Will India Challenge China? Not yet.

Last month my wife and I took our first ever trip to India. Since that time I have struggled to put into words what I learned on our trip – not only about India, but also about China. Since today is the last day of 2011, I have determined that my latest thinking on this topic, however crudely formed at this point, is going up on the blog today.

India Gate, Delhi

So what does China have to do with India? More importantly, you may be asking, how could one hope to learn anything about China by visiting a completely different country?

Why India?

Aside from the fact that I thought India would be an interesting place to visit, I had begun to notice over the past year news stories, blog posts and twitter discussions about whether India would ever challenge China economically, militarily and/or diplomatically.

One book I read earlier in 2011 was Robert Kaplan's Monsoon, a fascinating historical approach to explaining why the Indian Ocean will become the world's most contested region, and how China and India are already competing for influence. (Kaplan also leads the reader to wonder a.) whether the US understands the importance of this region and b.) even if the US gets it, whether the US will have either the will or the ability to maintain its influence.)

The question of whether China's influence in the region will increase is no longer contested, but many people – including some long-time China watchers such as me – see India as a potentially credible rival to China. India has a large land mass, the world's second largest population and an economy that has consistently turned in upper-single digit economic growth for most of the past two decades. India and China also share a long and contested border, with both countries occupying lands claimed by the other, and as a result, the level of trust between the two has always been fairly low.

Regardless of whether India could become a credible rival, it is easy to see that many of the necessary ingredients for a rivalry are there. And given what I know about China – that it fully intends to return to its historical role as regional (if not global) hegemon – I wanted to see for myself whether India might truly be on the cusp of challenging China's ambitions.

So why might I have expected to learn anything about China while in India? Perhaps it is because China is the first country in which I ever spent significant time abroad. Ever since the mid-'90s, every other country I have visited has further illuminated my view of China.

Since 2000, when my employer sent me to Japan for a couple of years, I have viewed China slightly differently. To give but one small example, having been a waiter in college, I had always thought that service in China was poor because no one tipped in restaurants. After my first dinner in Japan, not only was I amazed by the friendly and efficient service, but also by the fact that the Japanese don't tip in restaurants either. There was clearly a much deeper cultural or sociological explanation for the disparity in service levels between China and Japan.

Will India challenge China?

So, back to the first burning question that drove me to India, the question of whether India will be a credible rival to China. The short answer to this question, I am disappointed to admit, is no – certainly not in the near future, and not without China self-destructing from the inside.

As thrilled as we were to have arrived at the clean new terminal of Delhi Airport, my wife and I were simply dumbstruck by the the poverty, filth and chaos we witnessed during the hour-long ride to our hotel. Delhi makes Beijing look clean and orderly by comparison (a fact that cannot have been lost on any Chinese leaders who have visited India). And while I reserved judgment on that first day, the remainder of the two weeks we spent in India further confirmed that India is not quite ready for prime time.

Chandni Chowk Bazaar

This is not to say that India has no hope at all, but a lot of what I saw on the ground, combined with what one may easily learn about politics in India by reading the news, leaves me to believe that India has much further to go if it ever hopes to catch up with China. I simply never imagined India's overall development gap with China would be so wide.

I also came away from India with a new level of appreciation and respect for the accomplishments of China. While I don't believe China's accomplishments excuse the lack of personal freedoms and rampant abuses of human rights, one cannot help but admire the speed with which China has pulled itself out of a deep hole of poverty.

Traveling in India and China

Traveling in China, while having improved quite a bit over the past two decades is still a bit of a grind, and in some areas it has become worse. When there were fewer people traveling by air back in the '90s, there were also far fewer unexplained flight delays than there are now.

That said, we found traveling in India to be even more difficult. Travel agencies and airline ticket offices tend to close on Sundays so if an emergency arises (say, for example, one gets food poisoning – don't ask me how I know about this) and you need to change your travel plans, just be sure it doesn't happen on a Sunday. (Apparently the planes do still fly on Sunday.)

Also, trains in India are apparently affected by fog. The day we left Delhi for Agra, our train was two hours late, which actually wasn't bad considering many trains were as much as six or seven hours late that day.

New Delhi Train Station

This connection between train travel and weather would not have occurred to me, but apparently train engineers in India need to have a certain distance of visibility before a train can travel. Having traveled on trains in China in all kinds of weather, I don't think this is the case there, though I could be wrong. I mean, if all trains follow their appointed schedules, and all trains are connected via radio to each other and to a central dispatch, avoiding collisions shouldn't be rocket science.

