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.
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."
If you get right down to it, Xi and Li have inherited a huge pile of unsustainability. The OECD is projecting that China will overtake the U.S. economy in size in 2016 in terms of purchasing power parity. To keep that engine humming, however, the growth model has to shift from investment-led to driven by consumption. As Economist Andy Xie put it in Caixin Magazine recently: "If China keeps pushing growth through fixed-asset investment and credit, a full-blown banking crisis is likely within five years. Kicking the can down the road is not a viable option for the new government. Reform is necessary for survival, not a choice."
During his "southern tour" in December, Xi paid homage to Deng Xiaoping and his transformative market reforms. Xi said that the Party Congress that had just appointed him as Party chairman had issued "a new mobilization order" to deepen reform and opening up. An official speech from that tour is now circulating among Party officials. According to an analysis by independent Chinese journalist Gao Yu, Xi expands his vision for "the China Dream" to lay down firm lines against political reforms. He discusses the Soviet Union's collapse and complains that the Soviet Communist Party fell because "nobody was man enough to stand up and resist" when the military was no longer under the firm grip of the Party. The speech makes clear that Xi does not want to become China's Gorbachev and undertake risky reforms that could unravel the system. Instead, Xi emphasizes that "Only socialism can save China. Only reform and opening-up can develop China, develop socialism, and develop Marxism." An evolving early mantra employed by Xi is being called the "three confidences." They are: "confidence in direction, confidence in theoretical foundation, and confidence in system."
And this brings us to Lu Xun, who I ran into at Bell's Books, a wonderful used book bookstore in Palo Alto on my last U.S. stop. I stumbled upon a copy of "A Brief History of Chinese Fiction" that grew out of notes Lu Xun drafted for his lectures at Peking University between 1920 and 1924. Paging through this English translation from 1959, I found several passages that offer some ageless insight and wisdom about China that can explain the obstacles facing Xi and Li and how their efforts could play out.
As Lu Xun told his students 90 years ago: "When we look at the evolution of China we are struck by two peculiarities. One is that the old makes a comeback long after the new has appeared -- in other words, retrogression. The other is that the old remains long after the new has appeared -- in other words, amalgamation. This does not mean there is no evolution, however. Only it is comparatively slow, so that hotheads like myself feel that 'one day is like three autumns'."
As for Xi and Li's campaign to eradicate government corruption and extravagance with such efforts as limiting official banquets to "four dishes and a soup" and banishing traffic-choking official motorcades, Lu Xun cites the difficulties faced by reformers in the Qing, China's final dynasty. "They carry on as usual, concealing the true state of affairs from above and below, while the worst of them employ bad men to get them off by bribery. Thus the evil, instead of being checked, goes from bad to worse."
Xi and Li's pursuit of plain talk and less formalism brings to mind this advice from a Qing Dynasty novel "Exposure of the Official World" cited by Lu Xun. "The son of the Minister of Justice sought advice for how to handle his first audience with the emperor from a senior adviser to the emperor who his family had provided with "ten thousand taels of curios." He was told "Kowtow a lot and say little: that is the way to be promoted," later adding, "Even kowtowing when it isn't strictly necessary will do no harm."
In Deng Xiaoping's day, when nobody had nothing, nearly everybody in China supported reform and opening. Now that there are so many vested interests that profit handsomely from the current system, Xi and Li have their work cut out for them. The last leadership team in China seemed to be stuck in a reform pattern of taking one step forward and two steps back. Maybe the best Xi and Li can hope for is two steps forward and one step back.