We’re probably approaching that point in the US.  Christmas has some potential to dissappoint, and if we lose the auto industry to uncontrolled bankruptcy and collapse then that could also leave a mark.  But by February or March, this recession isn’t going to be about statistics — it will be about sentiment.  If people believe that things will get worse, then they won’t spend or invest — and then things really do get worse as deflation feeds upon itself and devalues real assets. 

In China, sentiment is still relatively good — though it’s showing signs of wearing thin in spots.  That’s why I was a little suprised to see CNN poking the bear with a stick this morning — and trying out their own completely original spin on the recent protests and rioting in Gansu.

CNN’s headline was, “China Fears Job Riots”

BEIJING, China (CNN) — China’s job outlook is “grim,” and the global financial crisis could cause more layoffs and more labor unrest until the country’s economic stimulus package kicks in next year, the nation’s minister of human resources and social security said Thursday.

Xinhuanet, the official government news agency took a different approach:

30 arrested in violent protest in NW China’s Gansu, dozens injured

    LONGNAN, Gansu Province, Nov. 20 (Xinhua) — Police arrested 30 people involved in a violent protest in northwest China’s Gansu Province, a local official said at a press conference here on Thursday.

    A group of 30 petitioners, who opposed a resettlement project in the Wudu District of Longnan City, initiated the protest on Monday. Eventually, more than 2,000 people became involved.

 Ok, it’s no surprise that XinHua missed the jobs-riot angle, but what about the New York Times?  They’ve been anti-China longer then they’ve been anti-Bush, but even they seemed to dropped the ball on this one. 

And you’re right.  China might be the answer for what ails the B2B service sector in big US cities.  But the question has changed.

China isn’t about cheap manufacturing anymore.  It’s about high-level business services and market expansion.  Except this time, the Chinese are buyers of the business services – and they are the ones expanding their markets to include the US and Europe.

More and more high value-added business services like lawyers, accountants, management consultants, software developers, and designers are going to be forging cross-border partnerships with their opposite number in China.  In a typical arrangement, both sides will actively develop business in one-another’s markets.  The top guys from BOTH offices will service high-profile clients in NY and Shanghai, while the Chinese office can bulk up its team with plenty of skilled, moderately-paid staffers who can do the basic jobs just as well as their American counterparts – for about 60% of the cost.  Every high-value business service follows a similar structure – a few very expensive rainmakers out front, and dozens of overworked college grads in staff positions making the bosses look good.  Whatever the field, there is always a back-office.   Settlement clerks, AR managers, paralegals, logistics, researchers, bookkeepers, accountants, designers, and coders – this is the army that keeps modern law, accounting, advertising, and consulting practices going.   New partnerships will develop to take advantage of the lower costs – and market potential in China.  Chinese partners are going to want access to mid-range clients in the US.  

This is a whole different ball game from OEM factory work or old-style Sino-Western JVs.   Westerners walked into those agreements like the fat rich uncle coming to a poor relative’s wedding.  We just wanted to get in and out as quickly as possible without getting ripped off too much.    

This time both sides have more to offer – and more to lose.  Westerners have to know what to ask for and how to structure this new kind of partnership.  Your list of deal points and variables will now include:

• Marketing partnership
• Your access to China
• His access to US
• Staffing – how you’ll use it as a competitive advantage 
• Quality control
• BizDev responsibilities

If you have a business plan that doesn’t include aggressively marketing your top-end services to businesses in major Chinese cities, then you have to scrap it and start over.  Marketing B2B services to China just became a much higher priority for business owners and senior managers in the US.  China may end up being one of the last markets standing – but it takes time to develop.  Start looking at your options now.
—————-  

Please help with a research project by taking a brief, simple & anonymous survey about US-Mainland negotiation. http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149

 My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on ChinaSolved.com , ChineseNegotiation.com and DiligenceChina.com .

http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149

The old stories are the best stories, but sometimes you have to pull back and skip over some of the details. 5 years ago the glossy newsweeklies were gushing about a China that would leapfrog the west. Now they are talking about the China that will outlast the west. 

