<http://truth-out.org/opinion/item/13137-the-china-information-conundrum>
The China Information Conundrum
Sunday, 09 December 2012 07:50
By Charles Humphrey , Truthout | Op-Ed
With President Obama's re-election sealed, he faces an intimidating
number of challenges both at home and abroad. One problem in
particular, while it is overshadowed by domestic economic concerns,
nonetheless deserves the administration's full attention if the
United States is to solve its domestic and international challenges
of the next four years and beyond. That problem is China and its
rogue administration. The reality is that the world faces a problem
in China that is both of crucial importance and very difficult to
discuss. This problem is the impossibility of obtaining clear,
reliable information on the country's political, social and economic
situation. In the West, there are normatively high standards required
for mainstream journalists in terms of sourcing and fact checking.
When these standards are applied to a political system whose survival
and function depends on a tightly controlled information economy, it
makes for a gaping chasm between the global perception of China and
the realities on the ground. This is a matter that should be of
concern to private investors, policymakers and the growing number of
people around the world whose personal and professional lives may
become increasingly tied up with China.
To be sure, there are exceptions to this rule, but their nature only
proves the point. There are a number of firsthand personal accounts
in print and the Internet which, to the discerning reader, give a
glimpse into the deeper reality of what is going on behind the
Chinese Communist Party's (CCP) one-way mirror. Most notable is the
August 2012 Prospect article by Mark Kitto entitled "You'll Never Be
Chinese" documenting one man's decision to leave China after years
dealing with a corrupt court system (to call it a "legal" or
"justice" system would be inaccurate) and widespread insecurity,
uncertainty and overall frustration. Kitto's account is exceptional
in that by basing his business in China, he more directly experienced
the difficulties and dangers of operating there than the average
outside investor, but his story is not unique in and of itself. The
'net is rife with blogs and posts from on-the-ground expats who live
in such a way that brings them into direct contact with the reality
of life in China. For all the effort of such individuals, the
marginal place of such information in the larger infostream, and the
way in which it can be dismissed as mere subjective griping, affords
them little power in shaping mainstream debate and perceptions.
Despite the proliferation of alternative media, the world still
relies heavily on the mainstream media for a reliable picture of the
world. There are good reasons for this. The reputation, resources and
accountability of a major media organization provide for the
possibility of greater depth, breadth and accuracy that all the
bloggers and tweeters in the world cannot hope to replicate. Say what
you will, #BobinBeijing is not likely to be as reliable as BBC World,
whatever biases may come into play for mainstream outlets.
To be fair to the mainstream media in China, there are exceptions,
the most notable being Al Jazeera's Melissa Chan, who did exceptional
reporting highlighting the overwhelmingly dark side of life in China.
Her writing was broad and in-depth, covering forced abortions, black
jails and powerful gangs, as well as a piece specifically on the
dangers she ran from police and hired thugs when trying to interview
common Chinese about their problems. Chan was exceptional in that
what happened to her demonstrated how little actual reporting gets
done by other mainstream journalists. She did real journalism, and
was expelled for it.
The logical conclusion is that reporters still remaining in China are
careful and tactful enough about not ticking off the CCP that they
are allowed to stay. The impact such a situation has on our ability
to obtain in-depth and reliable information from China is obvious. It
is hard enough to get a clear picture in a country as vast,
complicated and politically unstable as China, but it is downright
impossible when the interests of continuing one's career in that
country make one unwilling to even try. That Chan was made to leave
while a large number of foreign correspondents remain indicates that
this enforced apathy may well be the status quo amongst those
reporting in China.
Beyond the failure of mainstream media to work effectively in China,
there is a further problem in China information. This problem is
slightly less concrete, but perhaps more important in a world where
financial metrics come to determine a great number of decisions. It
simply doesn't make sense to put any faith in metrics which were
developed by and for Western societies in the China context. In my
opinion and that of many of those who have spent considerable time
here, China's apparent rise is largely due to the CCP's ability to
play with metrics in a way that more transparent governments are not.
A number of factors play into this situation.
At the heart of it is a general lack of accountability at the top,
which then trickles down to every segment of society. Something that
anyone who has never lived in China cannot appreciate is the extent
to which rule of law is absent. The very notion of rule of law as
understood in most developed societies is impossible in a system such
as China's. For law to exist requires some recourse to redress open
to all members of society. When a governing body is composed of a
political organization which by its power and constitution is
unaccountable to the rest of society, then law in itself is
impossible beyond a mere external charade of court rooms and
costumes. This was clearly illustrated in Kitto's story of being told
he had "won" a case, only to later be told that in fact, owing to a
phone call to the judge by someone in power, he had "lost."
This plays out in a number of unfortunate ways in the lives of common
Chinese people, and this fact has occasionally been documented. But
more unsettling in a global context is what this means for the
reliability of Chinese metrics. If there is no law, then there can be
no effective regulatory enforcement of even the barest accounting
standards. There is simply no way to enforce any kind of regulatory
standards on Chinese businesses or government agencies owing to the
particularity of China's system. Not only is this an immediate
problem for verifying reports, but it creates a growing and
persistent rot in undermining any culture of accountability. If
positive numbers mean success and respect, and there is no effective
means of ensuring accuracy, then the onus falls on accountants
working in Chinese organizations to find every way they can to
inflate numbers and create false perceptions. This is already a
danger in a culture where direct communication is often taboo, but
the combination of a lack of clear regulatory enforcement and the
culture this generates within organizations, repeated across a
country of 1.3 billion, creates the potential for a proliferation of
massive, self-perpetuating metric bubbles.
