized objectives and hire renowned firms with analytical and research capabilities to identify effective commercial strategies, while for SME’s I would suggest such work be distributed to the national and localized Chambers of Commerce with the practical business knowledge of their members rather than G2B institutions. Investors in China should look to non-Government funded sources and more user-friendly, analysts and researchers to look for answers and opportunities.

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