The engine of China’s growth is about to get throttled down significantly, and when it comes back to smooth ground it’s going to be running a lot cooler than double digit GDP growth.  Look for 7.5 to be the new 9.  No more tax breaks for FDI, no more SEZs – except for the new ones that will pop up deep inside the country.  People will talk about the ‘good old days’ of the Wild Wild East.  Yeah – some of you are about to become ‘nostalgia guy’ without even knowing it.  There’ll be plenty of opportunities left in China, but first mover advantage is pretty much played out.  It’s organized and citified now – like all great gold rushes after they peak. 

But 7.something sure beats 1.something – and that may be the middle side of average for US GDP growth for a few years yet.  I’m no economist, but I’m figuring that

A) We were spending off our curve in the first place,

B) New taxes will be need to pay for the bailout and basic services 

C) Interest rates will rise (to service debt for the bailout)  

D) Regulation will intensify

E) Greater international influence will be brought to bear on US regulators.

All of this stuff is going to drive down our natural GDP.  (Natural GDP is the rough equilibrium rate of speed that the economy would move at over long periods of normal conditions with no external shocks.  It never, ever happens, but it tells you what normal might be.  Right now it’s around 3%.  Clearly, though, the number itself doesn’t matter.  The direction matters.  Our Natural GDP just got a lot more constrained.  US business, in the midterm (10 years), will have much less economic activity than it did in 2007.  That means fewer buyers, fewer sellers, and fewer middlemen.  If that group includes you, it’s time for some deep thinking.

That’s what brings us back to those gleaming Chinese towers on the cover of Time.   Well, they’re going to be looking a little tarnished and gritty in the near future, but they’ll still be there.  China will only be taking a couple of quick jabs from this.  They’ll fall to a low of 5 or 6% growth during their worst quarter and come quickly back up to 7 or 8% — where it will stay.  Their world isn’t going to fall apart.   They’ll be back – slower and more expensive.  But that’s ok with Beijing.  NY and Europe, however, are going to look like very, very expensive places to operate – especially if there are no more customers.  

China won’t outperform the West – it will drop less than the west does, and eventually get back on a stable, albeit slower, path forward.   We’re all going down the same hole together, but China is only going to fall half as far.    And once we all get up, the US and Europe will be limping and broken.  China will only be banged up a little.  

China is set to become one of the world’s last big buyers of high value-added goods and services.  They are going to achieve this in a very traditional Chinese fashion:  quietly outlasting all the other players who were too busy exhausting their own resources to notice.

US owners and partners with a little downtime on their hands should glance over their preliminary marketing plan for China – and make sure they have one.  They’re going to need one.  

Look out past this week’s headlines.  Forget the statistics and details for a moment.  What are the Big Trends that we’ll all be living with for the next 10 – 15 years.  Stop fretting about the next 18 months - look at what could happen.

A Smaller, Smarter USA

The US takes its lumps.  Obama champions a more moderate, mature, forward-looking America.  Look for GDP to be slashed.  Higher interest rates will be needed to pay for the excesses of previous generations (including ours) so consumption will be lower.  Taxes will be higher and there will be more regulation.  We’re looking at a lower-growth scenario for the next 10 years – and that’s a best-case scenario. (If Obama or the G20 fail us, we could be looking at a more serious recession or even a depression – but that will moderate our spending as well.) We’ll be living within our means – one way or another – for a while at least.

China also goes to a slower-growth scenario – leveling out about 3% points lower than it has been.  Look for 8% to be the new mid-range target going out a few years.  (The Economist says it might be 7%.)  This isn’t necessarily a bad thing, but it’s going to be different. 

The Revenge of Sarbanes Oxley

Both sides of the water are likely to be affected by much higher levels of oversight, regulations and bureaucracy.  The weekend’s G20 is more an agenda-setting introduction than a decisive action-plan. The US disdain for regulation AND coordinated international policy is about to give way to satisficing belief that ‘bad law is better than no law’.   Europeans and Chinese negotiators won’t ever agree to much – but they will converge in their belief that today’s problems are due to the US of yesterday.  All balls, no brains.  Since the new Democratic administration is likely to be of the same mind, the only question is how soon and how bad the new regulatory regime will be. 