Of course, one can easily avoid the hassles of air and train travel by hiring a car and driver, but it can be quite expensive, particularly if it is arranged by your hotel, which (as we later realized) has no problem doubling the price of the car for their own profit.

Corruption

And in terms of scams and general corruption, I used to think the Chinese were masters at cheating foreigners, but they have nothing on the Indians I encountered on the tourist track. By comparison, the Chinese are rank amateurs. At every turn – particularly in north India, but less so in the south – we encountered people who, on the pretense of being friendly and inquisitive, wanted nothing more than to separate us from our money while providing nothing of value in return.

A market in central New Delhi. Where were all the women?

In all fairness, I must emphasize that these people were gathered in massive numbers around the areas frequented by tourists. Because we did not really experience the everyday lives of average Indian citizens, I cannot comment on whether such corruption affects their lives to a similar degree. However, if the many Bollywood movies I have watched are any indication, perhaps the corruption for the average Indian is just as bad though taking on different forms.

But you should go to India anyway...

While my post thus far has focused on some of our negative experiences in India, the truth is that my wife and I loved India. The amazing sights we saw, the outstanding food we ate, and the smart and honest people whom we encountered along the way combined to make the whole experience worthwhile.

If you have ever considered traveling to India just to see the sights, we can attest that it is absolutely worth the effort. (And this comes from a couple who have seen many of the amazing sights that China, Vietnam, Japan and California have to offer.) Though we were disappointed to find our view of the Taj Mahal completely obscured by pea-soup fog, this in no way diminished our experiences in seeing the Qutb Minar, Humayun's Tomb, the Red Fort, Agra Fort and the Amber Fort near Jaipur, among others.

The Taj Mahal (It's back there somewhere.)

We also experienced fantastic service aboard a kettuvallam boat on the backwaters of Kerala while dining on outstanding Kerala cuisine and learning about the lives of the people who farm and fish in the area. And probably our best experience was at a farm homestay near Kochi where we enjoyed the warm hospitality of a world-wise Syrian Christian family and engaging conversation around the family dinner table.

The crew on our kettuvallam cruise, Lake Vembanad, Kerala

All of this should come as no surprise to anyone who has traveled to more than a handful of foreign countries. The world is a big place, and every country has both its pluses and minuses. While I still have yet to visit most of the world's countries, in every country I have visited, I have discovered uniquenesses that make my travels worthwhile. And though India did not live up to my (unreasonable) expectations, I have no regrets for having visited, and I will most certainly return. (While I was able to touch the Taj Mahal, I still have yet to see it!)

Evolving views on India vs China

This has been a difficult blog post for me to write, if for no other reason than that I really, really wanted India to be the credible rival that China needs to have in Asia. Also, since returning from India, my wife and I both have found that our views are evolving as we continue to ruminate over our experiences there and compare them to our experiences elsewhere.

And I must also emphasize that this does not arise from a desire to “keep China down” as China's media often likes to claim whenever foreigners disagree with China's government. As I stated before, I have an even greater appreciation for China's accomplishments to date. Yet at the same time, it is somewhat unnerving to the free world that a big, powerful country such as China may have figured out a way to build prosperity without personal freedoms (note the emphasis on “may”). It makes many people uncomfortable that this kind of government aspires to regional hegemony and world leadership.

I would argue that no one really has a desire to “keep China down,” but that many do have a desire to keep authoritarianism down. If China were to demonstrate its concern for human rights, few would have a problem with its asserting influence around the world. (Though one might argue the same for the United States.)

And this is precisely why my hopes for India were so high. I very much wanted to see for myself that a democratically-led government could provide for its citizens both freedom and economic prosperity, and act as a counterweight to the other big country in the region that only wants to provide the latter. But what I saw is that, similar to America, India's prosperity is limited to a small sliver at the very top of society. The middle class experience stagnation while the poor are just trying to keep their heads above water.

It would be easy to blame democracy for the disparity between China and India, but I believe that is too simplistic of an answer. (Naturally, this is the lesson that China's leaders will choose to take from their own comparisons with India.) There are many other differences between China and India that cannot be ruled out as factors affecting the countries' trajectories of development.

