Oct 29

(Letter) Crisis and The Great Wall of China

Written by chinayouren on Wednesday, October 29th, 2008 at 2:00 am
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During my travels these last weeks in Europe and Asia, and on my return to China, I have observed some rather striking contrasts. So much that they made me think a lot about the present state of Chinese economy, and here is a word about it.

Two different ways of seeing the world

I was in Europe for the last time the week of the “Meltdown Monday”, the one when the Lehman Brothers declared bankruptcy. Quite scary, but the news didn’t seem so surprising for anyone. Ever since the beginning of the year most people had seen the crisis coming. On the Spanish beaches, there were less tourists to be seen this summer, and the variable rate mortgages were getting stiffer for all. The governments that were not in electoral campaign had profusely announced what was to come.

That same week, during a congress in Lyon, the American guest from the marketing consultancy came out to the stand and presented the prospects of our industry up to 2010. He had a very professional looking PowerPoint with some colourful graphs that vaguely reminded me of the slides in a waterpark. The delegates from the rest of the countries looked bored, and only we – New Delhi, Kuala, Shanghai – were hurriedly taking notes. Nobody had shown us that back home.

The whole atmosphere I encountered in Europe was in stark contrast with what I had seen and what I am living still today in China. The crisis has not yet touched this country. The taxi drivers at the airport, who usually know a good deal of economics, don’t even mention the word crisis. On the corporate side, the contrast is even bigger. Most of my local clients, who take a WSJ for breakfast every morning, are not only not worried, but they actually look at the future with renewed optimism. They know that a big crisis (危机) is also a big opportunity(机会). In an intuitive language like Chinese, the two words share one single character.

The Great Wall of China

The prevailing thought here seems to be that of the Great Wall of China: Confident and proud of their financial system which has resisted the negative western influence, Chinese at all levels are convinced that the crisis will not hit them hard. To reassure them, there is the precedent of the 1997 Asian financial crisis, which devastated the Asian tigers’ economies and left China, the only country strong enough to ignore the western blunderer IMF, mostly unscathed.

The media here have already been speaking about the crisis for a while, but always as an external problem, and with a generally positive outlook. The official Chinese press is prudent as usual, but the general idea still seems to be that China shall be the word’s bastion of stability against the irresponsible western financial devices. Thus the official discourse goes: Growth to slow down mildy, there will be some restructuring to boost the domestic markets, and we will come out stronger in the end. And in everyone’s mind is the opportunity for Chinese companies to go out shopping for deals in capital thirsty western counterparts.

Of course, Chinese are aware that international markets are the weak link, as a large part of the GDP is made up of exports to western countries and FDI. But they count on two factors to ensure the minimum of vital growth required by the system. On one hand, the massive ongoing investments in infrastructure that expand their tentacles day after day to each end of the country. On the other hand, they bet on the development of Asian markets to counter the descent in Western demand.

In view of all this, the new priorities of the technocrats, as they explained last week in our industry briefing in Beijing, are: 1- Develop the markets to find a way out for Chinese production, and 2- Take advantage at the worst of the crisis to go out and acquire foreign companies, and achieve through these means the creation of truly global corporations, with an access to know-how and technology which is much more direct than that obtained from FDI.

The Great Wall of China, the myth that for millennia has defined the Chinese people, is born again in the realm of finance. And, shielded behind it, the sons of the Dragon hope to regain the glory of past times.

A weak point in the Wall

There are however some signs indicating that Beijing’s plans might not work out so cleanly. In the first place, although the Chinese financial system, entirely controlled by the government, has indeed remained more conservative and than the western one, this does not make it in itself an efficient system. A series of failed investments in the near past, such as Blackstone or Bear Sterns are good examples. And the opacity typical of the large Chinese banks, heavily influenced by the Communist Party, is not precisely the best guarantee of success.

It should be noted, as well, that the very foundations of the Great Wall, the massive reserves of foreign-currency held by the Chinese government, may not be the solution for every problem. Most people in China fail to understand that the foreign-exchange reserves are not free assets, and cannot be used freely by the government without seriously affecting its monetary policy, or rather, as professor Michael Pettis calls it, its currency regime. Indeed, until the domestic market is strong enough, China will be forced to keep the RMB as low as possible to keep up with the exports, which will completely condition the freedom of its policies.

