The eightfold path of paradox

To succeed in China, business leaders must get to grips with its complicated world view

Global business leaders need to be able to get to grips with the many paradoxes that characterise contemporary China. They also need a sense of history and a long-term perspective as well as an appreciation for Chinese culture and how it shapes attitudes to myriad topics ranging from governance, to intellectual property, pricing and parenting. Given the evolving geopolitical situation, they also need to grasp and balance both Chinese and international stakeholder expectations regarding their role in China’s development.

So, while it can be tempting to try to simplify China or reduce it to single factors or the latest development, this is insufficient for leaders who seek to maximise the opportunities whilst still managing the risks presented by a China that is growing larger and ever more complex.

International business leaders more than ever require a sophisticated China prism that is capable of refracting the full spectrum of China’s growth, illuminating all the potential areas of alignment for global enterprises, and the various impediments a company may be seen to pose – at a given point in time, and with an eye to the future. This prism needs to be able to refract the historical, cultural and political dimensions of doing business in and in relation to China, including international stakeholder views about China and the role of foreign companies in its development.

Paradox 1: Centralising power vs network effects

On the one hand, power in China has been recentralised in many aspects in recent years as the Communist Party plays a more assertive and central role and has leveraged technology to disseminate its message (e.g., Study the Great Nation app).

On the other hand, information technologies have also enabled a wide range of stakeholders to participate in public affairs and enabled scrutiny that arguably leads to more responsive government.

Paradox 2: Increasingly global outlook vs rising patriotism

On the one hand, the Chinese are increasingly looking beyond China for opportunities and experiences and have had much greater exposure to the world through travel, study investment and consumption of media. Each year sees increases in the number of Chinese choosing to study abroad: in 2018, 662,100 Chinese students were studying abroad, up 8.83% from 2017. A total of 5.86 million Chinese studied abroad between 1978 and the end of 2018.

On the other hand, the Chinese are becoming more patriotic and confident in their achievements as a nation and as a people. This patriotism has arguably increased in response to actions taken against China by the US as manifest, for example, in “patriotic purchasing behaviour”. It is important to understand rising patriotism can present both challenges and opportunities for China’s leaders who may for example face greater pressure to take a hard position defending China’s interests.

Paradox 3: Innovation vs technological dependency

On the one hand, China is investing and making progress in innovation in myriad fields from ecommerce, transportation, and manufacturing to 5G. This is evident in the numbers of patents and engineers generated in China, and in long-term strategies to move China up the value chain. China is particularly strong at second phase innovation and this has certainly enabled it to take a larger share of global markets in many areas. Science policy experts from the European Commission and others have concluded China has already become a research and innovation powerhouse and is on track to compete with the EU and US for industrial and technological leadership by 2049. China is meanwhile calling for more “indigenous innovation” and preparing a “plan B” in case tech “decoupling” accelerates amid ongoing US-China conflicts, although the pace, extent, and cost of this “decoupling” is very uncertain.

On the other hand, China is not as strong in novel technology innovation and is still highly dependent on imported technologies in many areas, especially in the most challenging fields of science and technology. This is evident in the relatively low number of triadic patents (patents registered in United States, Europe and Japan simultaneously) and in data points such as the fact that it still spends more each year on imported semiconductors than on imported oil. China’s success is also uneven with strengths in ICT unmatched in other priority areas such as pharmaceuticals, for example. “Tech decoupling” would bring short-term pain and present major challenges to China – while spurring China to become much less reliant on foreign technologies.

Paradox 4: Pragmatism vs ideology

On the one hand, the Chinese are very pragmatic, and the success of the last 40 years of opening up and reform lifting almost a billion people out of poverty can largely be attributed to a pragmatic and adaptive approach to development and meeting challenges. This was communicated in the early phase of opening up and reform through slogans such as “it does not matter if the cat is black or white” and “crossing the river by feeling the stones” – and is still very much in evidence in China’s approach to the myriad challenges it faces, including the trade war. China’s calibration of the approach to One Belt One Road and Made in China 2025 in response to international concerns as well as China’s engagement with foreign companies – particularly at present – to counter overseas China hawks continue to be examples of China’s pragmatism.

On the other hand, ideology is arguably making a comeback, as the Party under President Xi seeks to maintain its control and legitimacy and manage issues such as corruption. At the 4th Plenum meeting in October 2019 President Xi Jinping delivered a communique explaining the Communist Party Central Committee’s decision on some major issues concerning how to uphold and improve the system of socialism with Chinese characteristics. That said, it can be argued that by referencing “Chinese characteristics” (as leaders since Mao have done) there is a streak of pragmatism in China’s governing ideology and the emphasis on ideology is itself pragmatic from the perspective of what needs to be done to maintain legitimacy.