The most obvious difference is demographic. Whereas China is quite homogeneous, India is a patchwork of ethnicities, religions and languages. Without going into too much detail, I can only say that it is a surprise to me that India has remained a cohesive unit since 1947. The fact that it didn't break into dozens of rival states is a testament of the determination of independent India's first leader Jawaharlal Nehru. Love him or hate him, one cannot deny that he laid the foundation for modern India – both good and bad.

Since this blog post is already far longer than most people will bother to read, I will end it here and simply note that my thinking on this topic is far from complete. Scholars far more brilliant than I have tackled this topic of comparative modernization, and have yet to produce anything more than hypotheses (some more plausible than others).

The one thing I know, however, is that I will most certainly spend time in both India and China again in the future. I see great value in understanding both countries and how their political systems affect the lives of real people.

Happy 2012, everyone!

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EDIT (4 Jan 2012)
Dan Harris at ChinaLawBlog, one of my favorite China blogs, linked to my India-China post and had some interesting comments of his own -- some of them way too kind, but also some valid criticism. Since his site generates a lot more traffic than mine, his post generated a lot more comments than mine (although I believe this post sets the all-time record for comments at ChinaBizGov.)

Check out Dan's post and also the comments that follow. Some people are critical of the fact that we would even compare China and India, but I think the fact that so many people took issue with this post tells me that there really is no consensus answer on this topic. There are a lot of great ideas and food for thought in the comments (along with the usual anonymous sniping from the sidelines).

If you're really interested, here's another related post on this topic that I came across today. It's written by someone with a great deal more experience in both China and India than me, and he includes a lot of facts and figures to back up his assertions.

Hold on to your lugnuts! It's time for a Trade War!

The Wall Street Journal is reporting today that China is preparing to levy duties on certain autos imported from the US. This would be on top of the 25 percent duties that China is still allowed to levy under its WTO commitments.

China's Ministry of Commerce said in a statement late Wednesday that it will levy antidumping and antisubsidy duties on imports from the U.S. of some vehicles with engine capacities above 2.5 liters beginning on Thursday and lasting through the next two years. ...

The ministry said several U.S. companies, including General Motors Co., Chrysler Group LLC and the U.S. arm of Honda Motor Co., engage in dumping and subsidizing. The statement said the move would also affect cars made by the U.S. arms of Mercedes-Benz and BMW AG, though it said their level of dumping was smaller.

Note that China's Commerce Ministry singled out not only the traditional US automakers GM and Chrysler, but also the US arms of Honda, Mercedes and BMW.

While China could have plausibly argued that GM and Chrysler benefit from government subsidies due to the bailouts these two companies received, they instead chose to make this about all cars with engines larger than 2.5 liters made in the US (but not in Japan or Germany!).

Does anyone think the US Congress will choose to view this as any less than an attack on the livelihoods of American workers -- and in an election year no less? Of course, Congress cannot portray themselves as innocents in all of this as Congress has already singled out China's solar panel industry for US-imposed tariffs. Then again, Congress can point to China's currency...

And on and on it goes. One thing I learned in grad school about wars (the kind in which people shoot at each other) is that it is nearly impossible to identify who started it. No matter which incident one side points to, the other side can go further back in history to identify another.

If we look at this incident only with regard to China's auto industry, it is also easy to see a kind of pattern here. Back in 2009, when China launched the stimulus heard round the world, they chose to subsidize consumer purchases of vehicles with engines smaller than 1.6 liters.

Why 1.6 liters? Because the foreign automakers that were dominating China's auto market had very little to offer in the small car segment. That subsidy was intended to boost sales of Chinese-branded cars.

Of course, the foreign automakers didn't stand still. Many of them already had small cars in the pipeline, so they got them to market faster -- just in time for China to cancel the subsidy toward the end of 2010.

Why are the import duties now focused on 2.5 liters? Because this is an area in which the foreign automakers pretty much own the market. This effort to make these imports more expensive may ideally (from China's point-of-view) accomplish two things: 1) make Chinese consumers more likely to consider a less expensive Chinese-branded car, and 2) make foreign automakers consider moving more assembly of their larger models to China.

In reality China's new tariff may not accomplish either purpose. For one, the Chinese consumers who are more interested in these larger cars (as the WSJ article points out) are less price sensitive anyway. They are already interested in these large foreign brands because they perceive them to have higher quality. In addition, because the volume of these larger cars in China is still comparatively small, it is highly doubtful that much, if any, of their production would be moved to China. (Perhaps that second one is a straw man argument.)

So what does China really stand to gain? Not much, really. In the end, China will get the trade war that it has been warning us about for years, and its home-grown automakers will still face a quality gap with their foreign partners/competitors.