 Best-case scenario?  The UN gets a new big-budget council or committee and we all promise to be more careful.  Worst case?  Trade war, bitter recriminations about currency and policy — and the cold long winter of trade restrictions and protectionism.  Most likely:  a multilingual Sarbanes Oxley on steroids that makes certain types of international investment and credit very difficult but leaves most of the international regulatory landscape unchanged.

 Globalism threatened?

There’s also a good chance that both countries get more inward looking – at least for a year or so.  Once the recovery starts, there will be plenty of opportunities close to home – and very little credit to crowd the field.  In the long term, the growth will be in China, but it looks like things may be shifting to 3+ cities (3^rd tier or lower).  These markets will be harder to run from offshore, and local Mainland firms will develop cash cows that can fund operations and R&D for years.  Both sides are likely to develop / re-flate their own domestic demand before looking offshore for a while.  

But the mid term trend is going to shift.  Look for western companies to start actively seeking Chinese partnerships.   This time the westerners are looking for rich markets instead of cheap factories.  If the year is 2014, you’ve got your sights set on Fortune 500 and are looking to build out your first overseas market presence, there’s a great chance you’ll be looking at establishing a Shanghai beach-head.

The Chinese, on the other hand, are going to be ready to take their act on the road.  This time, watch services and niche hi-tech.  Outsourcing is going to look good in higher value-added areas.   Plenty of those hip little JVs that formed up a few years ago will be looking to compete for business in big US cities, backed up by plenty of well-trained, cheapish Chinese work forces.  What kind of services could start showing up in American offices 5 years out?  Design. Internet. Engineering.  Marketing.  Media. Advertising.  Fashion.  F&B… Look in the classifieds in That’s Shanghai.  Any one of these people could be going international – back at the US – in a few years.  (Yeah – NY and San Francisco may soon be ranked alongside China’s second cities.)

I’m also watching what China is doing with smart phones, tiny computers, and other cool screen-based electronics.  And you had better watch China’s electric car initiatives.  Could turn out to be nothing – but if they get mass production ramped up before anyone else – damn.  Damn! 

Which brings up the question of energy.  China needs better access to energy too, and pollution is getting bad here.  They have the political will to make it happen, too, and that could make all the difference.   A decade out, the scene is now set to see China end up with two or three key technologies like good batteries, electric cars, a new generation of hand-held devices, or something good in solar.  

The good news?  China is going to get serious about IP and contract law.  The bad news?  They’ll be the ones collecting the royalties and license fees.

The NYTimes wrote about new product testing in the 11/13 edition, titled F.D.A. Detains Chinese Imports for Testing:

Candy, snacks, cereal and any other products from China that contain milk will be detained at the border until tests prove that they are not contaminated, the federal government announced Thursday…

The F.D.A. routinely blocks imports of individual food products, but it is rare for the agency to block an entire category of foods from a particular country. Last year, the F.D.A. blocked five types of farm-raised seafood as well as vegetable protein from China because of repeated instances of contamination from unapproved animal drugs and food additives.

“It’s going to jam the ports up all up the supply chain,” said Mr. England, who represents food supply companies.
…
As a result of the earlier alerts on seafood and vegetable protein, most private laboratories that perform product tests for melamine already have long waiting lists, Mr. England said. And the F.D.A. takes three to four weeks to review submitted tests, Mr. England said.

The effect of the alert will probably be long-lasting, Mr. England said, because importers must prove that each and every shipment is free of contamination.

“It’s impossible to get off the alert list,” Mr. England said.

There are a few warning signs here. 

1) The US FDA will see this as a China problem that requires a China solution – namely targeting all Chinese imports with specific inspections and tests.  The Chinese will almost certainly see it as aggressive trade tactics – particularly after Chinese authorities have already taken some kind of action (regardless of what that action is). 