Looking at the markets, already several observers have started to note the fall in sales of Chinese companies. It is very doubtful that the Asian Markets can grow sufficiently quickly to absorb the growing Chinese manufacturing output. In the end of the day, Asian markets mean India and Russia, the only two countries with a critical mass to match Chinese needs. They are both strangled by serious structural problems to be able to respond quickly enough to China’s needs. And the hesitating actions taken for land reform to increase the consumption of peasants might be a good idea in the long term, but it sounds very optimistic to bet on domestic consumption in the short term.

Add to this that Chinese economy, in spite of being in the middle of a development miracle, has severe structural problems, partly derived from its political system, as commenter Will Hutton brilliantly puts forward in his book “The Writing on the Wall”.The lack of a “soft” infrastructure, as he calls the ensemble of characteristics of a civil society that are necessary for the proper functioning of a market economy, makes China a very vulnerable system. It is symptomatic, for example, the total lack of internationally recognized brands, or the many cases of mismanagement, such as the recent case of baby milk contamination.

Beijing taken

But there is a much more worrying aspect, which derives precisely from the Great Wall effect. Historically, the Great Wall of China has not been effective to prevent barbarian invasions, and in a way it has often had the opposite effect. The Han people, protected by their Wall, had a tendency to feel invulnerable and live with their back to the North. In 1644, when the Manchus crossed Shanhaiguan, they took the Chinese by surprise. Beijing fell very quickly (to internal rebels in the frst place), and the last of the Han emperors was left with no choice but to hang himself from a Pagoda tree at the Jingshan Hill, right behind his forbidden city. This is History. But it is a story that has too often repeated itself in China, and which can revive under a new shape in the XXI century.

It is well known, and the economic miracle of the last 30 years is a proof of it, that Chinese economy is guided by a corps of well trained technocrats who know very well their subject. And undoubtedly Zhongnanhai must have a Plan B readily prepared for contingencies. But it seems clear that, as much as they might want to prepare, if the crisis hits hard in China, the scope of reaction of the system is very limited by its own structure and its own people.

Indeed, the great majority of Chinese workers, unlike their western counterparts, are ill prepared to face a crisis, let alone to understand it. Ever since the end of the Cultural Revolution, they have only known 30 years straight of growth. The Chinese people has kept silence since the summer of 89, when Deng and the Red Army made them understand that getting rich comes first. Since then they have accepted injustice, inequality and corruption in exchange for national pride and a notable increase in material conditions. The day the system fails to deliver, due to unemployment, inflation, or other crisis effects, the pact of silence shall be broken.

Unlike our governments, the Chinese Communist Party will be unable to shield itself behind an international economic situation that its own people do not understand. And all its legitimacy, based on economic development and on the dubious legacy of Mao, can vanish overnight. China needs a minimum annual growth to employ the massive wave of peasants that are migrating to its cities, the biggest migration in the history of humanity, as the topic usually goes in China comment books. The leaders know this very well, and the 7.5% of annual growth that they set as a goal in the 11th Five Year Plan is probably about the minimum they estimate for the whole formula to add up.

It the Wall falls in these circumstances, as in the Ming period, the psychological effect could be devastating. And when the forces of the hundreds of millions are unleashed, the bureaucrats in Beijing might have no other way left than the one of the (political) Jingshan hill.

Possible outcomes

We might be right now at a turning point in the process of development of modern China, which will seriously impact the course of history in the XXI century. This year 2008, the one of the 30 anniversary of the beginning of Deng’s reform, marked by a series of disasters, and rounded off by the spectacular success of the Olympic Games, might well be the year in which everything changes. In the Chinese tradition, natural disasters, and earthquakes in particular, have long been omen of political change. The last serious earthquake was, precisely, in 1976.

Whatever happens, whether the Chinese Wall resists or not, the international crisis shall precipitate many changes in China, and in the rest of the world we shall do well to keep a watchful eye on these events, because they shall have a major impact on our own lives.

If the Wall resists, Westerners will be forced to admit the validity of the Chinese economic system. Chinese capital shall go out to the world. Taking advantage of the opportunities provided by the crisis, Chinese economy may take in a very short period of time a decisive leap, and under the solid supervision of a regime legitimize by its success, it can spectacularly accelerate its progression to become a superpower. In a very short period of time, the most optimistic of predictions for China can become true.