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In case you're wondering where the picture at the top came from:

China, without all the paranoia

I recently returned from a trip to Taiwan as part of an American Young Scholars' Delegation. Pretending that I could still qualify as “young,” I joined ten other American scholars as a guest of Taiwan's Ministry of Foreign Affairs (MOFA) for a week of meetings and sightseeing.

The purpose of this trip was for Taiwan to introduce itself to a handful of foreign scholars who previously had little contact with Taiwan, but who were interested to see the country up close. About half of our delegation were China scholars, with the rest having interest in aspects of Taiwan's culture, politics or society related to their own research.

As is my custom, on the first morning after the trans-Pacific flight, I hit the streets for a quick run and my first look at Taipei as the sun was rising. The area around our hotel in Taipei felt much like parts of Hong Kong or Shenzhen: green and well-swept.

Whenever I run in China, I am accustomed to being either stared at or ignored, but I was surprised when two different people greeted me during my first run in Taipei. One security guard enjoying a cigarette gave me a big wave and a deep-voiced “ni hao.” Another middle-aged Chinese man greeted me with broad smile, a nod and an enthusiastic “good morning!”.


In hindsight, I guess I shouldn't have been so surprised by the openness and friendliness of strangers on the streets in Taiwan. Our entire itinerary was intended to impart that impression. Everywhere we went, we were greeted with openness and a willingness to answer all but the most sensitive of questions. (I'll forgive the Deputy Minister of Defense for not fully answering Katherine's question about Taiwan's strategy for defending the Taiwan-held Jinmen [Kinmen] island against an attack by the mainland.)

And while no one chose to dwell on the negative aspects of Taiwan's politics, no one shied away from the facts that fistfights have occurred on the floor of the legislature in the past or that Taiwan's former president now serves a prison sentence for corruption. Indeed, on the day we visited the Legislative Yuan, there was a protest taking place on the street out front. No problem for us though: we just went around back. We learned that Taiwan has been continuously developing its own democratic system for the past two-plus decades, and that, despite the occasional chaos, despite the international isolation, and despite the ever-present threat of big, bad China next door, Taiwan's people have a say in how their lives are run.

Contrast this trip with, well, every trip I have ever taken to China. While the average Chinese citizen can be as open and friendly in private as the average citizen of Taiwan is on the street, there is a stark difference in the general atmosphere. (And I'm not just talking about China's awful pollution.)

Though it is hard to describe in concrete terms, there is a heaviness in China that one feels as soon as one steps off the plane – a sense that one must be careful about what he does, what he says and where he goes. (And any Chinese government official reading this is saying to himself, “well, of course! That's how it's supposed to work!”)

Despite months and months of trying desperately to get even the lowliest bureaucrat on the mainland to discuss China's auto industry with me during my field research a few years ago, out of over 100 interviews, I only managed to interview a single government official. (Though I did talk to several people who work in government-controlled “NGOs”.) And among those whom I did manage to interview, only a few were willing to delve very deeply into the political forces that have shaped China's industrial planning. Even some expatriates with whom I met were scared to talk openly with me. (One expat even demanded that I return his name card after the interview!)

Another surprise during our trip came in our visit to the American Institute in Taiwan (AIT), the de facto embassy of the United States in Taiwan. Having visited a few US consulates on the mainland, I thought I had an idea of what to expect, and indeed AIT had that familiar smell of an old church with a pot of coffee brewing somewhere. But our meeting with AIT officials (our Taiwan MOFA minder remained outside) revealed a surprising level of enthusiasm. In contrast with the bunker mentality I have encountered among bureaucrats at US consulates on the mainland, these folks made no attempt to conceal their enthusiasm, indeed, their advocacy, for Taiwan and all it stands for.

This is not to say that our entire trip was propaganda-free. After all, Taiwan, just like the mainland, also has an agenda. But unlike the mainland, that agenda doesn't include the continued rule of an unelected government, the stifling of free speech, the occupation of, or claim to, territories that do not wish to be a part of the larger whole.

What Taiwan wants is quite simple. They want the rest of the world to know how open and transparent their system is, how much freedom their people enjoy, and how much like the rest of the developed world Taiwan is. In short, the whole purpose of Taiwan's Ministry of Foreign Affairs is to run out the clock. To use a basketball analogy, the task of MOFA is to keep the ball in play, and to keep the other side from getting their hands on the ball. I think the best hope is that China will eventually change into something Taiwan wants to be a part of.

