With President Obama's re-election sealed, he faces an intimidating number of challenges both at home and abroad. One problem in particular, while it is overshadowed by domestic economic concerns, nonetheless deserves the administration's full attention if the United States is to solve its domestic and international challenges of the next four years and beyond. That problem is China and its rogue administration. The reality is that the world faces a problem in China that is both of crucial importance and very difficult to discuss. This problem is the impossibility of obtaining clear, reliable information on the country's political, social and economic situation. In the West, there are normatively high standards required for mainstream journalists in terms of sourcing and fact checking. When these standards are applied to a political system whose survival and function depends on a tightly controlled information economy, it makes for a gaping chasm between the global perception of China and the realities on the ground. This is a matter that should be of concern to private investors, policymakers and the growing number of people around the world whose personal and professional lives may become increasingly tied up with China.
To be sure, there are exceptions to this rule, but their nature only proves the point. There are a number of firsthand personal accounts in print and the Internet which, to the discerning reader, give a glimpse into the deeper reality of what is going on behind the Chinese Communist Party's (CCP) one-way mirror. Most notable is the August 2012 Prospect article by Mark Kitto entitled "You'll Never Be Chinese" documenting one man's decision to leave China after years dealing with a corrupt court system (to call it a "legal" or "justice" system would be inaccurate) and widespread insecurity, uncertainty and overall frustration. Kitto's account is exceptional in that by basing his business in China, he more directly experienced the difficulties and dangers of operating there than the average outside investor, but his story is not unique in and of itself. The 'net is rife with blogs and posts from on-the-ground expats who live in such a way that brings them into direct contact with the reality of life in China. For all the effort of such individuals, the marginal place of such information in the larger infostream, and the way in which it can be dismissed as mere subjective griping, affords them little power in shaping mainstream debate and perceptions.
Despite the proliferation of alternative media, the world still relies heavily on the mainstream media for a reliable picture of the world. There are good reasons for this. The reputation, resources and accountability of a major media organization provide for the possibility of greater depth, breadth and accuracy that all the bloggers and tweeters in the world cannot hope to replicate. Say what you will, #BobinBeijing is not likely to be as reliable as BBC World, whatever biases may come into play for mainstream outlets.
To be fair to the mainstream media in China, there are exceptions, the most notable being Al Jazeera's Melissa Chan, who did exceptional reporting highlighting the overwhelmingly dark side of life in China. Her writing was broad and in-depth, covering forced abortions, black jails and powerful gangs, as well as a piece specifically on the dangers she ran from police and hired thugs when trying to interview common Chinese about their problems. Chan was exceptional in that what happened to her demonstrated how little actual reporting gets done by other mainstream journalists. She did real journalism, and was expelled for it.
The logical conclusion is that reporters still remaining in China are careful and tactful enough about not ticking off the CCP that they are allowed to stay. The impact such a situation has on our ability to obtain in-depth and reliable information from China is obvious. It is hard enough to get a clear picture in a country as vast, complicated and politically unstable as China, but it is downright impossible when the interests of continuing one's career in that country make one unwilling to even try. That Chan was made to leave while a large number of foreign correspondents remain indicates that this enforced apathy may well be the status quo amongst those reporting in China.
Beyond the failure of mainstream media to work effectively in China, there is a further problem in China information. This problem is slightly less concrete, but perhaps more important in a world where financial metrics come to determine a great number of decisions. It simply doesn't make sense to put any faith in metrics which were developed by and for Western societies in the China context. In my opinion and that of many of those who have spent considerable time here, China's apparent rise is largely due to the CCP's ability to play with metrics in a way that more transparent governments are not. A number of factors play into this situation.
At the heart of it is a general lack of accountability at the top, which then trickles down to every segment of society. Something that anyone who has never lived in China cannot appreciate is the extent to which rule of law is absent. The very notion of rule of law as understood in most developed societies is impossible in a system such as China's. For law to exist requires some recourse to redress open to all members of society. When a governing body is composed of a political organization which by its power and constitution is unaccountable to the rest of society, then law in itself is impossible beyond a mere external charade of court rooms and costumes. This was clearly illustrated in Kitto's story of being told he had "won" a case, only to later be told that in fact, owing to a phone call to the judge by someone in power, he had "lost."
This plays out in a number of unfortunate ways in the lives of common Chinese people, and this fact has occasionally been documented. But more unsettling in a global context is what this means for the reliability of Chinese metrics. If there is no law, then there can be no effective regulatory enforcement of even the barest accounting standards. There is simply no way to enforce any kind of regulatory standards on Chinese businesses or government agencies owing to the particularity of China's system. Not only is this an immediate problem for verifying reports, but it creates a growing and persistent rot in undermining any culture of accountability. If positive numbers mean success and respect, and there is no effective means of ensuring accuracy, then the onus falls on accountants working in Chinese organizations to find every way they can to inflate numbers and create false perceptions. This is already a danger in a culture where direct communication is often taboo, but the combination of a lack of clear regulatory enforcement and the culture this generates within organizations, repeated across a country of 1.3 billion, creates the potential for a proliferation of massive, self-perpetuating metric bubbles.
