DiligenceChina

Is China an international superpower? The stock answer among Chinese people is that the PRC is becoming an important global economy, but won’t be a superpower any time soon. The real news at the end of last year is what did NOT happen.

Five easily overlooked non-events at the end of ’06 that point to a Super PRC:

1) China blows up a satellite, explains it to advanced countries, talks about peace. Sure the explanation was lame – like Ronald Reagan naming a missile system “the Peacekeeper”. But the fact that China felt the need to share it’s feelings with nations like Japan and the UK indicate just how far it has come. Boys with toys in the military never really ever grow up, but it’s significant that the guys in nice suits took time to have a heart-to-heart with the international media. Being a superpower means ALWAYS having to say your sorry – even if you are sorry that other people misunderstand your benevolent intentions.

2) Hugo Chavez gets snubbed at the 21st Century Socialist Cotillion. Not only did China not ask Venezuela to dance, but didn’t show up to the party at all. Hugo pretended he liked that Iran better anyway, but Columbia told everyone Chavey was upset and cried himself to sleep that night. Just a few years ago, China would have been the belle of the ball, but now has been heard mumbling, “I can’t believe I used to hang out with those guys”.

3) Internet crashes and stays crashed for going on a month now. Porn starved ex-pats don’t talk about a conspiracy…much. Xinhua acknowledges a minor problem – somewhere on page 16, between the minutes of the Yunnan Tractor Manufacturer’s Association meeting and the reprint of the Shandong party associate vice-secretary of waste management’s speech. Westerner’s tut-tut about China’s information policy, but consensus was that it was more force-majeur than sinister black op. A non-event yawner in 2007, this would have been an Orwellian cover-up/media circus just a few years ago.

4) Chinese telecom workers taken hostage in Africa. The African street has been slowly falling out of love with Chinese investment, which is less and less about socialist fellowship and more about taking resources out of the ground and putting them on boats. What’s old is what’s new as African populist leaders grumble about promised opportunities not materializing, exploitation, and spreading influence. Is the PRC trying to have it all – love and oil? Been there, done that. Pure kryptonite.

5) China and Japan quietly start patching up their differences and decide to coexist as good neighbors rather than old enemies. This is a bitter pill for old-guard nationalist types on both sides, but Beijing seems to be deciding to stuff this particular genie back in the bottle. The new Japanese PM, Shinzo Abe visited Beijing in October and the People’s Daily wasted no time heralding a thaw in the 5 year-old deadlock between the neighbors. Bitter historic antipathy is a luxury that Superpowers can’t afford – unless it’s helpful in the short term. Right now it isn’t.

Most Chinese people still don’t like saying the ‘SP’ phrase – and are quick to qualify it as economics rather than politics. But there’s no denying that China is, in many cases, behaving more G7 than the G7. It may be too early to talk about China as a true global leader, but Chinese politicos have been quietly distancing themselves from the non-aligned gang it used to run with. As those heady days of the “burgeoning economic miracle” give way to real concerns about building permanent structures and sustainable economic growth, China will be focusing more and more on its relationships with other wealthy nations and organizations. It’s been a long time since China stopped asking for aid funds and started distributing them – but now Chinese reps at high-profile international meets are starting to dispense advice and policy inputs as well.

Chinese people still like to hem and haw about China as a World Leader, but this is probably a case where the environment has the final say. Powerful nations don’t become supers because that’s their policy – it’s because they are the ones who foot the bills and support the global systems & structures.

Implications for Western investors and managers:

1) China may not have arrived, but its well on its way. The PRC has mapped out its future and is drilling down to the details on issues like corporate governance, foreign investment and rule of law. From here on in, changes are likely to be evolutionary – not revolutionary (no pun). This is pretty much as good as it gets. If you’ve been waiting on the sidelines for China’s policies to become clear, it’s time to make your move.

2) China will be charting its own course from here on in. Systems and methodologies will be analogous to processes back home, but the days of blindly mimicking western products and services are over. The same goes for legal and governmental procedures. Overseas Chinese and returnees aren’t given the red-carpet treatment they once received. Chinese policy-makers, both in business and in government, are more concerned with what works here in China – not in the US or Europe.

3) Leverage is diminishing. China isn’t desperate for technology, funding or markets anymore. An international brand name or US university diploma still counts for more here than it does in the west, but not nearly as much as in the past. Don’t make open-ended deals based on your ability to control technology, distribution or brand names. The best deals in China are close-ended, highly structured and clear.

4) A confident China isn’t necessarily a belligerent competitor – but it isn’t necessarily a loyal partner either. I know people who keep waiting for Chinese companies to learn the benefits of western-style best practices. It may not ever happen. Many Chinese managers are becoming decidedly cynical about imported business methodologies. Western managers who come here waiting for Chinese corporates to “get it” may be the ones missing the real point. Chinese managers aren’t (necessarily) incompetent at executing western strategy – they may be adequately carrying out a completely different strategy.

5) China’s centrally directed economy isn’t an accident waiting to be cleaned up. It’s bedrock PRC policy, and as far as Beijing is concerned is the only viable option for China Inc. Many Americans still seem to be waiting for a vengeful Market to wipe away government control and centralized planning. They’ll be waiting for a very, very long time. Learn to live with SOEs or learn to live without them – but stop closing your eyes to the reality of China Inc. True privatization is simply not in the cards.