Taiwan has been effectively isolated in the world by China, but Taiwan's diplomats are doing the best they can to let the rest of the world know they exist and that they have a society worth preserving in its present state. And judging by some of the results, Taiwan's efforts are paying off. To cite but one example, the citizens of Taiwan now enjoy visa-free travel to 124 countries around the world compared to only 34 for citizens of the PRC. (I don't know how many countries US citizens can travel to visa-free, but I'm certain it's fewer than Taiwan's citizens enjoy.)

There are, of course, downsides to Taiwan's position. The question of whether Taiwan should declare de jure independence from China or adhere to the status quo dominates Taiwan's politics – to the extent that important domestic issues often fail to get the attention they deserve. National elections tend to be primarily about a candidate's position on cross-strait relations.

Also, there appears to be some confusion around identity in Taiwan, and this confusion revealed itself in some of the language used. What are the people who live on Taiwan supposed to call themselves? Are they Chinese? Are they Taiwanese? The former may be confused with citizens of the PRC. The latter may be confused with aboriginal people who lived on Taiwan for thousands of years before the mainlanders arrived with Chiang Kai-shek in 1949. One of our tour guides kept using the awkward-sounding term, “Taiwan people.”

When we visited the National Library, I noticed that their “Center for Chinese Studies” called itself “漢學研究中心”which could literally be translated, “center for the study of the Han people.” But again, this excludes the aboriginal people who have lived on Taiwan for millennia. And the Palace Museum (which is a must-see for anyone visiting Taiwan) contained mostly relics that had been transported from the mainland, and a history timeline of dynasties presented as if it were Taiwan's own.

I have no suggestions for how Taiwan should address these issues, and in fact, I'm not certain that these issues are really all that important compared to the existential issue Taiwan faces with the ever-present threat of an angry mainland. And the mainland, whose Communist Party has painted itself into a corner with its irredentist claims to Taiwan, really has no way out but to persist with those claims.

Nor do I have any suggestions for the US in its Taiwan policy, other than to stay the course, maintain ambiguity and occasionally ensure that the security balance doesn't tip too far in the direction of the mainland. Taiwan doesn't want to give up its freedoms; China doesn't want to give up Taiwan; and the US doesn't want to see any of its aircraft carriers sent to the bottom of the Taiwan Strait.

The Chinese may often wonder why this tiny island of 23 million people is so important to the United States. After all, Taiwan hasn't really been a democracy for all that long, and the US has much greater problems to deal with in trying to extract itself from Afghanistan and in restoring growth to its own economy.

But having now been to Taiwan and seen with my own eyes what it is all about, I have a better understanding. In the end, America cannot help but admire and support a budding democracy trying its best to resist a bullying, autocratic overlord. A little over 200 years ago, that was us.

A legitimate beef with China

A leader in this week's Economist, concerning the US Senate's passage of a bill intended to punish China for currency manipulation, warns that, however right the Senate may be about currency manipulation, passage of the bill would risk an unnecessary trade war.

The Economist goes on to say that America does have "legitimate beefs with China, but this bill is the wrong way to address them. It is legally flawed, economically dangerous and unnecessary." If passed, China would surely have a legitimate claim against the US through the WTO, and would almost certainly retaliate with its own trade-limiting measures.

While I understand the value of this measure as a political tactic for Senators who are part of the most hated US Congress in history, the fact is that there are better ways for America to get what it wants (not that Congress even cares).

While the WTO mechanisms designed to facilitate open trade are slow to work, China recognizes them as legitimate and has generally adhered to their judgments in the past. Although, as The Economist admits, currency manipulation is not addressed in WTO rules, America indeed has "legitimate beefs" with China that could be addressed under the WTO. Yet, for some reason, the US Congress chooses to focus on currency, and the Obama administration apparently chooses to look the other way when it comes to some of China's real WTO violations.

While I haven't cataloged all of China's violations, I know that there are several going on in the auto industry that no one seems to think are worth calling China on. For example, a couple of key measures in China's WTO accession agreement forbid China from conditioning investment in China on technology transfer and local content requirement. (This agreement dates back to 2001, by the way, so it's nothing new.)

As for the tech transfer part of the rules, China's ability to apply pressure to foreign automakers to transfer technology in exchange for permission to expand in the country has been well-documented. (A couple of example articles are here and here.)