The consequences this can have for investors outside China was made
clear in the case of Sinoforest, a Yunnan-based forestry company
which at one point was the highest-valued resource stock on Canada's
Toronto Stock Exchange but which turned out to have none of the
physical or liquid assets it reported and whose head office was in
fact nonexistent. Sinoforest is exceptional not in itself but in the
fact that it was exposed. Anyone with serious on-the-ground
experience and a good analytical mind knows that the Chinese market
is full of such companies waiting to be outed. Many of them never
will be.
A less extreme example, but one which is very illustrative of the
problems for outsiders understanding China is captured in a 2011
interview in McKinsey Quarterly with China International Marine
Containers (CIMC) President Mai Boliang. The opening paragraph
glorifies CIMC's growth in much the same glowing way that marks much
China business reporting, stating how, "20 years ago [CIMC] was a
small, little-known container manufacturer with just 59 employees.
Since then, under the leadership of Mai Boliang, the company has
become the industry's global leader."
This all sounds fine in itself; companies grow, and very small
companies, if well run, can become global leaders. McKinsey points to
"aggressive domestic and global M&A [mergers and acquisitions]
program ... and a relentless push to innovate and to disrupt the
status quo" as the explanation for CIMC's growth. Now, to a Western
reader, this gives a certain image based on a legacy of successful
business innovators. The mistake that ends up being made when dealing
with Chinese businesses is to assume that these reasons mean the same
thing in China as in a reader's country of origin. In many
industrialized countries outside of China, this type of success story
means that a business, operating on a relatively level playing field,
was able to fairly outperform competitors. This trajectory indicates
sound business fundamentals and solid leadership. What about inside
China? Naturally, Mai was playing to his audience and telling them
what organizations like McKinsey expect to hear - the story of
innovation, competition and hard work. The reality of CIMC's rise is
apparent in some of Mai's comments on CIMC's early days, as well as
on his CV.
The logic of this analysis risks being lost on anyone who doesn't
understand the workings of Chinese society and the
business-government nexus which lies at its core. For insiders, it
doesn't take long reading the McKinsey article to see what's going
on. Note first that CIMC is a state-owned enterprise, officially an
organ of the government. This is important for what comes next. While
Mai indulges his ego in the interview by suggesting it was his
vision, hard work and intelligence that allowed the company to grow,
it's important to note the casual remark that when Mai took over, the
supposedly cash-poor company "signed agreements with other
manufacturing companies under which we operated their businesses,
paid them lease fees for the opportunity, and pocketed whatever was
left over."
Mai has couched this in civilized language, but this amounts to an
effective government expropriation with compensation which was
obviously below the returns generated by the expropriated businesses.
That a successful manufacturer would allow CIMC to operate their
business for a lease fee that was below their expected profits,
allowing CIMC to "pocket the difference" would be unthinkable outside
the context of an unaccountable state-owned enterprise (SOE) with a
mandate to expand. Unfortunately, Mai's bio is not available on
Chinavitae, but based on his meteoric rise from obtaining a BS in
mechanical engineering in 1982 to president of CIMC in 1992 at the
age of 33, and then on to effective expropriation of China's coastal
container manufacturing industry, I would bet my meager savings that
his father is a senior government official.
This would mean that the rise of CIMC is not in any way due to the
usual combination of thrift and innovation that is required in a
level playing field, but instead would be due to the overwhelming
power of Mai's family connections. The corollary of this possibility
is that CIMC's continued success does not hinge upon the continued
effort of its leadership, but on the political fortunes of its
government backers. This point is particularly salient given the
power transition coming up this fall. Politics and business are
always tied in some manner, but in China, the two are inseparable in
a way that is hard for outside observers to fathom. The leaps
involved in this deduction are again not apparent to anyone who has
not lived and worked with normal Chinese people who are not connected
to the government, but it is based on fundamental social realities of
life in China. This illustrates the problem that the basic logic upon
which outside observers of China base their judgments on the country
is foreign to the Chinese situation.
The trends outlined in this article are part of a worrying set of
phenomena which will puzzle governments and investors in the coming
decade. For better or for worse, China's rise is a reality no one can
avoid. However, the combination of effective interdiction of
investigation by outside media, the difficulties of obtaining
reliable metrics, and the different logic required in a society where
business and government are one and the same and are run by a single
overarching organization in the CCP make sound China strategies next
to impossible for even the shrewdest analyst. This is a problem of
which too few observers and investors are aware and one which
distorts global perception and response to China, much to the benefit
of China's ruling CCP and the detriment of non-Chinese investors and
governments.
In response to this, it seems essential that in the absence of
reliable traditional sources, those whose dealings involve
significant China exposure round out their picture with less
traditional sources of information. While the accountability of major
media outlets and the ease of analysis of financial metrics are
obviously desirable, they are not tenable in the China case. A true
understanding of the Chinese situation requires a messier, fuzzier
information-gathering approach, one which intersperses mainstream
accounts and metrics with the subjective details of various
on-the-ground observers. Beyond these, there are some good online
tools which give a view into Chinese media, the most notable being
chinaSMACK, a site which translates stories from Chinese online news
and social media, along with comments, into English. Many writers are
fond of saying that China is changing the game, but in order to
respond to this fact, those wishing to operate in China must change
their game, too. This starts with a heavily critical attitude toward
the information that the CCP is broadcasting out and a willingness to
explore the uncertain territory of a plethora of alternative accounts
which provide much needed context and nuance to the current narrative
coming out of the Middle Kingdom.
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