DiligenceChina

China’s biggest strength may also be its biggest threat: The Chinese People.

Welcome to the Utopiacalypse.

China’s middle class was the great hope of all the architects of Chinese economic development through the ages (since 1972). If they could rise from the cold ashes of every failed reform and misguided 5 year plan to witness the wonders of 2008 Shanghai, they would praise their ancestors for the miracles that their labors have wrought. This economy has surpassed every rational hope and padded, overly exuberant estimate.

And that’s how the trouble started.

Because now China has a middle class - and two things are true about middle classes everywhere and every time.

1) Middle Class wants more.
2) You screw with Middle Class at your own peril.

What does the Chinese Middle Class want? More than anything, it wants parity with Middle Class all over the world. For centuries rank and file Chinese have been told that they are culturally, intellectually and spiritually superior to anyone else on the planet, and that the moment their day in the sun arrived they would take their proper place in the world. Well, their day is here. And they don’t want everything their international colleagues have – they expect it.

What does this mean for policy makers in Beijing? 2 sticky issues.

Education. The Chinese have a mania for educating their kids. This is already part of the common folklore about China but I just want to make sure that we’re all on the same page here. Chinese people really, REALLY care about education. It’s not an urban myth, outdated quirk or exaggerated stereotype. Education is considered the road to success and respectability in China.

Now, it just so happens that education policy – particularly for the very young – is a cornerstone of Party plans to stay in power for the long term. Next to the Army, the public school system is probably the most powerful lever of control available to Beijing policy makers.

If you’re the guy at the top of the education policy food chain, you are looking at 3 pretty stark choices:

1) Reform you entire system from the ground up – starting with kindergarten – to reflect the needs of an urban intellectual elite that you don’t really trust in the first place.
2) Maintain a dual system – free public schooling for the masses and a free-wheeling system of elite private schools for the Princelings – often run by foreigners.
3) Ban or sharply curtail private schools and maintain the ‘level playing field’ – and control over education of the middle class.

Which one are they going to go with? If recent history is any indicator, they will probably go with some hodge-podge, slapped-together hybrid of conflicting rules and unenforced edicts. Policy makers have already taken a few timid steps towards limiting the growth of foreign-run school — but have been running into trouble. For a while it seemed that the “overseas passport only” rule was helping – but then it turned out that China was one of the few nations where satisfied, patriotic people would actually switch citizenship to get their kids into a better school. If that isn’t possible, they can always ship the little princes off to Canada or the British countryside for a few years.

The nation’s greatest pride may become its greatest peril. If the government doesn’t give its free-spending, jet-setting, barely-contented middle class access to top-notch education, they will either send their kids abroad or take to the streets. If the government reforms education for all, then it loses even more control in the countryside – and the factory floor. If only the elite get good education in the new China then you are moving backwards — to a China where only the elite get a good education.

Media. I Want My MTV – or Prison-Break Season XII. Pirated DVDs and blinky bootleg satellite HBO aren’t cutting it anymore. Chinese yuppies want to take their network global. Everyone likes letting it drop that they still have friends from school in Boston or California. It won’t be quite as cool to mention that you couldn’t watch the video or use the right IM service because it was blocked in China. (Ed note: This site is presently blocked in Mainland China.)

The media access issue goes beyond Youtube and Flickr cruising. Xinhua has already anointed itself the sole provider (or at last final arbiter) of all financial news disseminated within China. Yeah, they haven’t abused or restricted most types of data or sources so far – but up until now the economic news has been uniformly encouraging. There seems to be a little variance between the official inflation figures and the whisper numbers on the street – but the real fear is that we could see China backslide to the bad-old-days of propaganda stats and opaque reporting. Old China hands remember stories of locked-down information flows requiring analysts to count coal-cars entering Beijing to make estimates about Chinese economic activity. Big chunks of the Chinese economy are still state run or controlled (including, to some degree, the oil companies, airlines, telephone carriers, and even the financial press’ darlings Huawei, Lenovo and Haier) – and Beijing will apply all kinds of effective pressure on their managements if the situation seems to call for it.

Even if the international finance machine gets the numbers it wants the way it needs them, China’s media & censorship policies are still looking ludicrously out-dated. When China was the Poor Man of Asia the government could justify a Stalinist information policy. But as Shanghai sharpies and the rest of China’s middle class get set to muscle their way in to foreign markets, lack of basic data is going to put them at a severe disadvantage. Chinese businessmen who have never seen a viral video on YouTube or read on editorial about western attitudes towards Tibet can still buy western brands and equipment – but they will have a considerably harder time selling their products or services overseas. Foreigners who come to China to do business have to accept culture gaps and blind-spots. Westerners shopping in their local malls don’t.

If China wants to compete in international markets with its own brands and intellectual property, than it is going to need every resource and advantage it can get. Right now media access and outdated education policies are playing to the strengths of giant Multinational Corporations (MNCs) who have the wherewithal to hire big teams, train (or retrain) them thoroughly, and supervise them with an international coterie of experienced managers. If China wants to climb the value ladder, it’s going to have to build a stronger foundation to support its efforts.