Some Things You Should Know About China   (November 9, 2011)

If all you know about China comes from PBoC and Central Government reports and analysts' financial statements, then you know very little about China or how it actually works.

I know it's tough to think about anything but the fast-melting ice cream cone that is Europe, but there are some things you should know about China. All the reassurances you've been reading about China's "soft landing" and its "they know what they're doing" central government are probably false. Here's why: very little in China is as it seems on the surface, or as it's presented to the Big Noses (Westerners). There are three reasons for this.

Before I explain, let me stipulate that I am not passing judgment on what's "good" or "bad" about China, or any other nation. Each country functions in its own peculiar way, and there are always productive and counterproductive elements to each nation's way of doing things. But it is important not to gloss over reality and accept illusion as truth.

1. Old cultures are far more opaque than young cultures. All sorts of traditions and foibles get embedded into the culture as time progresses, and these features manifest themselves in the economy, finance and the machinery of governance.

What this means is that it takes a lot of time to truly understand the inner workings of old cultures and their economies. Sure, you can get a report from the central bank, or buy a villa there, and make some superficial acquaintances. All these things will foster your hubris that you "really know" how the country works.

You don't, and you won't, until you've married into a family there, lived there for years, if not decades, and actually done business there, on the ground, with your own capital and contacts. If all you know about China comes from PBoC and Central Government reports and analysts' financial statements, then you know very little about China or how it actually works.

Quite frankly, you'd be better off going to the zoo with the proverbial dartboard and having the chimpanzees toss some darts at it; those prognostications will be equally valid, and you'll be outside in the fresh air (unless you're actually in China) instead of some glitzy dining room gorging yourself on yet another wasteful banquet.

The same is true of Italy, France, Greece, and many other old countries. The attitudes, governance and actual mechanics of the economy are not transparent in any of these old cultures. Take the television tax in France. If you don't know about it, and how it's evaded and grudgingly paid, then what do you know about how things actually work in France?

I once received an email from British reader who was outraged by my comments on black-market labor in France. He had a house in Brittany, and he knew the people, and there was no black market labor there. It took me a while to stop laughing, for this is the typical "visitor who thinks he's a real resident" syndrome which you find everywhere.

We all want to be insiders, of course, and we all want to be accepted by the locals. And so we construct a thin veneer of working knowledge and delude ourselves that we've "gone native" by defending our adopted land vigorously, lauding its ancient culture, and so on.

The new arrival falls in love, and their romance lasts from a few months to a few years. Eventually the way things actually work becomes evident, and start grinding away at the love affair. After a long time, the outsider-resident become cynical, or even bitter; what a bloody unholy mess this place is, beneath the phony surface sold to tourists. The 20-year resident listens with a wry smile to the newcomer gush over the ancient ways and glorious food, etc., but keeps his mouth shut. Why spoil romance? Reality will do so soon enough.

This is how you can live in, say, Japan, for twenty years, and be accepted--as a gaijin. Until you die or leave. In other words, you will never be accepted in the way you might hope. You will be accepted as part of the landscape, but you will never become Japanese. Being accepted is the sort of thing we expect as Americans, because America is a young country and being here and liking American sports, or reviling certain teams even if you are disinterested in the sport, is enough: hey, you're an American now.

Which brings us to point 2:

2. Immigrant nations require a certain level of functional transparency; if they lack this requisite level of transparency in how things actually work, then they quickly become two-tier societies and economies filled with the resentment of second-class citizens.

This is why old cultures have so much trouble with immigration, and why America is one of the more transparent places to live and work in the world. In the dynamic parts of the American landscape and economy, say Silicon Valley and similar hotbeds, then we've got places to go, things to do, people to see and wealth to create, and we don't have time or interest in explaining arcane cultural rules to a huge spectrum of people with a non-native grasp of English. So we keep things fairly transparent. Having a lot of tangled cultural anacronysms that have to be hidden lest "people get the wrong idea" (i.e. discover the truth) just gums things up and wastes time and money.

So we don't have much of that. Nobody cares where you're from, or what caste you are, or anything like that. As long as you do your work without being a real pain in the rear-end, are pleasant to your neighbors and workmates, keep your pitbull chained, etc., then you are good to go. Many if not most of the people you interact with also know English as a second language, and since that's burden enough for all of us, we dispense with all the insider stuff. America is on most levels a WYSIWYG culture: what you see is what you get.

Places like China and Japan are on the opposite end of the spectrum: they are not immigrant cultures. Very few nations have a culture that is adapted not to tradition and an opaque mindset but to getting on with immigrants from everywhere. This is one reason people want to come to America; they lose their baggage here and can be themselves, because nobody cares, we're busy with other things, and it doesn't take 15 years to figure out how things actually work here. If it did, the whole thing would grind to a halt and that would be really annoying.

In other words: I've got another meeting, so let's cut to the chase and get this done, OK? Talk to legal, talk to accounting, get it signed and do what you agreed to do. If you can't or don't, you're out and we're not interested in complicated nuances and back-door sub rosa stuff. Those are time-sinks and we're in a hurry here.

3. China, and other Asian cultures, are built around "face". This requires a public facade, to maintain face and cloak the private, back-door reality. In general, Asian people do not like criticizing their country, as this is experienced as a loss of face.

I cover this in my longish essay from 2005, China: An Interim Report: Its Economy, Ecology and Future.

Here's how "face" works. If you marry a "local" in China, Japan, Thailand, etc., then they will eventually, obliquely and with reluctance, tell you some of the unsavory details of how life actually works. Maybe. If they do, they will not like it if you repeat these "we lose face" realities to other Big Noses. You will have to do so in private, in a hushed voice.