2) It could turn into an accretive regulatory nightmare, with one set of contradicting standards and regulations overlaid upon another every time a new safety concern arises.  This is compounded if testing labs can’t handle the workflow and there are long delays.  Chinese customs may reciprocate. 

3) If the flow of Chinese imports into the US is seriously crimped, look for “unfair product standards” to become the Chinese trade battle-cry, just as US protectionists once tried to link “unfair human rights standards” to trade status (remember MFN debates)?   Proponents of tougher Chinese product standards and broader enforcement clearly have a point – but they had better realize how political the topic can become.  Hopefully, they will cover their bases and do a comprehensive review on the safety and qualify standards of imports from other countries as well.   They should also make sure that their new regs are enforceable and streamlined.

One man’s crisis is another man’s opportunity, and it’s time for smart managers to look beyond the gloom and misery and try to see through to the other side of this economic cycle.  The question you should be considering – even as you struggle to keep your company afloat – is what will the China market look like when this is over? 

Let’s make some assumptions, just of the sake of discussion.  Let’s say that China goes through 3-4 quarters of sub 8% GDP growth.  The US was hit harder and earlier, and it is probably within a quarter or two of hitting bottom.  It’s possible that the US will start to recover earlier than China – albeit off a much lower base.

What will this mean to US investors and international companies with China interests?  18 months from now, we can expect to see a few new developments – and some existing trends reinforced.

Existing trends that will be accelerated by an economic slowdown in China:

1) Tougher competition within China.
This was happening anyway, but a prolonged recession will fulfill the prophesy of China as a cauldron of capitalism.  If you think that China was a competitive environment last year - just wait.  There will be fewer companies around – but the ones that survive and prosper in a recession will be lean, mean, and nimble.  They will fight hard to hold on to their domestic market, and may look overseas if the US or Japan recovers first.   A prolonged recession in China will act like corporate shock therapy – and the winners will finally be ready to take their act on the road and become truly global competitors. 

2) A sparser corporate landscape.
We’ve already seen a string of bankruptcies in the manufacturing sector, but that’s just the beginning.  As demand collapses around the world we can expect to see more companies fold, pull out of China, reduce their presence or delay expansion plans.  Medium-sized international companies with one or two struggling branches in China may decide to focus on their home markets.  There will be fewer customers out there for B2B services.  For the first time, we may see a drop in the number of new business registrations from overseas. 

3) A devastated manufacturing sector
China is going to be putting a lot more emphasis on services and quasi-services (like software and IP – which you may buy in a package like a manufactured product but really function like a service).  The manufacturing sector was becoming less important before the slowdown, which is natural for a country at China’s point in its development.  Beijing’s game plan has been to climb the value chain and develop homegrown IP and technology.  Don’t expect to see all the shuttered toy & textile manufacturers to reopen when demand picks up again. 

4) A more demanding middle class consumer.
This is another trend that was already developing before the recession hit.  Quality and value are going to be more important than branding or status.  There will be fewer aspirational & lifestyle driven purchases and more attention to quality, function and warranties.  Chinese companies were already ramping up their QC before this, and now domestic customers are going to put enormous pressure on Chinese businesses to deliver higher quality and better value.  The companies that can meet the needs of the more value-conscious Chinese consumer will be well positioned to go after niches in developed overseas markets.

5) Fewer expats
Localization is working this time – because now CFOs and not HR managers are driving it.  Chinese managers are moving up the corporate ranks in multinationals – and an extended slowdown will force them to hone their skills and become more competitive.  Expat packages just aren’t cost effective in this environment. Besides, the status that foreign experts enjoyed in China has been tarnished by the gross mismanagement on Wall St.

New developments:

6) Trade policy may become more defensive
Beijing isn’t going to try to defend every company, but it will step in to make sure that key firms in pillar industries stay afloat.   Look out for trade tensions with the US as the Democratic congress starts talking about exchange rates, product safety, human rights and anti-dumping rules.  The new contract law makes it very hard to fire people – and we can expect to see Beijing apply this law unevenly – with foreign firms finding it particularly difficult to shed large numbers of idle workers.