Paradox 5: Globalisation and opening vs barriers and self-sufficiency

On the one hand, China’s core strategy to accelerate development has been opening up to foreign investment and integration with global industry and innovation ecosystems. Foreign investment in China continues to grow and China is expanding market access for foreign companies in a range of areas, recently extending to financial sectors. China was placed 31st in the 2020 World Bank’s ease of doing business rankings, up from 46th a year earlier and overtaking France. China is emphasising a commitment to openness despite rising trade protectionism globally, with the China International Import Expo in Shanghai providing an opportunity to demonstrate this. China is also advancing its China Going Global strategy (e.g., through overseas M&A) and initiatives such as One Belt One Road which increase its role and influence on the global stage. China is meanwhile contending with increased restrictions on Chinese investment (e.g., in the US and the EU) and other measures that limit China’s global influence and expansion.

On the other hand, China still limits participation for foreign investors in many areas. The OECD FDI Regulatory Restrictiveness Index shows that in 2018 – despite huge improvements from its score in 1997 – China still scored 0.251, compared with Germany at 0.023 and Japan’s 0.052 – meaning it is still much more restrictive when it comes to foreign investment. The regulatory playing field for foreign and local companies remains uneven and the international business community continues to call for greater reciprocity. Recently, there has also been a revival of calls in China for self-sufficiency in areas including foods, energy and technology driven in part by geopolitical concerns. Foreign investors also continue to have concerns about China’s intellectual property and technology transfer situation – some driven by misunderstanding, which could be clarified via a direct and targeted communication effort. (Note: calls for reciprocity in terms of current market access sometimes ignore or are ignorant of the fact that other countries were also comparatively restrictive with foreign investment at comparable stages of development while they sought to nurture local champions and industries).

Paradox 6: Public sector vs private sector

On the one hand, the state-owned sector of the economy is very large and, in some ways, growing; SOEs (state-owned-enterprises) are being consolidated and subsidised in various forms as part of China’s “socialist market economy”. SOEs in China are not just businesses, they are often the vehicles of the Party / state used to achieve broader policy objectives, such as financial and social stability. Notably, China halted a dispute at the WTO in June over its claim to be “a market economy”. In addition, “civil-military fusion” continues to be a hotly debated and scrutinised area as many in the international community have concerns about investment by the Chinese government in growing capacity and innovation that is applicable in both these domains.

On the other hand, China emphasises reliance on market forces and China’s private sector is developing fast and is often underestimated by outside observers. A recent World Economic Forum working paper stated that “China’s private sector is now serving as the main driver of China’s economic growth.” The same paper noted that the private sector provides 90% of new jobs and that private wealth is responsible for 70% of investment and 90% of exports. Nevertheless, government interventions with private companies still widely exist. The Chinese government has indicated, however, that it is responding to calls from the private sector for greater property rights protection, rule of law, and less external intervention to better level the playing field. “Competitive neutrality” (between state and private sectors) – if more fully realised – would benefit the private sector in China, including foreign companies.

Paradox 7: Confucianism vs legalism

On the one hand, Confucianism, which has also made a comeback in the past decade, is based on the understanding that people are inherently good but unequal. People need to be cultivated and developed and there needs to be a well-functioning hierarchy with benevolent leaders at the top for society to be harmonious.

On the other hand, elements of Legalism, another ancient governance philosophy which assumes people have bad tendencies and need to be ruled with sticks and carrots (in that order), can also arguably be seen in governance methods today. These are combined with elements of Confucianism to make it more palatable as has conceivably been the case since at least the Han dynasty). China’s developing social credit system is one such example.

Paradox 8: Wealth vs inequality

On the one hand, China is home to one fifth of the world’s population and has an amazing record of sustained economic growth. The People’s Republic has generated many billionaires and millionaires and as a nation has accumulated wealth through decades of 10%+ GDP growth. Certain regions have reached levels of development comparable to western Europe.

(Note: growth has moderated in recent years to levels which most countries would be very happy with (6%+) and arguably reflects China’s higher level of development. It is important to consider that this growth is on a massively expanded economic base.)

On the other hand, China still suffers from major income and developmental inequalities with some regions still very underdeveloped and experiencing poverty. China is far from rich when we consider the nominal per capita gross domestic product of China was just a sixth of that of the US in 2018. In 2015, China scored 50 points on the Net Gini Index, compared with Latin America – which averaged a slightly more equitable 41 – while elsewhere in Asia, the ASEAN-5 scored 38. A 2016 study from Peking University found that the top 1% of Chinese controlled over one-third of the country’s wealth. The share of wealth in the hands of individuals as opposed to government and companies is also very limited compared to advanced economies.

There is a risk that rapid technological progress and China’s increasing technology competency may only further expand the divide through labour-saving technologies that eliminate jobs and generate high profits for a few.

Meanwhile, decreased social mobility (which is lower than in many European countries, Japan and Canada) is becoming an issue in an avowedly socialist country.

 

Read more from Atticus Journal Volume 25 This is an excerpt from The China Prism 447 KB