Hello from Beijing

I just arrived in Beijing for a week of visits, meetings, and interviews with friends, former colleagues, and other contacts.

When I worked for the American Chamber of Commerce here (2001-04), I made a point of attending all of our luncheon lectures, in which a guest speaker would discuss his or her area of expertise. The series attracted a range of talent, from U.S. senators to professional athletes, but each shared at least two things in common: 1) they were usually just passing through China on a fact-finding mission or promotional tour, and 2) they had the unenviable task of trying to convince a crowd of grizzled "old China hands" that they were hearing something they didn't already know.

While the quality of the lectures was generally high, the audience would always groan when a speaker broke the ice by remarking, 'Wow, the city sure has changed since the last time I was here!' Such a comment rang so hollow in our jaded ears that, on those rare occasions when I had the opportunity to host such luncheons, I would try to coach the speaker beforehand.

So that being said, let me get the impulse out of my system by stating here that, wow, this city sure has changed since the last time I was here (in 2007).

Happy Thanksgiving!

Today's New York Times has a great piece on China's evolving economy. The country's transition from an agrarian society to the world's factory may have been the "easy" part. China's business model of cheap labor is not sustainable, as manufacturers will inevitably find cheaper alternatives. Maintaining China's robust growth will require innovative products and services. Just ask the United States.

Send Us Your Coal

I happen to know a little something about coal, in as much as I lived across from a building-sized pile of the stuff for three years (1996-99) in Shenyang, China. The coal dust was largely invisible but the first wash cycle of any load of laundry invariably became an inky-black mess. At that time, the global debate on the subject focused on the unintended results of China's agreement to "wash" much of its coal. Coal washing removes most of the surface impurities from coal bricks so that fewer pollutants are discharged through burning. While China's move was seen as an environmental win, its "clean" coal quickly found eager buyers in countries that banned the use of untreated coal and coal producers outside of China bemoaned the sudden glut of cheap coal on the international market.

Their concerns were short-lived, as China's booming economic growth has required more and more energy from all sources, foreign and domestic. China is now a net-importer of coal and the inescapable environmental questions associated with coal now fall back on its chief exporters: the United States, Canada, and Australia.

Because We Said So

I miss the good old days of strident and syntactically fractured Chinese editorials. They are still strident, I suppose, and not above the outright spinning of China's policies, but are increasingly adept at asking pointed questions regarding U.S. fiscal and foreign policy, leaving U.S. officials in an awkward position of having to ask world leaders to 'do as we say, not as we do'.

Playing the India Card

For what it's worth, President Obama has endorsed India's bid for a permanent seat on the United Nations Security Council. There are numerous political and administrative obstacles in India's way, but this signal by the United States puts China in the uncomfortable position of having to argue why the second most populous country in the world should not be so represented.

U.S. and Indian foreign policy are not wholly aligned vis a vis China, but India certainly considers China a rival while the Chinese government assumes that any Security Council votes cast by India would fall in line with those of the United States. This courtship is just the latest in a series of moves by both the U.S. and China to secure alliances in key geographic and economic circles.

A Sign of the Times

China has surpassed the United States as the world's number one energy consumer. The U.S. is still tops in terms of per capita consumption, but developing a nation of 1.3 billion people requires all the energy China can find, be it through oil imports or local wind farms--so much so that the PRC has become a global leader in renewable energy investments along the way.

The correlation between between energy demand and investments in R&D of alternative sources should not come as a surprise to anyone, but begs the question of when U.S. priorities in this area will be recast as matters of national security, to which traditional "market" considerations do not apply.

One, Two, Three, Four...

China has dispatched more than six million census takers to tabulate its estimated population of more than 1.3 billion. This is the sixth census since the Communist revolution of 1949, but the first to acknowledge the fact that huge numbers of migrant workers flock to the country's urban centers in search of work. While that should come as no surprise given the developmental gap between the boom towns of eastern China and the rural interior, such labor flows are complicated by the fact that they are, strictly speaking, illegal under Chinese law.

China's 户口 system requires formal registration of one's household, which can effectively confine an individual to his or her province, even county, of birth. While enforcement is not nearly as strict as was the case from the 1970s to the 1990s, a laborer from Gansu Province, who made his or her way to Shanghai to work on a construction project, would still be excluded from most local government services. As a result, a remittance economy has developed where migrant workers live in crude, temporary housing and send a portion of their earnings to those family members who remain plugged into whatever social programs exist in their hometowns.

Their nebulous legal status leaves migrant workers vulnerable to abuse. For example, a migrant worker would have, at best, limited access to local courts in the event of a wage dispute. While the possibility of re-registering in a new locality exists, the administrative process is formidable, even for highly-skilled workers.

And What is a Good "Netizen"?

H.L. Mencken quipped that a good citizen is "simply one who never says, does, or thinks anything that is unusual" -- and he didn't even live to see the work being done by the Shanghai Information Network Security Association.