As a result, there are always two doors in Asia: the front door, carefully arranged to present a face-enhancing image to the outside world, and the back door, where everything important actually takes place.

A typical front door in China is the banquet with the glad-handing mayor. The back door is for his mistress, the cash "commissions" from various deals and the cover-up of the face-damaging deaths in the local factory. Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.

This is how you get top-ranked American officials who travel the world constantly, flitting from meeting to meeting, "getting down to business in heart-to-heart talks" (cynical guffaw), staying a night or two in a fancy resort or hotel, and then being whisked away to another country. (That's the burden of Empire; you have to fly a lot. On the plus side, you soon accumulate a list of amusing cocktail-party stories of quaint locals, strange foods and night-time visits to embassies in quasi-dangerous places.) If you live in D.C., you know lots of people like this. If you can brag about your multiple visits to Afghanistan, you might even be one.

But this sort of tourist-slash-water-carrier-for-the-Empire doesn't really know anything about the countries he or she lands in for "power lunches." They don't know the lingo, the geography, the history, the culture or what passes through the back door.

This is also how we get superficial opinions passed off as analysis. There is an amazing amount of claptrap written about China in the Western media, seemingly most of it by people who have never been there or visitors who have no contacts others than PR flacks, denizens of Shanghai bars or official handlers.

Take, for example, the constantly repeated idea that "China can easily keep its workforce busy on big infrastructure projects." That is repeated as if it was an undeniable truth.

Have any of the people repeating this as fact ever actually watched a building project under construction in China? Things are pretty efficient there, despite all those photos you've seen of thousands of peasants planting trees in the desert, etc. The number of people required to toss up a highrise is remarkably small. Given the workforce of hundreds of millions, even a thousand-kilometer rail line doesn't take that many workers.

Then there's the reality that all the low-hanging fruit of useful infrastructure has already been built. Now it's the really marginal stuff, classic malinvestment.

Then there's the reality that nothing gets maintained in China. A lot of new stuff gets built but nothing that's already built gets maintained. So all sorts of things start falling apart and stop working. The basic idea is that when it starts looking bad then we'll tear it down and build something new. That is a mindset built on limitless resources and money, neither of which is actually limitless.

The other opinion presented as fact is that China is transitioning from a "capital investment" economy to a consumer economy. The fact is that only 35% of the official economy is consumer-driven. But the other fact is that everybody who can afford anything in China already has it.

When I was there in 2000, there was already a glut of TVs. Our friend's amah already owns a car, and she isn't paid much even by Chinese standards. It sits in a garage, rarely taken out, because she doesn't really need a car; it's simply a status symbol. Everyone with enough money to do so has already bought a car.

As for real estate: Our friends' friends already owned three rental flats each five years ago. No-nothing Westerners mindlessly talk about the 700 million peasants who need housing, but this just reveals their bottomless ignorance. Chinese families were offered their own flats for a dirt-cheap price decades ago by the central government. Most families have owned their own flat (not the land, that's 100% government-owned) for years before the bubble.

The 700 million low-wage people in China might like a $200,000 flat, but they can't afford one. They're living on $13 a month in rural villages, or making a few hundred dollars a month in a factory or other low-wage position. Claiming that there is an endless demand for costly housing in China is like saying the demand for more McMansions is endless in the U.S. because 20 million poor people south of the border want a luxury home.

The reality is that everyone who could afford a flat in China already owns one, or two or three. Those who don't own one cannot buy one, not this year or next year or in ten years. Their income is 1/40th the cost of the flat, and the price of the flat dropping in half doesn't meaningfully change the equation.

Chinese consumers with money have already bought everything they could possibly want, and purchased Coach bags for their boss's wife (you can forget the promotion if you don't pony up a legitimate Coach bag for the Missus, or perhaps Number One mistress; be sure to include the receipt and official Coach bag to show it's legit).

Those without this kind of income have seen their purchasing power decimated by high inflation in essentials like food. To save face, the government issues statistics that "prove" inflation is dropping. This is as reliable as the bogus unemployment number in the U.S., you know, the one that keeps dropping because the government stops counting millions of people in the workforce, not because the number of people with real jobs is rising.

The only sources who actually know what's going on in China are in local government. Another fantasy Westerners lap up is that the central government actually knows what's going on, and even more laughable, knows how to "fix" everything. If you don't even know what's happening, how can you fix the problem?

Westerners also don't understand "corruption." They think in terms of bribes that could be suppressed by some new rules. That is beyond laughable, for corruption isn't bribes, it's the warp and woof of how things work in China. They don't understand that pirated goods are crushed by bulldozers for a show of face; nothing changes behind the facade presented for show.

There is a lot of anger and resentment in China, especially among young people. This will not go away because some new railway is built, or a new mall opens.

Occasionally a glimpse of the back door makes it into the mainstream media. Here are some recent examples worth reading:

Swimming Naked in China With the Chinese government tightening credit, the massive leakage from the formal banking sector into the ‘shadow system’ ultimately risks sinking the country’s financial system.

Why We Should All Be Very Skeptical on China

And most importantly: Top of Chinese wealthy's wish list? To leave China

"Among the 20,000 Chinese with at least 100 million yuan ($15 million) in individual investment assets, 27 percent have already emigrated and 47 percent are considering it, according to a report by China Merchants Bank and U.S. consultants Bain & Co. published in April."

The Western resident of Beijing (married to a Chinese woman, with two children) who posted this on his blog added, "Everyone with money has a escape plan."

Here's a simple question for China bulls and all those writing about how infrastructure projects, an omniscient central government and rampant consumerism are going to keep China's growth engine humming for years to come: if the future's so bright, then why does everyone with money have a bug-out plan, two passports and a house in Vancouver, New York or Los Angeles?

If you can't answer that, then you need better sources.

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