Caged Hedgehogs, Car Smugglers, and GuanxiCaged Hedgehogs, Car Smugglers and Guanxi

Henry Blogett – Slate

What you think about the China Gold Rush.
By Henry Blodget
Posted Thursday, Feb. 3, 2005, at 12:51 PM PT
The downside of writing this type of series, in which you start knowing nothing and learn as you go, is that you might as well hang out a sign that says, “I am a moron.” In the past two weeks, in response to my request for help, several hundred readers have graciously taken the time to write and advise me about how to cover China. Not surprisingly, almost all of them know more about the China gold rush than I do. Also not surprisingly, a few are quite exercised about this fact.
For example, one writer excoriated me for using clichéd food shtick in last week’s piece about Mr. China (“Look at the wacky stuff they serve at banquets!”). He also dismissed the 1990s direct-investment wave I found so entertaining as “Gordon Gekko-era stuff” and predicted that once I got to China I would marvel at caged hedgehogs in restaurants, giggle at madcap linguistic faux-pas (“horse” and “fuck” are apparently only a tone apart), and upload phone-cam pictures of nutty spellings on street menus…
…Such was the volume of notes, in fact, that I have still only been able to read about half of them. But some themes are emerging.
For example, I now have a better idea of what expatriates do in China. In addition to the predictable occupations—banker, lawyer, consultant, teacher, investor, journalist, professor, student, backpacker, M&A adviser—I have heard from (or of) a French horn player in an orchestra in Guangzhou, a Web designer from Montreal who telecommutes from Shenzhen, the founder of a chain of Internet cafes, a prizewinning blogger, a German restaurateur, a magazine publisher, an oil executive, an English-school mogul, a DJ, a headhunter, an architect, a factory manager, a public-relations honcho, and “a guy in Beijing who made $1 million smuggling cars into the PRC (a crime punishable by execution) and then lost it all gambling in Macao.” (I’ve requested an interview.)
Readers’ ideas can be distilled into several groups, many of which I’ll explore in the weeks ahead:
Chinese and Westerners “think differently.” This is a consistent theme in the books I’m reading, and it obviously has profound implications for business. From the stories I’ve heard, one source of conflict appears to be differing attitudes about the purpose of companies. Westerners, especially Americans, tend to regard firms’ raison d’etre as delivering the highest possible returns to owners. Chinese, meanwhile, tend to regard the purpose as delivering jobs and sustenance to employees and partners. Although both views are perfectly reasonable, they lead to frustration and mistrust about management decisions.
The Chinese care about face-saving and appearances. One reader cited my apparent failure to understand this as evidence that Chinese and Westerners will never understand each other. Having lived in Japan, I thought I had a sense of how central these considerations can be in other cultures. Having worked on Wall Street, however, I can also say that the corollary implication—Americans don’t care about face-saving and appearances—is absurd. I have yet to read any vivid examples of how the face-saving proclivity is different in China than that in the West, so if you know any, please send them along…
…China’s 1.3 billion people should be viewed not just as potential customers, but as potential competitors. As one writer put it, “the Chinese look at this gold rush in a very different way. They don’t see themselves as being ‘colonized,’ or even necessarily the recipients of investment. They seek to invest in the West, and maintain the upper hand in business deals with Western companies. This gold rush is just as much about the Chinese making a killing selling stuff to rich foreigners as it is us making a killing selling stuff to them.” Another writer pointed out that the Chinese “invented the marketplace while our European ancestors were trying to get an alphabet together.”…
…The ticking time bomb hidden within the Chinese economy is bank loans to lousy companies. Financial busts result from excessive leverage—something in the system that makes the system look healthier than it actually is (China’s 9 percent GDP growth for decades, for example, or the U.S. telecom boom a few years ago). Non-performing loans issued by China’s state-run banks to China’s state-run firms appear to be the mother of all leverage.
One writer explained that China’s economy is “still dominated by massive and moribund state companies which are supported by a banking system that is technically insolvent. The government issues bonds and spends the money to keep the state companies in operation and keep the banks (somewhat) capitalized. The state banks buy the bonds and lend to the state industries. The government keeps this up because it is deathly afraid of what would happen if hundreds of millions of state employees were suddenly added to the millions of farmers and others now out of work.” When this bomb goes off—and it’s a “when,” not an “if”—the bust will be heard round the world.
Guanxi, guanxi, guanxi. Everyone agrees: If there’s one thing you need to succeed in business in China, it’s guanxi. Often translated as “connections” or “relationships,” the word seems to imply something deeper. One reader explained that “when the Don calls in his favors, you gotta do what you gotta do. Networking in China is more like Little Italy than the Hamptons.” Once again, although this concept seems more important in China than in the U.S., I can’t help but view it as a similarity. Anyone ever heard of the Carlyle Group?…
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