10 years ago, the scuttlebutt among foreign "experts" was that the combination of rapid economic growth and advancements in personal technology could not help but profoundly change China's political system. That may still happen, but the CCP has shown remarkable adaptability and a dogged determination to police the Internet (which is not to say that the Public Security Bureau is above traditional means of intimidation and variations thereof).

It's a Buyer's Market

China is no longer shy about its foreign policy, probably because it has never had more money to spend. China's strategy in Europe appears to be to scoop up distressed assets (especially in the transportation and logistics sector) while currying favor among cash-starved governments whose support would be beneficial in any currency battle with the United States.

China as Villain

Battle lines are forming over attempts by China's Huawei Technologies to crack the U.S. Internet telephony market. The story can be read as either that of a homegrown Chinese company fighting its way into the ranks of elite telecoms, or one of a serial patent-infringer that poses a threat to U.S. commercial interests and national security.

On issues like this, I like to take a little from Column A and a little from Column B. You can say that I am hedging my bets, but I know of no "good guys" in the telecom sector. China's record with respect to intellectual property rights is a worldwide joke. At the same time, however, patent-infringement suits are routine among tech companies, regardless of their country of origin. Disputes that make it all the way to a court judgment end in the patent in question being invalidated roughly half the time, meaning that for every patent thief there is an over-aggressive patent holder.**

If, like me, you assumed Senator Lieberman's letter to the FCC about the risks associated with Chinese technology was motivated by special interest money, you might be disappointed by his list of contributors. Congress would not be doing its job if it did not consider the security interests tied up in telecommunications (or rare earths, or transportation and logistics, or aviation, or...). After all, the CIA allegedly thinks creatively along these lines.

My guess is this story has already run its course. In the private sector, tech companies will continue, as they always have, to defend their proprietary technologies through lawsuits. At the government level, however, there is not a lot that can be done, apart from congressional hearings and other grandstanding and dilatory tactics. Both the United States and China are members of the World Trade Organization, which apart from very narrow exceptions, does not allow one member country to prohibit investments by firms from another member country. The devil is in the details, of course, and the U.S. and China are constantly at odds over how the other reads the WTO agreements and implements them.

**My technology transfer professor in law school cited this statistic as evidence of an anti-patent bias among courts, but I countered that an even split in results among plaintiffs and defendants represents the optimal balance in civil litigation. Trials are time-consuming and expensive, and are pursued to the point of final judgment only when both parties are confident of a favorable outcome. Conversely, a party that begins to lack faith in its case will always push to settle the matter out of court, at any point short of a decision by an appellate court. Cases that make their way to judgment may be characterized as a coin flip, and as such, 50/50 results should be expected.

China as Panacea

In 1851, Horace Greeley famously said, "Go west, young man, and grow up with the country," and thereby helped inspire a generation of pioneers to settle the American frontier. Or maybe he didn't. In any case, it was sage advice, and is no less applicable today. I might just tweak it as "Go west until you hit 南京西路."

That is easier said than done, of course. Not everyone can seek their fortune abroad, but I can't quite laud the entrepreneurship of a school superintendent in rural Maine who is trying to cash in on the "China" craze as best he can.

Even at US$27,000 a year in tuition, there likely is sufficient demand among Chinese students and their parents. The real trick is how such students could ever secure a U.S. visa. The key criterion for tourist and student visas is whether the candidate presents a risk of overstay. Applicants for U.S. visas are presumed to be such a risk unless they show ties, e.g., family, assets, positions of power, that would compel their return to China. In short, the sort of ties a teen typically lacks.

The U.S. does, of course, issue some student visas to Chinese applicants, but the competition is fierce. When I was an English teacher in Shenyang, I was frequently asked by students to accompany them to the U.S. consulate and (literally) stand behind their visa requests. Only once did I agree to do so, but after waiting outside in line for an hour and inside a large waiting room for at least an hour more, I was ordered back to the waiting room when my student finally got her 30-second chance to argue her case (through a teller window) before a consular official. Her visa application was denied on the spot and she left in tears, with her scholarship to a Pennsylvanian college I had never heard of about to go to waste. I felt bad for her and would not have accompanied her had I not seen great potential in her. But while it was hard not to feel sympathy for the others rejected that day, the "ugly American" in me wanted to skewer those who displayed a smug sense of entitlement and cursed the United States as soon as things went badly for them. Hey, we're a nation of immigrants, but we can't let everyone in.

Years later in Beijing, I always enjoyed hearing stories from U.S. officials who worked in the visa section of the U.S. Embassy. By that time, many applicants were using Internet chat rooms to try and game the system. Each consular official was given a nickname (Blue Eyes, Fat Man, Blondie, and so on) and their apparent tendencies, likes, dislikes, favorite questions, etc., were much discussed. As with a line at a bank, teller selection was more or less random, so apart from showing up on a day when your "favorite" official was expected to work, there was probably no way to guarantee a face-to-face meeting. One official told me he was slightly offended when the first applicant he greeted after a shift change responded in horror with, "This is not Beautiful Man!"