Demystifying China

What the West Misunderstands

China challenges the Western imagination. It’s not just the numbers: a population of nearly 1.4 billion, an increasingly diverse and volatile $11-trillion economy and mass migrations from the countryside that result in explosive growth in cities like Beijing, where the population swelled to 20 million people in little more than a decade. On so many fronts, China is an experience like no other.

In describing what was unexpected about moving her husband and three children to Beijing in 2011, Parisian Amelie Negrier said: “Everything.”

“It took me six months to decipher the traffic patterns in order to cross the streets,” she recalled. “The people, the cars, the bikes—everyone was moving at once and it seemed that there were no rules. There are rules. It just took me time to figure them out.”

As a partner at Lazard Frères & Company, Negrier went to China to open the firm’s Beijing office. Now the new managing director of the Lazard office in Chicago, she can look back on the successful launch of one of the world’s premiere financial advisory firms in a country built on contradictions, at least by Western standards.

Negrier’s experience with communism, for example, was hardly what Westerners imagine. China is “hyper-competitive,” she said, marked by a focus on business, its people driven by a fierce industriousness to become part of the middle class. “Our housekeeper was able to send her children to a good school; she bought a car.”

Nearly 40 years after Deng Xiaoping melded economic liberalism with communism—lifting 300 million people out of poverty since the reforms of 1978 were put in place—Westerners are still taken by surprise at how that cultural mix plays out, and by the scope and stakes of the experiment.

There is so much that Westerners get wrong about China, according to Kenneth Lieberthal, senior fellow in foreign policy and global economy and development at the Brookings Institution.

“This place is a continent,” he noted. “People miss the enormousness of China. It’s the same size as the U.S. with more than four times the population. It has a very large middle class that’s now very well informed, and much more mobile than before.”

In a word, China is diverse. “It is lively, bursting at the seams,” Lieberthal said. “It is not fragile and disciplined or even monochromatic, which is the impression that many have of it.”

And it is a country very much still in transition. Progress for any country is never a smooth path, and lifting so many people out of poverty was no small task, even for China. Like other members of the modern world, China is seeking to solve its own problems while asserting itself in new ways. All of which helps to explain the tradeoffs and tensions that define today’s China, led since 2013 by President Xi Jinping, who also serves as general secretary of the Communist Party.

Having expanded so rapidly, China is now dealing with such growing pains as manufacturing overcapacity, environmental issues and a financial system marked by stock volatility and currency issues. At the same time, Xi is carrying out a sweeping campaign against corruption in the party and government bureaucracies.

But the fact is that China is still on a path that almost certainly will take it past the United States to become the world’s leading economic power “by the end of the 2020s,” Lieberthal said. “That’s not per capita, and says nothing of quality and composition of GDP, but in terms of total GDP.”

China has no rival in this race. “No other country but China is in competition to have the largest GDP in the world in the coming 15 years,” said Lieberthal. But even as China achieves this milestone, there is no guarantee that it will remain as a permanent fixture atop the list, as the United States has done for 140 years.

“There are trends in China that over a longer period of time could slow the China economy dramatically and the U.S. could again become the largest GDP, but that’s out several decades,” said Lieberthal.

As for China’s current growing pains, these aren’t necessarily bad or even unexpected, Lieberthal and other China experts noted, given President Xi’s hugely ambitious program to reposition the economy on a more stable growth trajectory for the long term.

Chinese GDP falling to 6.9 percent growth is not a crisis, according to Lieberthal. What many Westerners miss “is that sustaining 10 percent or greater growth had become destructive. The whole idea is to get to lower growth. Xi is working to restructure the drivers of China’s GDP from an export- and investment-driven growth strategy to a priority on developing innovation, higher value-added services and a greater role for household consumption.”

Those in the West who assume that a democratic transformation of China is inevitable may also be off the mark. “The Chinese system has shown an ability to adapt, extending its life for a rather long time,” said Gady Epstein of The Economist, who reported from China for 12 years before recently returning to the United States. “President Xi has made it clear that China does not intend to evolve into a Western-style system. Rather, he has taken important steps to extend the warranty of the China model.”