7) A Chinese managerial class embittered by layoffs, job cuts and hiring freezes.
For the first time, it will be hard for experienced Chinese managers to find jobs.  Layoffs and closed branches will introduce Chinese managers to the bitter reality that they can lose their jobs even when they’ve done nothing wrong.  China’s best and brightest managers used to rank multinationals as their top career choice, but now SOEs and entrepreneurial start-ups will enjoy a positive re-rating.

8) More government controls – but few direct bailouts.
Beijing is trying to spend its way out of this thing – and it will work to some degree.   Banks will focus lending on key state industries (even more than they already are).  It will be hard to lay off staff – particularly if you are a foreign firm that isn’t facing bankruptcy.  Infrastructure and development programs will make Beijing an even more important stakeholder than it is now.

9) Cash-starved entrepreneurial class will be smaller – but much tougher.
No bank loans, no cash flow from operations, and limited VC spending.  The ones that do make it will be tough as nails.  We will likely see roll-ups and mergers in fragmented industries that don’t yet have dominant players. 

10) Pent-up demand & higher savings rates
When this thing finally does end, look for massive consumer spending after the long winter of recession.  The Chinese consumer used to be famous for high savings rates and cautious buying – and we can expect to see a return to that trend.  Beijing is determined to shore up the rural and semi-rural regions far from Shanghai’s gleaming towers.  Domestic Chinese companies are best positioned to service these emerging markets.  When the purse strings start to loosen again a few quarters from now, spending patterns may favor local brands.

————–
Western economists have long maintained that recessions can have a positive long-term affect on corporate performance (in some cases) as marginal companies fall by the wayside and allow stronger competitors to build up market share.  One of the ironic twists of the global recession is that it may set the stage for local Chinese corporations to raise their skills and leapfrog multinational leaders.   Keep a close eye on the auto and electronics industries for Chinese upstarts that can change the rules of the game.

That’s why yesterday’s US$586 billion bombshell  is going to have a strange double-edged effect on Chinese consumption.

On the one hand, half a trillion bucks in infrastructure and services is going to help protect China from the worst aspects of a global downturn.  China should be commended for acting quickly (by Chinese standards) and delivering a huge wallop (by anyone’s standards) in the fight against economic dissolution.   It’s still not clear exactly where the money is going, but we do know that Beijing is targeting infrastructure, social services and Sichuan (still reeling from that massive earthquake).  It wouldn’t be surprising to find that much of the funds are going to the rural and semi-rural interior of China that never got its full share of China’s boom – and now looks vulnerable to the worst aspects of a deflationary bust. 

But – and yeah, you knew there was a BUT coming – this is exactly the kind of shock that grabs ordinary Chinese and shakes them out of their dream-world of everlasting prosperity and economic expansion.  Chinese commuters are unfolding newspapers with a rmb 3.8 trillion headline.  Sure its good news - but it’s the kind of good news no one wants.  Like ‘total remission’ or ‘we’ve found your child’ or ‘your job is safe for now’.   It’s only good news if you acknowledge just how bad the situation was before.

And that’s what we’re all waking up to this brisk Monday morning in Shanghai – and around the world.  The good news is that the planet’s last engine of economic growth is getting a serious overhaul.  The bad news is that it needed one.  NY and San Francisco and London may consider that obvious – but Chinese consumers did not.  Now they do.

What can we expect from rank & file Chinese?  Look for a pretty sharp shift in 3 areas.