If the Wall should collapse, on the other hand, Chinese economy may suffer a rapid decline, with almost immediate social and political consequences that may drag the rest of the world into a crisis that could go beyond the purely economic. The outcome in this case is much less predictable, and only mutual understanding and tolerance among the peoples of the world will avoid disastrous results.

So is the crisis hitting us or not?

The greatest economists have historically failed to predict crises, and are rather better at analyzing the problem a posteriori, finding out that it was all very clear after all. Crises are by definition unpredictable, so the point of this blog is not to guess whether or not the Great Wall of China shall resist this time the barbarians.

Instead, my conclusion is that, whatever the outcome, the role of China in the world can change radically following the international crisis. Most western media are, as usual, too busy following each other like a flock of chickens into the news of the day, from the Euro-Asian summit to the Moscow pact, and are, at the time of writing, blinded by the sudden surge of events in the western stock exchange. Suddenly, something will happen one of these days and they will all flock back into China with their copy-pasting machines, like they did at the time of the Tibet riots.

In the meantime, China blogs provide a good platform for both Chinese and western participants to keep a watchful eye on the Crisis and the Wall.



Hi, this is the initial entry I just posted on my new Chinayouren English blog, at http://chinayouren.com/eng. It is a blog where I intend to speak about the Crisis and other things of China.

I would like to publish it on FM, to try to get some feedback and also to try to connect with the English speaking chinablogging community.

Thanks, Chinayouren

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24 Responses to “(Letter) Crisis and The Great Wall of China”

  1. jack Says:

    Never prophesy, especially in the middle of a crisis.

  2. Steve Says:

    Chinayouren, thanks for the entry. You put a lot of thought into it and there’s quite a bit to chew on. I’m not an economist so I’ll be looking forward to reading the comments that follow.

  3. chinayouren Says:

    Hey, thanks for publishing. I just realize that with all this writing, I completely forgot the most important thing I had to do. Here it is, the link to my new website in English:


    Come over for a visit once in a while and I promise I will (sometimes) try to write less boring posts.

  4. Charles Liu Says:

    The Great Wall analogy is pretty good. Just want to point out the state of China’s economy seems to suggest it’s the latter stages of the GW – it’s not really keeping anyone out.

    Take the high % of foreign ownership of domestic production, for example. FDI is a double edge sword.

  5. TonyP4 Says:

    hi chinayouren, thanks!

    I wrote some similar comments in the previous article. The current events are:

    * China negotiated the pipeline from Russia. It is a win-win deal for both countries without knowing the detail.
    * China commits a large sum to railroad, the weakest, greenest and most important link in transportation for China. It will reduce unemployment and hence social unrest.
    * Large number of manufacturing factories esp. in toys have been closed recently in South China. It is due to poor QA problems (lead paint…) and recession in US and the west.

    The uphill battle and riskier investments:
    * Tibet mineral extraction. All new businesses have higher risk but bigger potential return.
    * African investments. Can they pay back?
    * Internal market. Lower down payment requirement to buy a house… Encourage citizens to spend more (preached by US!!!) by having a better safety net and insurance.
    * The product reputation even to Asian countries prevents China from making more export. Rocket launches are rarely used by other Asian countries even China has the best price/performance and safety record.

    With about 2 trillion reserve, China can do a lot. The export will be hurt for global recession to a less extend, as most of the export are low-cost consumer products.

    It is a critical year to see how China benefits this global crisis with its actions.

  6. Charles Liu Says:

    Tony, the fact China is being targeted for it’s Africa involvment seems to suggest there’s a stake there. My simplistic reaction is there’s probably a lot of oil in Darfur region, if we got involved with military aid to Jonh Garang 10 years ago, and are now blaming China for getting in there with economic aid.

  7. TonyP4 Says:

    Hi Charles,

    China’s non-interference policy in Africa is good as a business man, but bad by the west as human right violator. It is “he said, she said” and both are right (or wrong).

    When the cat can catch a mouse (do business in this case), you do not care it is yellow or black (their internal affairs).