The latest attempt by the Chinese to adhere to the letter of the law while blatantly violating its spirit includes holding off on investment approval until the foreign company "voluntarily" offers to contribute technology toward establishing a Chinese brand with its (state-owned) Chinese partner. Peugeot's CEO was quoted by the Financial Times as saying that, cooperating on building a Chinese brand is now "part of the deal."

And the automakers involved in this attempted extortion have no incentive to complain about it for fear of losing their access, all the while knowing that their competitors are all doing the same thing.

Okay, you may say, perhaps China's violations in this case would be too difficult to prove under the WTO's mechanisms. After all, the foreign automakers all appear to be "voluntarily" contributing technology in these cases, and anyway, none of them is complaining. Perhaps.

Then how about a more obvious violation of the rules? In this case, it involves the imposition of illegal local content requirements.

This actually surfaced a few weeks ago, and I commented about it on twitter, but only my friend @alexwoods5 seemed to think it was an issue worth being concerned about. The issue in question arose from a recent Wikileaks cable in which an employee of Ford in China revealed to US diplomatic personnel that Ford's operation in China is subject to a 40 percent local content requirement. This is the relevant section:

¶9. (SBU) All of Ford's parts suppliers must meet the Chinese Government's rules of minimum 40 percent local content by value, Chuang explained.

Does that not sound like a local content requirement? Could this have been a condition for Ford's recent investment in new factories in China?

I even emailed an acquaintance of mine at Ford, twice, seeking some sort of explanation or confirmation. The fact that he has yet even to respond with a "no comment" tells me that this may be worth investigating.

But is the Obama administration investigating it? If not, why not?

I know that the administration, or at least certain individuals in it, understand that the currency bill passed by the Senate would do great harm to both global trade and to America's relationship with China. But if they want to avoid such unpleasantness, why not at least make an effort to make China follow the agreements it has signed?

What is China? It's all in the name.

I've had little time for blog posting recently as I face the pressure of looming dissertation deadlines. But today I cannot hold my tongue as I observe the incredible audacity of a China that either does not understand the impact of its behavior on the rest of the world, or has simply decided it no longer cares.

I have been a scholar and watcher of China for a couple of decades, so by now, very little China does really surprises me; however, China's recent (over)reaction to Liu Xiaobo's Nobel Prize has caught me off guard. It caught me off guard, not because I never expected this kind of behavior from China, but because I just didn't expect it so soon. The latest news is that China's Foreign Ministry has delivered letters to other foreign embassies in Oslo, warning the representatives of other countries not to attend the awards ceremony for Liu Xiaobo.

Yesterday, China's Vice Foreign Minister Cui Tiankai made the warning even more explicit (from BBC website):

The choice before some European countries and others is clear and simple: do they want to be part of the political game to challenge China's judicial system or do they want to develop a true friendly relationship with the Chinese government and people? ... They have to make the choice according to their own judgment. If they make the wrong choice, they have to bear the consequences.

Excuse me? Is this the same China that constantly rants about people intervening in its internal affairs? Whatever happened to the China that was clever and reserved, the China that was supposed to be, according to Deng Xiaoping "concealing its capabilities and biding its time"?

What happened was that China decided the current recession affecting the West was the signal that China may now return to its rightful place as the "central kingdom".

Central kingdom? Yes, central, not middle. For years I have been trying (apparently ineffectively) to convince people that "middle kingdom" is not the proper translation of 中国. While the 中 may be translated as "middle", as in a physical location, it may also be translated as "central," as in importance, as in 中央政府 (central government).

This may be difficult for non-Chinese to understand, especially non-Chinese speakers, but to the Chinese, the name of the country has a meaning: it's not about a place, it's not even (primarily) about a race, it's about importance. When one is taught from the earliest age that the country in which he was fortunate enough to be born is the world's central kingdom, that means something.

To the rest of the world, it's just "China", a word applied centuries ago to a far way country due to one of its valued talents -- making really nice pottery.

I mean no disrespect for China. If anything, my respect for China has only grown over the years as I have spent much time in China and as I continue to learn much about the place and the people on a daily basis. My purpose today is to say that, if you, like me, are surprised at China's latest hubristic display, don't be. China is simply being what it is: the central kingdom. And that will never change, not as long as its name is 中国.

The difference now is that China's 150 years of misfortune at the hands of foreigners is over, and it is no longer the "central kingdom" in name only. And if the rest of the world refuses to recognize that, well, "they have to bear the consequences."