• 1) Outlooks will darken.  Chinese people tend to swing from unreasonable optimism to inconsolable despair pretty quickly.  They don’t waste a lot of time in the cautionary or ambiguous territories.  Yesterday there was no problem – today there is no hope.  Oversimplifying and over-generalizing?  Yeah – and I apologize if I’m offending anyone.  But those who have spent a lot of time in China know what I mean.  We’ll be looking at a darker, less optimistic China from today on.
• 2) Spending will plummet.  Consumer spending, that is.  Middle-class Chinese in the 20s and early 30s are going to start sounding a lot more like their grandparents’ generation.  Save, save, and save some more — because no one knows what the future will bring (but it will probably be awful).   The free-spending MWM (Mainlander With Money) is a newcomer to the Chinese landscape, and now his predecessor, the Chinese Saver is likely to overwhelm him again and drive him underground.  
• 3) Attitudes towards the West (in general) and the US (in particular) are likely to grow even more ambivalent and strained.  Sure, everyone loves the fact that we elected Obama – but that was last week.  This week you’re still making us poor, ruining our economy, attacking our products, and stifling our growth with environmental double-standards.  The fact that it’s all true is incidental.  What was always an undercurrent in mainstream Chinese thought is going to start popping up more and more in polite conversation.  The Chinese were all for globalization and economic openness when it got the cash-register’s ringing, but they will be a lot less friendly when it means getting sucked down the drain-hole of a global recession.  (Before you go tut-tutting the unsophisticated, ignorant Chinese, think back to Pres Elect Obama’s promise to stop US companies from ‘exporting jobs to China’.  Protectionism sells well on both sides of the Pacific).

I’ve said it before.  The good news is that you already know the bad news.  China’s in this thing almost as deep as the rest of us – and it has much further to fall than anyone else.

Americans are happy with their new President Elect, Barack Obama.  As for the rest of the Democratic administration that now controls both the House of Representatives and the Senate, we’ll have to see.  When Democrats control this many levers of power in Washington their first impulse is to move pretty sharply to the left.  Unfortunately that will put US leadership squarely at odds with Chinese leadership.  On the other hand, the Obama administration is going to be so beset with domestic crisis and foreign threats that China is looking like an old, trusted partner.  Yeah, times have changed that much that quickly.

Obama comes to office weighed down by enormous challenges and responsibilities – and he will doubtless focus on the US economy and Iraq first.  But those of us with business interests in China are already anxious about how the new administration will deal with the subtleties and peculiarities of managing relations with the Chinese Communist Party.  We know from hard experience that good intentions mean little when it comes to US-Sino relations.  Small slips can lead to violent schisms.  Sure, the policy statements will be grand and ambitious.  But when House Speaker Pelosi or Obama’s still unnamed cabinet officials get in front of an open microphone, how much damage will they do until they figure things out and learn to deal with China?

Put another way, what can go wrong in the first 100 days?

            Territorial issues.  (Note:  DiligenceChina has found itself on the wrong side of China’s fire_wll  a few times in the past, so we’re gonna be kind of oblique here.)  The Island and the Mountain Kingdom.  Westerners constantly under-estimate just how sensitive these issues are to Beijing, and Pelosi has already staked out a position that really annoys the party faithful in China.  It disturbed Beijing when she was a relatively minor player – now that the Democrats are running things, a few off-hand comments could cause major negative reverberations for years to come.  Sure, the grown-ups on Capitol Hill will craft a fine set of policies – but one or two stupid remarks to the media will undo years of diplomatic and commercial efforts.

            Human rights.  Bipartisanship and ‘reaching across the aisle’ in Congress sound great, but it’s a Democratic administration now and they are going to move the political and diplomatic center of the nation to the left.  That means that human rights are back on the agenda.  Look for the Dems to celebrate the dismantling of Guantanamo Bay detention facilities with a holier-than-thou attitude towards human rights around the world.  Every year the State Department issues its boilerplate condemnation on the state of human rights in China, and for the last few years they have been roundly ignored by just about everyone.  Well, not any more.  You may not care, your Chinese counter-parties may not care and your partners, clients, staff, and suppliers may not care – but that’s not really the key to this thing.  A Democratic congress is very likely to put a spotlight on the China human rights debate again.  