    China is targeted unfairly as the bad guy by the west and its media. Russia supplies over 90% weapons, and no media from the west points out this fact.

    The US has different philosophy. If you do not agree with me, I and my allies will not do business with you. In some cases, I’ll send soldiers to shut you down. Decide for yourself which one is better for our earth.

  8. Hongkonger Says:

    Here’s ANOTHER fear-mongering propaganda from the West on China:

    “Chinese little emperors & empresses” And here’s Howie Synder talking to CNN ….


  9. Allen Says:

    Since Africa came up a couple of times, thought people might be interested in a new policy paper titled “The EU, Africa and China: Towards trilateral dialogue and cooperation” put forth by the European Commission on October 17 (click here for citizen’s summary) that describes a new pragmatic policy approach to Africa with China as partner.

    Asia Times has a piece on it.

  10. DJ Says:

    A side note here: I have always doubted about the common practice of explaining “crisis (危机)” as also an “opportunity (机会)”. My understanding of 危机 is 危险的时机, which means simply Dangerous Moment.

    Meanwhile, I am still looking for the original form of the Chinese curse “May you live in interesting times.” The current moment, by the way, seems to qualify.

  11. EugeneZ Says:

    Thanks for an excellent post. We live in uncertain time, the only thing I am certain about is that anyone who claims he knows for sure what the financial and econimoc condition will be in the near future is too full of himself. I appreciate you outlining two possible, starkly different, scenarios for China, although I think that it is still possible that the end result may well be somewhere in between.

    Having said I can not be certain how the economic crisis will evolve, I would like to speculate a bit, just for the fun of it. Here is the scenario – Obama gets elected on Nov.4th, serves as a trigger for the recovery of confidence around the world. Stocks recover half of the loss within weeks, consumer confidence stablizes and even recovers some – just in time for the Christmas shopping season. Q4 will still be a negative GDP quarter in US which is already baked in, making the recesion official (Q3 and Q4 negative GDP). But then Q1’09 US GDP turns positive, a new stimulus package passes congress that is focused on creating jobs and investing in infrastructure. Consumer confidence recovers some more, foreclosures slow down, housing transactions pick up momentum, especially in areas where price has dropped a lot. Stocks recover some more lost ground, housing price shows signs of stablization in 2H of 09. US will be on way to reovery or, to be more accurate, to the forming of another bubble, depending on your point of view.

    China is another story, there are even more uncertainty, I do not even dare to speculate.

  12. Allen Says:

    Great post ChinaYouRen! Hope you will be contributing (or cross-contributing with you blog) here often.

  13. Wukailong Says:




  14. chinayouren Says:

    Hi, Thanks all.

    @5, 6, 9: Chinese investment in Africa is necessary for the viability of Chinese economy. It is the only place relatively open for them to get natural resources and energy. It only proves that China is playing now in the big league, and ensuring its own access to resources is one of the essential conditions.

    All this negative talk about China and Africa that has been in the media is mostly the result of the established dominating powers stirred by the arrival of a new player. Europe, and France in particular, have seen their position in West Africa menaced by the arrival of the Chinese. The chinese site http://www.chinafrique.com, entirely in French (I never managed to acces the “English” link) is a good proof of the very serious efforts that China is doing to position itself in francophone Africa, where the image of the French has gone down and China rightly sees a land of opportunity.

    The West is reacting in 2 ways to this menace:
    1- Using extraordinary dosis of hypocrisy to accuse China of not respecting human rights in Africa (!)
    2- Since China pays no heed of#1, launching friendly programs of “trilateral” cooperation and what not to remind Africans and Chinese that the West is still in the lead.

    In the long run, I have the feeling that the entry of China will be good for Africans. It introduces a new player and a competition among the powers to offer better conditions to Africans to gain acceptance there. And however bad the chinese do it in Africa, I just can’t see how they can do it any worse than the West has done.

  15. chinayouren Says:

    @DJ10: I am not sure I agree with that. Dangerous Moment would be: 危险的时期。 What you are saying is 危险的时机, which means Dangerous Opportunity, reinforcing even more my theory: a crisis is a dangerous opportunity. Any native chinese here to help us out?

    PS. In any case, regardless of its linguistic correctness, the comparison is too powerful not to use it. It is the kind of “symbolic” word play that any journalist loves to write. Actually it is not mine, I got it from a comment posted some time ago in this forum.