China’s first leader to have been born after the 1949 Communist revolution, Xi is a student of history, Epstein said, studying the past and tweaking the system to avoid the failures of Soviet communism.

Of the many studies that the Chinese produced to better understand the lessons of the Soviet failure, and avoid the same fate, was one that Xi commissioned, according to Epstein. It traced the roots of the Soviet collapse to Leonid Brezhnev’s era, from the mid-1960s until the early ’80s. Unresponsive to market reforms, Brezhnev’s regime allowed the rot of corruption to undermine the communist system.

649 Million Internet Users

Yet the former Soviet leaders did not have to contend with the Internet and the global spread of pop culture from the West, particularly from the United States.

Freedom in the Internet age takes a unique form in China. With 649 million users now online, the Chinese have access to much of what is available online in the West, including games, shopping and videos. But not to everything.

The most recent regulations for the Internet, announced in February, require those who engage in online publishing to “carry forward socialist core values” and spread ideology, morality and knowledge “that improve the quality of the nation and promote economic development.” Chinese laws and regulations governing the Internet have been selectively enforced in the past. But even if the new regulations are also not strictly enforced, they will have a strong signaling effect, according to some observers.

Meanwhile, Hollywood’s products are widely available in China and avidly consumed, especially by the young. The eighth season of “The Big Bang Theory” has drawn over 45 million views on Sohu.com. And “Furious 7,” the action film, has been one of the most popular movies at the Chinese box office.

The power of pop culture has not been lost on Xi. When he visited the United States last fall, Facebook’s Mark Zuckerberg, Microsoft’s Satya Nadella and Apple’s Tim Cook were among the business leaders seated with Xi and President Obama at the state dinner held in Xi’s honor at the White House. The picture offered a pop culture feast for the Chinese youth back home.

At the same time, Xi, who turns 63 in June, has become the image of the new China to Americans. In 2012, while still vice president, Xi revisited Muscatine, Iowa, the town where he spent two weeks as a youth on an agricultural research trip. In nothing short of a triumphant return, he had tea with the Iowans who hosted him in 1985. Dubbed “cornfield diplomacy,” the highly choreographed event showcased Xi’s connection to the American heartland.

In the current Kardashian era of celebrity culture, Xi cultivates an image of sophistication, quite a switch from the “gray man,” Hu Jintao, he replaced. Xi is married to a popular Chinese folk singer, Peng Liyuan, who was much better known to the public than Xi until his political elevation.

The End of an Era

Xi has come to the world stage at a
critical time, as China confronts the end of hyper growth and the need for major adjustments.

China’s economy is made up of multiple sub-economies, each more than a trillion dollars in size. And while some companies are still booming—including Cloud Frame, which builds data centers; Tencent, a social media company; and telecommunications giant Huawei—others are in decline.

“China is trying to get serious about addressing overcapacity in some industries, especially coal, steel, aluminum,” said Lieberthal. “Shifting people out of industries where they have built more capacity than they could possibly use presents challenges. Work in textiles, for example, has been priced out of the Chinese market and is moving to Vietnam and elsewhere. There are localities in China experiencing real stress.”

Lieberthal commends Xi for investing in environmental cleanup, after many years of little action, particularly with water and soil pollution.

The fact that China is dealing with so many serious issues is nothing new. Nor is it surprising, in light of the pace of its transformation.

China is “making changes that took other cultures and countries a century or a half-century to make,” Lieberthal said, “and compressing that transformation into two decades.”

Everything seems to be in play at the same time—“whether it’s urbanization or industrialization or opening the economy up to a greater foreign presence, or globalization, or even the digital revolution,” Lieberthal noted.

As China continues to expand, it will continue to grapple with the inevitable growing pains. But China has already proved that it is successfully playing the long game, which has taken it this far this fast.