            Ignoring China.  Ironically, the single biggest danger facing the new administration vis a vis China is overlooking it completely.  Those of us involved in Chinese business tend to see the US-China relationship as vital, valuable and high-maintenance.  If you are President Elect Barack Obama’s transition team, however, you probably view China relations as ‘not broke’ – so they don’t require much attention.   With the economy, Iraq, Afghanistan, Russia, Georgia, climate and a host of other fires to put out, the transition team may put China policy on the back burner and not get around to it for months.  Sure, this seems like a great option for you and me, but the old guys in Beijing are apprehensive enough about this administration.  We all know the drill about how important relationships are to the Chinese.  It’s true on the managerial level – and it’s even truer on leadership level.  The new administration ignores China at our peril.

            Blaming China for unemployment and other economic woes.  The Chinese party line is the US caused the global recession through greed, irresponsibility and lack of oversight – but they have pretty much held their tongue and avoided criticism.  If Democratic leaders start blaming China for stealing US jobs (as happened on the campaign trail) or undermining the economy, we could see things get a little nasty.  If it is accompanied by trade restrictions or refusal to allow Chinese corporates to buy US firms, we could find ourselves in an ugly little tit-for-tat spiral of trade barriers and bureaucratic resistance.

             Expecting too much from China.  On the other hand, the Democrats may try to embrace China as their newly discovered rich uncle who they expect to save the day. China has little interest in doing this – and will resent being asked to pick up the check to a banquet it wasn’t invited to - especially when it’s own economy is having problems.

US-China Relations – Long Way To Fall

Sometimes those of us living in China are so close to the daily tensions and challenges of cross-cultural life that we miss the bigger picture.  The China-US relationship is one of the most successful in the world – one of the few true globalization success stories we have ever had.  Relations are better than “close” or “cordial” or “special”.  They are stable and professional.  Those are the ones that spell good business potential.

So yes – that means there’s a long way to fall.  The outgoing administration was so busy spreading the benefits of American enlightenment and prosperity around the world that they let relations with China develop intelligently, consistently and fairly.   Hopefully the incoming administration will be so busy cleaning up at home and abroad that they won’t have time to wreck relations with China for a while.  But if you Google Pelosi, China you will see what I mean. 

Going forward, trouble spots to watch for.

• Human rights will come back into the vocabulary.  The Republicans are rapacious and aggressive but the Democrats are self righteous and passive-aggressive.  They will trot out the State Department’s annual warnings about human rights abuses, religious oppression and freedom of speech issues.  Yes, they will eventually learn that Chinese people don’t really care about any of this.  No, it will not stop them. 
   
• General protectionism.  Democrat policy makers tend to lean towards more protectionist policies because they think its better for working households and unions.  Also, we’re in a downturn.  The good news – it’ll give you a ticking bomb to use in cross border business negotiations. (’I hear Pelosi wants to shut down ALL US-China trade by 2012. Let’s do this thing NOW.’)  The bad news?  Pelosi may really want to shut down all US-China business by 2012.
   
• Product quality and inspections.  If they target China specifically, and they almost certainly will in word if not deed, then it will lead to a nasty spate of bureaucratic recriminations.  Make sure all of your paperwork is in order and your China supply chain is bullet-proof.
   
• Immigration and visas.  Better, probably.  It can still be a hassle for Chinese to get into the US, but that has apparently been easing lately anyway.  If there are flare-ups on human rights or border issues, look for visas and immigration to become a hassle on both sides of the Pacific.  
   
• General engagement.  The big news here is that we will start using the word ‘engagement’ even more than we do now.  Aside from that, you can expect a fair bit of ambiguity and tension as Washington’s greater and lesser angels battle for influence.  Obama would probably like a strong, stable, strategic relationship with China.  Pelosi will have to get on board with the new program, because if she continues on the trajectory she has set for herself there could be problems ahead. 
   
• Competition from Mexico and Lat-Am.  Oil prices have come down and with demand this low no one is really thinking about expanding production and processing.  Still a long term trend, but probably not a big deal for most of this political administration.  Democrats may play the Mexico card in their bluster, but as long as oil is cheap this one is a non-starter.
    
