China: Back to the Future

What the poet Lu Xun -- and other voices of China's past -- can tell us about the country's present challenges.
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chineseleaders.jpg(Jason Lee/Reuters)

I just arrived back in Beijing after a month-long trip across the U.S. My trip started with discussions with mutual and hedge fund managers, corporate executives and Washington policymakers. It ended in Palo Alto where I talked to technology executives and then stumbled across the Chinese literary legend and social critic Lu Xun, who has been dead since 1936 but still dispenses great insights and wisdom.

I am writing this under winter camping conditions in my Beijing apartment, wearing long underwear and three layers of fleece. That is because the Beijing municipal government annually turns off the heat in all residential complexes on March 15th and then turns it back on November 15th, no matter what the weather. As I write this, the temperature is 34 degrees, and the air pollution level is 224, which is considered okay these days as it only qualifies for "health warnings of emergency conditions" and "protections recommended." After readings of more than 1,000 on New Year's Eve, today's murky atmosphere is a relative oxygen bar, though I have my newly installed air filter whirring behind me.

I return to China asking myself if the country is poised to move forward or if China is heading back to the future. For much of the trip, I was watching the National People's Congress and the Chinese leadership transition from afar. While doing so, I found that everybody I talked to -- from those who have hundreds of millions invested in Chinese stocks to those who are advising Obama on how to interact with China during his second term -- is simultaneously very negative about China and also very hopeful that the new leadership can turn the country around and revitalize reform and opening.

The new Communist Party chairman and China president Xi Jinping is in a similar situation to that of Obama after his first election. People at home and abroad are disenchanted and disappointed with Xi's predecessors, and expectations are so high about Xi bringing positive change that even if he does a decent job he is likely to disappoint. We are seeing some early hopeful signs in Xi's governing style, messaging and the people chosen by the Party and rubber-stamped by the NPC for important government posts. The new foreign minister, Wang Yi, is a fluent Japanese speaker, former ambassador to Japan and was China's front man for the Six-Party talks with North Korea. He has the experience and relationships to help wind down the very dangerous and volatile China-Japan territorial dispute over the Diaoyu islands and help China rejigger its outdated "close-as-lips-and-teeth" relationship with an increasingly whacko North Korea. 

The new finance minister, Zhu Rongji protege Lou Jiwei, has the experience and relationships to find a face-saving solution to China's dispute with the U.S. Securities Exchange Commission and U.S. accounting regulators. Left unresolved, the dispute could lead to a wholesale delisting of Chinese companies from American exchanges if China doesn't allow U.S. inspectors to examine the auditors in China who are certifying the books of U.S.-listed Chinese companies as well as American companies with significant business in China. Lou is coming from the China Investment Corporation sovereign wealth fund that needs free access to overseas investments. 

American government officials who deal with China who I met with in Washington are increasingly frustrated that China doesn't even bother to pretend to tell the truth when discussing contentious issues.

One discouraging sign is that speculation that Pan Yue would become Minister of Environmental Protection did not pan out, no pun intended. He had been sidelined years ago when as deputy director of the then State Environmental Protection Agency he had criticized the "growth at any cost" development model and tried to enforce environmental laws against powerful, high-polluting state-enterprises. 

American government officials who deal with China who I met with in Washington are increasingly frustrated that China doesn't even bother to pretend to tell the truth when discussing contentious issues. Very solid evidence of state-directed cyber-hacking of just about any American multinational with valuable technology and industrial trade secrets is met with the admonishment that the U.S. must cease with these "groundless accusations" that result from "ulterior motives". The hedge funds and mutual funds that have been big investors in the China growth story and strong proponents of patience with China's reform process have run out of patience themselves. They figure that all Chinese companies are lying to their investors so they are now turning toward investing in American and European companies with significant China exposure or playing China stocks on pure speculation. In short, the American business community that has long been the stalwart supporter of China in the U.S. has basically lost trust in China as an entity while they still have great respect for the Chinese people and what they have accomplished. 

All eyes are now on Xi Jinping and the new premier, Li Keqiang. So far there are many positive signs. Their atmospherics and rhetoric are mostly progressive and positive. In their speeches both leaders have emphasized that the Chinese government needs to loosen its grip and be more of a "service oriented" government. Xi has told Party cadres to "think a little more, learn a little more" and focus on fulfilling "the Chinese dream" of job stability, quality education, higher income, reliable social security and better medical care. Li Keqiang says that there needs to be a "division of power" between the government and enterprises, the government and investors and the government and civil society. As he exited his decade as premier, Wen Jiabao set the stage for Xi and Li by passionately calling for political and economic reforms -- which it seems he didn't have the power to carry out - while characterizing the economy as "unstable, unbalanced, uncoordinated and unsustainable."

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James McGregor is the author of No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism and One Billion Customers: Lessons From the Front Lines of Doing Business in China. He is a former China bureau chief for The Wall Street Journal and a former CEO of Dow Jones China. He lives in Beijing.

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