The consequences this can have for investors outside China was made clear in the case of Sinoforest, a Yunnan-based forestry company which at one point was the highest-valued resource stock on Canada's Toronto Stock Exchange but which turned out to have none of the physical or liquid assets it reported and whose head office was in fact nonexistent. Sinoforest is exceptional not in itself but in the fact that it was exposed. Anyone with serious on-the-ground experience and a good analytical mind knows that the Chinese market is full of such companies waiting to be outed. Many of them never will be.
A less extreme example, but one which is very illustrative of the problems for outsiders understanding China is captured in a 2011 interview in McKinsey Quarterly with China International Marine Containers (CIMC) President Mai Boliang. The opening paragraph glorifies CIMC's growth in much the same glowing way that marks much China business reporting, stating how, "20 years ago [CIMC] was a small, little-known container manufacturer with just 59 employees. Since then, under the leadership of Mai Boliang, the company has become the industry's global leader."
This all sounds fine in itself; companies grow, and very small companies, if well run, can become global leaders. McKinsey points to "aggressive domestic and global M&A [mergers and acquisitions] program ... and a relentless push to innovate and to disrupt the status quo" as the explanation for CIMC's growth. Now, to a Western reader, this gives a certain image based on a legacy of successful business innovators. The mistake that ends up being made when dealing with Chinese businesses is to assume that these reasons mean the same thing in China as in a reader's country of origin. In many industrialized countries outside of China, this type of success story means that a business, operating on a relatively level playing field, was able to fairly outperform competitors. This trajectory indicates sound business fundamentals and solid leadership. What about inside China? Naturally, Mai was playing to his audience and telling them what organizations like McKinsey expect to hear - the story of innovation, competition and hard work. The reality of CIMC's rise is apparent in some of Mai's comments on CIMC's early days, as well as on his CV.
The logic of this analysis risks being lost on anyone who doesn't understand the workings of Chinese society and the business-government nexus which lies at its core. For insiders, it doesn't take long reading the McKinsey article to see what's going on. Note first that CIMC is a state-owned enterprise, officially an organ of the government. This is important for what comes next. While Mai indulges his ego in the interview by suggesting it was his vision, hard work and intelligence that allowed the company to grow, it's important to note the casual remark that when Mai took over, the supposedly cash-poor company "signed agreements with other manufacturing companies under which we operated their businesses, paid them lease fees for the opportunity, and pocketed whatever was left over."
Mai has couched this in civilized language, but this amounts to an effective government expropriation with compensation which was obviously below the returns generated by the expropriated businesses. That a successful manufacturer would allow CIMC to operate their business for a lease fee that was below their expected profits, allowing CIMC to "pocket the difference" would be unthinkable outside the context of an unaccountable state-owned enterprise (SOE) with a mandate to expand. Unfortunately, Mai's bio is not available on Chinavitae, but based on his meteoric rise from obtaining a BS in mechanical engineering in 1982 to president of CIMC in 1992 at the age of 33, and then on to effective expropriation of China's coastal container manufacturing industry, I would bet my meager savings that his father is a senior government official.
This would mean that the rise of CIMC is not in any way due to the usual combination of thrift and innovation that is required in a level playing field, but instead would be due to the overwhelming power of Mai's family connections. The corollary of this possibility is that CIMC's continued success does not hinge upon the continued effort of its leadership, but on the political fortunes of its government backers. This point is particularly salient given the power transition coming up this fall. Politics and business are always tied in some manner, but in China, the two are inseparable in a way that is hard for outside observers to fathom. The leaps involved in this deduction are again not apparent to anyone who has not lived and worked with normal Chinese people who are not connected to the government, but it is based on fundamental social realities of life in China. This illustrates the problem that the basic logic upon which outside observers of China base their judgments on the country is foreign to the Chinese situation.
The trends outlined in this article are part of a worrying set of phenomena which will puzzle governments and investors in the coming decade. For better or for worse, China's rise is a reality no one can avoid. However, the combination of effective interdiction of investigation by outside media, the difficulties of obtaining reliable metrics, and the different logic required in a society where business and government are one and the same and are run by a single overarching organization in the CCP make sound China strategies next to impossible for even the shrewdest analyst. This is a problem of which too few observers and investors are aware and one which distorts global perception and response to China, much to the benefit of China's ruling CCP and the detriment of non-Chinese investors and governments.
In response to this, it seems essential that in the absence of reliable traditional sources, those whose dealings involve significant China exposure round out their picture with less traditional sources of information. While the accountability of major media outlets and the ease of analysis of financial metrics are obviously desirable, they are not tenable in the China case. A true understanding of the Chinese situation requires a messier, fuzzier information-gathering approach, one which intersperses mainstream accounts and metrics with the subjective details of various on-the-ground observers. Beyond these, there are some good online tools which give a view into Chinese media, the most notable being chinaSMACK, a site which translates stories from Chinese online news and social media, along with comments, into English. Many writers are fond of saying that China is changing the game, but in order to respond to this fact, those wishing to operate in China must change their game, too. This starts with a heavily critical attitude toward the information that the CCP is broadcasting out and a willingness to explore the uncertain territory of a plethora of alternative accounts which provide much needed context and nuance to the current narrative coming out of the Middle Kingdom.