Geopolitics and doing business in Hong Kong and China.
I’m forming a view that there are three general strategy ‘domains’ that need to be thought about when dealing with China. These are interconnected and not unique to China but they demonstrate different facets to foreign interaction with the country. I call these the Economic Domain, the Nationalist Domain and Political Domain. They combine and overlap, of course, but can provide a means of understanding ways of identifying broad areas of engagement. There’ll be other matters to consider, but these three seem to dominate – at least for me!
Clearly, these domains are inter-related, and all countries have them, but it seems to me that their conflation by many commentators and politicians cause problems when building both confidence and a business strategy for China.
Despite the clear drive to develop and exploit technology in China as part of Made in China 2025, one of the most frustrating aspects of visiting China is the blocking of many of the apps we seem to rely on. My personal bug is the lack of access to Dropbox, BBC and The Economist. A VPN goes some way to alleviating this, but it was very obvious at the World Internet Conference, as I approached the exhibition, the internet opened like a virtual Aladdin’s Cave and I had access to these as well as the normally banned Facebook (not sure that this is such a win!). I reflected on this ability to isolate internet access and it’s strangely impressive that the government can do that so effectively in contrast with the expected increase in democratisation of all societies when the Internet first made an appearance in our lives.
In the Economic Domain ordinary people get on with their daily lives trying to make money so, for all intents and purpose, doing business there is much like anywhere. The people are broadly content to live in a state that provides them access to opportunity and the lack of democratic accountability is generally not seen as a problem so long as you make money and get ahead and experience improved standards of living.
All the same, I have had open and frank discussions about the democratic deficit with business people and there is a view that democracy will evolve with Chinese Characteristics. After all, it took several centuries for the Westminster model to evolve and it’s less that 100 years since general universal suffrage emerged in western countries, so maybe this is not unreasonable given that ‘modern’ China is only about forty years old.
The Political Domain is, of course, dominated by the Chinese Communist Party (CCP) which still reflects the old paternalistic nature of totalitarian government which may have evolved into an instance of, perhaps, ‘wise kingship’ which was evidenced throughout western history and so long as it aligns with people’s needs will be tolerated. The worry is, of course, that Lord Acton’s dictum that ‘power corrupts, and absolute power corrupts absolutely’ also holds true and the instances of the powerful being abusive also abound through history to the current day. Which is why westerners place so much emphasis on separation of powers and the rule of law, something that is at the centre of the protests in Hong Kong.
The move to some form of authoritarianism seems to be growing in some western countries too, and with the overlay of populism demonstrates that we can’t be complacent. Australia, for example, seems bent on criminalising aspects of the freedom of the Press which is an example of the gradual erosion of once held rights that seem to have increased in recent years; as is the use of the threat of “terrorism” and security concerns as a reason to gradually erode the rights and freedoms that have been hard won by past generations and which we may be taking for granted.
My point is that government exists to defend society and to build a framework within which people can prosper and grow. Over the last forty years, the CCP has achieved this by freeing people economically and the people broadly accept the party’s role as providing wise kingship that encourages them to keep out of politics. Given this ‘social contract’ with the people, it’s no surprise that the biggest fear of the CCP is that anything that damages this prosperity will lead to social upheaval. In this regard, the events in Hong Kong and the broader support of the population for the demonstrators must be a worry to Beijing.
I have heard it suggested that the party’s control is more to monitor mood than to lay the foundations of an Actonesque absolute power state – which is why several people I have met are concerned about Xi’s recent ‘President for Life’ ruse. Nonetheless, to western eyes it appears arbitrary and no respecter of human rights. The Politics Domain is complicated for business to navigate.
The CCP (maybe one day they’ll drop the ‘Communist’ bit as this is now a misnomer in my view) is probably right to push back on comment by foreigners on their internal governance as I think this is evolving within the confines of the party’s existing deliberating mechanism. There’s a book worth reading which goes into this, Cheng Li’s Chinese Politics in the Xi Jinping Era. He goes into some detail about the internal dynamics of the machinery of government and between conservatives and reformers – basically the Xi camp and followers of Deng Xiaoping’s ideas.
The geopolitical situation is different, however. Economic power has always led to the extension, in some form, of wider geographical political influence and it is appropriate that western powers call out the contradictions of authoritarian states, including China, as they expand their influence. So, on a government to government level it is both reasonable and appropriate that questions of Human Rights, governance and political interference are raised.
But, for countries that rely on trade with China, there now arises the question as to whether they have the freedom to protect their own interests, and promote the welfare of their people, through economic interchange. This dilemma may well be at the centre of geopolitical engagement for the rest of this century and could be where the economic and political domains run up against each other.
As far as the Nationalist Domain is concerned, the natural pride that the Chinese people have in what they have achieved (and it is very much the achievement of the people) built upon the long history of China, has been adopted by the CCP as evidence of the party’s own achievement. Holding pride in one’s nation is the same the world over but is used extensively by the CCP to gain the support of the populace.
Business needs to understand this pride but also how both the Nationalists Guo Min Dang in the 1920’s and 30’s, and Communist Party, thereafter, used the trade wars of the nineteenth century as the case against foreigners involving themselves in China. This also forms the basis for keeping foreigners at bay after the war and up to the late 1970’s. So that today it is still possible to experience distrust and a belief that foreigners are in China to rip them off, while foreign business has a case in the opposite direction. It is as much this historic and nationalist narrative that creates the need to build relationships and trust that can make business engagement so protracted as questions around language and cultural differences.
The economic opportunity is there to be had and the fact that there are around fifteen million graduates unemployed and nine million more people graduating each year, means that economic growth remains important for China as elsewhere. Therefore, you see the Party impressing on all regions the need to encourage inbound investment to absorb these young people in productive work through a focus on advanced technology and start ups. This is proving a challenge as overseas business is cautious about engagement and concerns remain about safeguarding intellectual property. But there are companies that plan properly and take the plunge and it seems to me that within the economic domain there is a desire in the people and most regional political entities to welcome and work with foreign business. The engagement of foreign companies with local incubators is also a sign that things are changing.
This factor also underlies the recent announcements of improvements to the processing of foreign business formation, allowing wider areas of operation and easier tourism visas. It also points to greater opening of the country, not withstanding its love of surveillance and control.
Understanding any new market is essential and that clearly applies to China. The nationalist domain is something to be understood and the issues of the political domain needs to be left to world governments to deal with between one another. For business, they should be aware of these matters as part of due diligence but should remain focused on the economic domain of China, as this is their area of competence and where they need to develop and engage with China and not be fearful of it.
Of course, if you are suspicious of China there are another 5.6 billion people living outside China you can trade with, but the economic, nationalist and political domains require careful assessment for any country investment strategy. China is a country that has changed and developed incredibly over the twenty years I’ve been visiting. There are certainly aspects of the politics that I am very uncomfortable with, and continuous surveillance is one. If my friends are right in China about gradual democratic change, the Political Domain may be the last domain to ‘open up’ and with the clear desire to work with foreign partners within the economic domain, opportunities should continue to be pursued.