  16. Steve Says:

    chinayouren~ isn’t Australia the greatest source of resources and energy for China? I thought I had read that somewhere and geographically it’s much closer. Isn’t there some kind of huge joint natural gas project?I also thought that they had signed long term contracts with Russia for both minerals and oil. Maybe I don’t realize the amount of resources that are available in Africa, but I was just curious about it.

  17. Raj Says:

    If the Wall resists, Westerners will be forced to admit the validity of the Chinese economic system.

    What exactly would the “validity” refer to and how would you measuere whether the “Wall resists”?

    I certainly wouldn’t agree that if China is not significantly affected by the global financial crisis then everyone should say China’s system is best. It would the case of China being relatively lucky, as there are a number of things that China should do to make its system better – encouraging more capitalism, breaking up State-controlled business and allowing energy prices to move up and down more easily are examples.

    My view is that China will suffer but not as necessarily as much as say the US primarily because it is still a developing nation with much more potential. However, the length of the global trouble will be linked to how China fairs – the longer it goes on the more difficulty China will have with exports and foreign companies moving to find cheaper labourers in places like Vietnam (as they are already doing).

    Using extraordinary dosis of hypocrisy to accuse China of not respecting human rights in Africa

    How is it hypocritical for people to complain about China not respecting human rights? We have nothing to do with business or governments – many of us criticise companies around the world for what they do.

    But even if you want to complain about “countries”, I would say that while not all our companies are perfect, generally speaking “we” (on the national level) have been much more willing to tie aid to political and economic reform. On the other hand China is not trying to encourage any sensible reform. That is bad because it hurts Africans and the wider world – unstable nations do not make for good investment. Is China going to just abandon Africa when the resources are mostly gone, or is it interested in trying to help the continent build a future that isn’t just based on oil, gas and jewels?

    Since China pays no heed of#1, launching friendly programs of “trilateral” cooperation and what not to remind Africans and Chinese that the West is still in the lead.

    So what you’re saying is we’re reasserting our own influence in Africa with more deals? Seems sensible.

    And however bad the chinese do it in Africa, I just can’t see how they can do it any worse than the West has done.

    Are you talking about now or history? If you’re talking about history well that’s in the past – we’re in the 21st century. If you’re talking about now then do you really think European companies offer as bad or worse employee rights than Chinese ones? I won’t pretend that newspaper reports from here automatically offer the right view, but I’ve yet to read independent reports from African publications that are hailing the arrival of Chinese companies in regards to workers’ rights. If anything what I’ve read says things are the other way around. People like Michael Sata are focusing on Chinese firms, not ones from Europe and the US. He isn’t an angel, but it wouldn’t be to his advantage in complaining about them if they weren’t the most badly regarded. I’m not saying they’re evil, but at best they have a very mixed reputation in many parts of Africa, which is not as good as that generally of their European and American competitors.

  18. Allen Says:

    @Raj #17,

    You wrote:

    I would say that while not all our companies are perfect, generally speaking “we” (on the national level) have been much more willing to tie aid to political and economic reform. On the other hand China is not trying to encourage any sensible reform. That is bad because it hurts Africans and the wider world – unstable nations do not make for good investment.

    To me – this sounds a lot like “white man’s” burden rhetoric I used to read a lot about in text books…

    Perhaps we should take a deep breathe and see – perhaps Africa is neither the West’s nor China’s responsibility. Perhaps instead of aid, China should simply do business with Africa as “normal” business partners, leaving the Africans themselves to decide how best to develop and reform Africa.

    I recently came across a working paper by a renowned researcher on Western-style foreign aid. If anyone wants to learn about the ideologies and economics behind Western-style aid, the paper is a good source of many useful information.

    But for my purposes, I’d simply like to quote the author’s concluding paragraph:

    As far as the role of outsiders in such growth, it is suggestive that most sustained and largest surges in GDP per capita (notably Botswana and Mauritius in Africa, as well as the East Asian tigers elsewhere, and more recently, India and China) have been largely homegrown rather than the result of ambitious outside aid and intervention.50 It would be worth testing and exploring more the hypothesis that most successful development is homegrown. And if so, research should concentrate more on homegrown determinants of development rather than spend so much time on outsiders’ actions. Perhaps then we might find that the ones most likely to “save Africa” are Africans themselves.