Anshan's proposed investment in US: are we OK with this?

A couple of days ago, news surfaced that Anshan Iron and Steel, one of the largest steel manufacturers in China intends to purchase a 20 percent stake in a near-bankrupt Mississippi steel mill. I say "surfaced" because the actual decision to pursue this investment apparently came in May, but for whatever reason never made the news in the US.

As would be expected, the Congressional Steel Caucus, a group of about 50 US lawmakers who are advocates of the US steel industry, raised objections to the proposed investment. These objections are similar to those raised by CNOOC's proposed takeover of Unocal back in 2005, so there is really nothing new here. The requisite "national security" implications are raised. And there is little doubt that the Steel Caucus's "investigation" will recommend against allowing this investment to happen.

Of course, the Steel Caucus can only make a recommendation; it does not have the final word, so it is not inconceivable that the investment could happen anyway. After all, a 20 percent stake is not a controlling stake, right? And even if it were, Anshan is just like any other profit-seeking business, right?

To address the first question, the answer is that we cannot always be certain whether 20 percent is a controlling stake. That really depends on who the other shareholders are and how large their stakes are. According to the Wall Street Journal, the Mississippi plant in question is owned by a private company, the Steel Development Co., which, according to its website is owned by "institutional investment firms headquartered in the United States, as well as [its] management group." So I think it is reasonable to assume that Anshan's proposed 20 percent stake would not be a controlling stake.

As for the question of whether Anshan is a profit-seeking business, the short answer is, yes, except for when it is not.

Beijing-based lawyer and blogger, Stan Abrams, posted a funny, and partially tongue-in-cheek, article today essentially making fun of the Congressional Steel Caucus's knee-jerk commie baiting (my term, not Stan's). While I largely agree with Stan's conclusion, I have to wonder whether the fact that Anshan is a state-owned enterprise is a significant factor that deserves further scrutiny.

Stan says (again, tongue-in-cheek):

Everyone knows that the company is controlled by China’s Assets Supervision Commission of the State Council (SASAC), which means that the company is merely a tool of the Communist Party. With all of those subsidies, Anshan is definitely up to no good.

Well, let's take this apart. First of all, I think we can be sure that not "everyone knows" this. Whether they should remains to be seen. Second, yes, Anshan is indeed owned by SASAC, the arm of the State Council that holds the shares of China's largest state-owned enterprises.

Third, while Anshan isn't "merely" a tool of the Communist Party (it is also other things), it is nevertheless a tool of the Communist Party. Anshan is 67 percent owned by SASAC, which doesn't necessarily make it a tool of the Communist Party -- until you take a closer look. The senior management of SASAC-owned companies, including Anshan, are appointed, not by their Boards of Directors, not by SASAC, not by the State Council, but by the Politburo of the Chinese Communist Party. (Richard McGregor's new book documents much of this. It's also a great read. McGregor explains some of this in an interview here on the China Beat.)

I also found it interesting that Qi Xiangdong, Deputy Secretary General of the Chinese Iron and Steel Association seemed to bend over backward to try to redefine what "state-owned" means:

"A market-economy country like the U.S. shouldn't make administrative intervention to corporate behavior," Mr. Qi said. "Western countries still have a stereotype of [Chinese] state-owned enterprises. ...Anshan Iron is a listed company, and not a Chinese state-owned enterprise in the traditional sense." (WSJ, 5 July 2010)

Setting aside the irony that the king of state interventionist governments would lecture the US about what a market economy is, it is extremely disingenuous of Mr. Qi to suggest that a company that is 67 percent owned by the government is not state-owned. If I were a conspiracy theorist, which I'm not, I might begin to suspect that there is a Chinese plot to redefine English language words such as state-owned, democracy, rule-of-law, etc., so as to confuse their foreign detractors.

What about "all of those subsidies"? Well, since Anshan is indeed a state-owned enterprise, we can be certain that, at some point in the past, and probably at some point in the future, Anshan will benefit from government subsidies. Part of the reason for continued government control of major enterprises in China is fear of instability that would be caused by massive layoffs if these giant firms were to go bankrupt. As long as any company is in state hands, that's not a problem. Anshan is "blessed" with a soft budget constraint, and they know it.

Is Anshan "up to no good"? Probably not, though when it comes to the murky world of Chinese state-owned enterprises, nothing can be said with all certainty. Anshan's external shareholders, a diffuse group of individuals and institutions who collectively own only 33 percent of Anshan's shares, have no say in what the company does. Anshan is part of a large group company, and there is absolutely zero visibility into the operations or financial statements of the unlisted entities. It may also give us pause that a Chinese official stretches reason in order to declare Anshan not to be a state-owned enterprise when it clearly is.