• Media interest.  China is pleasantly boring these days.  Iraq, Afghanistan, Pakistan, Russia, mid-east – all big stories.  Lots of ‘how will Obama handle this, how will Obama handle that…” unless China’s economy does either really well or really badly, there are no pressing hot-button issues at the moment.  (In China, that’s a good thing.  Half the China headlines in 08 seemed to be natural disasters or product safety.)   The caveat here is that House Speaker Pelosi has the ability to turn an instant spotlight on China if she wants to. 

The odds are the Pelosi will moderate her anti-China rhetoric as other issues crowd the agenda.  President-Elect Obama barely referenced China during his entire campaign except for a few remarks about lost jobs.  Remember, the Democrats now run everything, so they’ll have to accept the responsibility if they undo the only decent thing the previous administration did right (or at least didn’t screw up miserably).  But the US-China relationship is entering a new phase.  We’ll have to keep on eye on the diplomatic side of things again.

NOTE:  This article is largely based on material taken from a DiligenceChina piece published about 6 months ago.  Much of the older material from this site was lost due to technical problems, but we will try to salvage and repost pertinent material from time to time.  Thanks for you patience.  -editor

In a major economic shift — such as the global recession we’re now experiencing — recovery and transformation go hand in hand.  The bankruptcies are easy to see — new competitive advantages and exploiting new opportunities are not apparant until years later.    These are the forces shaping China’s development over the next 2 years.  When it comes to a recession, it’s not about who falls first — or even who falls the furthest.  It’s about who gets up first.

Here are a few scenarios that may play out over the next few months.

China Inc may dodge the worst of a global downturn by focusing on its own large & notoriously weird domestic market while Japanese and Western industries stumble and fade. China could leapfrog the US on the value chain in specific industries (small-screen computers/smart-phones seem a good bet, but I hear green technology is also interesting). If they ever learn to brand and market they stand a chance of penetrating western markets towards the top of the food chain and then exploiting the toehold for some big market impact. (You listening FoxConn & Shinco?)

US and Western corporates may take advantage of a global downturn to leverage their presence in China and other emerging Asian markets — and dominate 3nd & 4rd tier cities up and down the coast. Shanghai and Beijing will always have too many places to shop, but the outskirts of 2nd cities and smaller villages (sub 5 million residents) tend to have fewer options so it’s low-hanging fruit for an organization that can open branches on a systematic schedule.  I’ve been noticing that some of the new industrial zones have sprouted malls and commercial districts that look a lot like Long Island. The really scary part is that if the numbers work in one anonymous commercial or industrial city then the numbers will work pretty much the same in all of them. If the western economies go dark for a couple of years there may not be any other growth options -  and Beijing would welcome any move that brings jobs and development to the regular folks in the sticks.

Chinese entrepreneurial class may get their first real shot at the big time, as State Owned Enterprises (SOEs) crumble under the weight of skyrocketing fuel & material costs. Mainlanders With Money (MWMs) have grown into senior management positions at the SOEs and they have a completely different agenda from their fifty-something bureaucrat bosses. Private enterprises get all the headlines in the western business press, but government policy has always treated SOEs like the favorite son. It’s going to take a pretty big shock, but if Beijing & the bureau banks ever start letting private businesses borrow money and expand their operations like their competitors do, then it may be a whole new ball game - for everyone, everywhere.

China ‘s pampered business class has long been willing to sacrifice democratic freedoms for nice apartments and a Santanas but that may be changing. No, the Chinese middle class haven’t had backbones implanted. (Ok, that would have been funnier if some intern from the Bush administration wasn’t reading my mail right now.) China has either banned or restricted Wikopedia, various blogging platforms, Godaddy, Flickr, the BBC, technoratti, and Youtube  at various times over the past year – and doesn’t show any signs of loosening control over the media in general – and the internet in particular.  Chinese yuppies have needs - and if those needs are of a fashion or business or entertainment variety, I pity whoever gets in their way. China’s middle class expectations have never been higher and media & press restrictions are starting to cramp their style.