    It is high time the world start to treat each other as equals and with respect. Africa may be less developed than other continents, but it is not someone else’s responsibility. Africa needs capital and resources – and the opportunities to do trade. Africa does not need ideological lecturing from the haves of the world….

  19. Charles Liu Says:

    Exactely Allen, the World Bank under neocon puppetmaster was noting but a tool for US hegemony. Paul Wolfowitz even tied loans to anti-abortion mandate from Washington conservatives:


    There’s your “sensible reform”. BTW as a proud American it pains me to say this – but it’s the truth.

    (You know, if PKD implements some “sensible reform”, like not banning people for having an opinion they don’t like, perhaps Raj wouldn’t be so bored, he has to come here.)

  20. Raj Says:


    To me – this sounds a lot like “white man’s” burden rhetoric I used to read a lot about in text books…

    Interesting – which country did you grow up in that talked about that? Personally I didn’t know what it meant for a long time, and when I did I wasn’t interested.

    Perhaps instead of aid, China should simply do business with Africa as “normal” business partners, leaving the Africans themselves to decide how best to develop and reform Africa.

    Maybe, but it has already “interfered” such as when it indicated it wouldn’t be happy if Michael Sata won the previous (not current) presidental elections. Also it is in everyone’s interest to encourage reform. Is the Congo a good place for investment right now? Is Zimbabwe? Clearly not. Africans can change things for the better, but they need outside help. Even if you put aside helping Africans, reform leads to better investment opportunities and thus helps us too.


    You know, if PKD implements some “sensible reform”, like not banning people for having an opinion they don’t like

    Charles, that’s complete nonsense. People get banned for they way they express their views, not just for having an opinion richard doesn’t like. If it was the case he banned people he disagrees with, I’d have been banned some time ago (re my views on US politics).

    As I’ve said before, eventually most people are let back on. To date the only person who has a permanent ban that I know of is MAJ. Even ferin, who has been temporarily banned more than once, was allowed back on. If ferin can be forgiven there are few people who can’t be.

    Richard’s policy is if you make it personal and ignore his warnings, you’re out the door. If you try to evade the ban like Moneyball it takes longer to get back in. Equally if people just troll the blog/slag richard off then obviously their stay will be short. I may not agree with some of that is written here, but I don’t bitch about the authors.

    perhaps Raj wouldn’t be so bored, he has to come here

    So you’re saying this place is so boring that people only come here if there’s no interesting discussion anywhere else? Glad you’re so positive about it…..

  21. Frank Says:

    Reform is good, but forced reform based on botch idealogy, or reform in name but exploitation using corrupt agents in actual are the common tricks used to exploit the African. Otherwise why after so many decade dealing with the west without chinese participation, the African is still worst off when compare to other where no white men interfere?

  22. chinayouren Says:

    Hi, Im a bit late to answer.

    @16Steve: you are right, it is not pure economics, there is a political decision there. i.e. they could be able to simply get their oil/minerals in the market but that would leave the control of strategic resources in the hands of others. Thats what I meant by playing in the big league, geopolitics.

    @Raj: Sorry, too many things to answer and I am not a specialist in Africa. Just to say that yes, I think the West is hypocritical.

    Of course, western people are right to protest about the way chinese companies treat African employees, but really, Africans suffer much much more from their present economic/political situation than those workers will suffer doing 60h a week w/o insurance.

    And no, I am not speaking of 19th century, but of today. Of supporting cruel governments only to ensure their support of our interests in the area. Of maintaining high import tariffs for African products while forcing them to eliminate theirs for Western manufactures. Of selling arms indiscriminately, etc. I wish to see more westerners protest about that, as well as about the Chinese attitude in Darfur.

  23. Michael Says:

    There is nothing to fear from the worker class. They have no political motivations and the local riots are alwas put under control, it’s normal.

    Nobody is foolish enough to challange CCP by inciting the workers.

    In any case, we are doing a good job exporting unskilled workers overseas for different projects. So I’m not worried at all.

  24. Даниил Says:

    Да уж Ну у вас или талант писать, либо это скопировано откуда-то! 🙂

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