So while Anshan is probably just looking for a good investment in a business that it already knows, without visibility into the rest of Anshan's dealings, its leadership, its true controlling owners (i.e. the Politburo), we cannot be absolutely certain.

So are we OK with this investment?

Yeah, why not? Let the folks in Mississippi take Anshan's money. When it comes to the power of the Chinese state, it pretty much stops at the borders of the United States. Once Chinese money and people enter the US, they are subject to rule-of-law. And while the Chinese may wish to redefine what that term means within their own borders, they will find US courts quite unsympathetic to any attempts to do so elsewhere.

Continuously Lost in Translation

Part of the challenge of dealing with culture not one's own, whether it be for business, academia or diplomacy is finding a common language in which one can communicate with others.

A few comments on Twitter and Google Reader about yesterday's post bring this difficulty to light. Part of the upshot of that post was that perhaps many outside of China had mistranslated guo tui min jin to mean "privatization" when that was not the understanding of those in China who propounded the policy.

I would even suggest that when Chinese use the word "privatization" in English language conversation, their understanding may also be different from that of native English speakers who use the same word.

We tend to define both 民营化 (minyinghua) and 私有化 (siyouhua) as "privatization", and vice-versa. As I showed in yesterday's post, the Chinese do not define minyinghua and siyouhua as the same thing. However, a glance at both Google Translate and Babelfish shows these two terms as interchangeable with the English word "privatization".

Based on discussions that have taken place since yesterday's post, I feel safe in saying that privatization and minyinghua do not have precisely the same meanings. As nearly as I can tell, here is what they do mean:

privatization = absence of government involvement

民营化 = presence of non-government involvement

To illustrate, when the US Government finally sells its 60 percent stake in General Motors, this will be considered a "privatization". But the Chinese definition of minyinghua is already satisfied at the present because the other 40 percent of General Motors shares are in the hands of non-governmental entities (the UAW, institutional and private investors).

In China the fact that many of China's large SOEs are now publicly traded and minority positions are held by non-governmental entities counts as 民营化, and if our dictionaries are to be believed, it also counts as privatization. However, in this case, we are better off not trusting our dictionaries.

As a bonus, here's another term that we often get wrong.

Our dictionaries define 外国人 (waiguoren, literally, "outside person") as "foreigner", and vice-versa. However, when Chinese citizens visit the United States, they do not consider themselves to be 外国人.

Why?

Because the opposite of 外国人 is 中国人 (zhongguoren) or Chinese person (literally, person from the Central Kingdom). Their identities as 中国人 do not change when they leave China.

So while I refer to Chinese visitors in America as "foreigners", and I refer to myself as a "foreigner" when I visit China, the Chinese always refer to me as 外国人 and themselves as 中国人, irrespective of location.

And while I fully agree with the sage advice of Dan Harris at ChinaLawBlog to write your agreements with Chinese counterparties in Chinese, you may also want to ensure that you and your counterparties agree on what all of the words mean.

I know there are many other equally confusing Chinese-English translations. Which ones have you come across?

The next post in this series can be found here.

China Gives the US a Way to Save Face

We often hear scholars and policy wonks ask the question of what kind of power China will be in terms of international relations. We attempt to put them into our Western-derived boxes such as realist, liberal, status quo, etc.

I think China is increasingly showing us that it will not fit into our traditional boxes. While it may at times exhibit realist or liberal behaviors, at its roots, China is what it has always been: a Chinese power.

Such Chineseness was on display today as China's Ministry of Defense summed up two days of maritime safety meetings with the US military:

The way to resolve China-US maritime incidents is for the US to change its surveillance and survey operations policies against China, decrease and eventually stop such operations. (See Financial Times story here.)

Notice what they did not say. They did not make demands for what we can be certain they really want, which is an immediate end to US surveillance. Rather, China is offering the US a face-saving way out of this. As China suggests, the US can begin to decrease such operations, then eventually end them.

This assumes, of course, that, at some point in the future, China will be in a position to force the US to stop such surveillance in its own backyard. China itself seems quite certain that, at some point, the US won't be there anymore. The only question, from their point of view, is whether the US gradually and voluntarily ends such surveillance in the near future, or China ends it in the longer term.