China Dialogue: Exploring the Past, Present and Future

Covering topics ranging from China’s enormous entrepreneurial enthusiasm to the ongoing tensions in the South China Sea, world-renowned China scholar Dr. Orville SCHELL and CKGSB Dean Xiang Bing engaged in a dynamic discussion this month at CKGSB’s New York office.

World-renowned China scholar Dr. Orville SCHELL, left, and CKGSB Dean Xiang Bing explored China’s economy as part of a CKGSB Knowledge Series event in partnership with The Center on U.S.-China Relations at the Asia Society.

Dr. Schell, a former professor and Dean at the University of California, Berkeley Graduate School of Journalism,  is an internationally-esteemed commentator on China. He is the author of fifteen books, ten of which are about China, and he has written widely for many magazines and newspapers. He currently serves as the Arthur Ross Director of the Center on U.S.-China Relations at Asia Society in New York.

In addition to founding and operating CKGSB, Dean Xiang is a leading authority on Chinese business, innovations in China, the globalization of Chinese companies and the global implications of the transformation of China.

A CKGSB Knowledge Series event in partnership with The Center on U.S.-China Relations at the Asia Society, this deep dive into the past, present and future of China’s economy was attended by a full house of businessmen and women.

An audience crowded CKGSB’s New York office to hear China scholar Dr. Orville SCHELL and CKGSB Dean Xiang Bing engage in a deep discussion on the past, present and future of China’s economy.

Dr. Schell asked Dean Xiang for his thoughts and opinions on sustainability, information democratization, the “China model” and much more. An edited transcript of the conversation follows.

Dr. Schell: China is really in the process of reinventing itself in almost every area of life that you look at, whether it’s the economy, the body politic, social construction, value systems, and so on. So I wanted to get you to share some thoughts with us. You were born in 1962. You really have lived through and witnessed one of the great transitions of world history, where China has gone from being a revolutionary country with a very centralized economy to being what it is today, and that really is the question that we are here to address. So tell me, what is it like for you to have been through this extraordinary transition? Where are we, and where are we going?

Dean Xiang: One of the reasons why I’m more confident about the future of China is because people my age have experienced so much: the communism, the socialism, the capitalism, the market economy, the command economy and the Cultural Revolution. When you’ve experienced so much first-hand, when you face the future with so many choices, you tend to be more confident.

I have a tendency to look into the future in a positive light. I try to leverage each element of my experiences into an asset, including the Cultural Revolution. The Cultural Revolution did so much damage to China, but, at the same time, it liberated people like me. We can think about anything now. So the possibility of creating a company like Google or Facebook is attainable.

With all this experience, I think China will become a key center for innovations.

Dr. Schell: You mention the word “liberation.” For China, 1949 is, technically speaking, the moment of liberation for Mao’s notion of revolution. And yet today we have a very, very different society. I’m wondering how you view this. I don’t think I can think of any other country in the world that’s undergone so many total transitions from dynastic period to republicanism to communism to whatever Deng Xiaoping-ism is, to the present. How do you see that blank slate getting filled in again with something that is stable, durable and workable?

Dean Xiang: Well, economically, Deng Xiaoping followed much of the practice as initiated by Ms. Thatcher and Ronald Reagan, what we call, academically, neoliberalism. That’s a key element of change in China. Another element is Deng Xiaoping’s open-door policy. This led to China becoming a member of the World Trade Organization in December 2001, and it was after this that most of the economic progress in China took place. So China should thank the US for helping China to get into the WTO so that China could join this wave of globalization. And this information democratization pushed by the internet gives China a huge advantage, plus the population dividends coming from Mao Zedong’s time.

To me, those are the key reasons why China succeeded.

Of course, the peaceful environment was essential. For the future, China’s far more dependent on global trade compared with 20 years ago. Our trade as a percentage of our GDP was as high as 70 percent in 2008. Even today, it’s around 45 percent. We’re far more dependent on trade than the US and Japan. We depend on importing resources from around the globe. So today there’s absolutely no incentive for China to be engaged in any military conflicts with anyone. It would be plain stupid. Why would China do that? China has every incentive to ensure safe passage of sea lands. To commit a crime, you need incentive. What’s the incentive for China to engage in any trouble with any country, especially the US, the most powerful nation?

Dr. Schell: This is precisely, I’m sorry to say, what some Western powers think China is doing in the South China Sea, namely, making trouble. So if you say China has no motive, how do you then explain this very tense situation which we’ve seen develop which could, in fact, if it doesn’t work out well, really throw things off the track for everybody?

Dean Xiang: Well I’m no expert on this geopolitical issue, but I look at the issue economically. If everything goes smoothly, the GDP per capita of China by 2049 will be half of the US. China has a long way to go to be half as affluent as the US. As of today, Germany is the only country that is more dependent than China on global trade.

I look at this issue from a historical and philosophical level. China believes in harmony in diversity. Even when China has been No. 1, looking at the long history of China, China has never been expansionistic.

We never believed our system should be copied, even when we were No. 1, which is fundamentally different from some US thinking as in “we’re No. 1, maybe you should follow our practice.” This comes from the Confucian notion of “harmony in diversity.”

So with today’s situation, I think China will have every incentive to ensure safe passage of sea lands because China depends so heavily on global trade.

The Chinese perspective of this issue would be this: The controversy coming from the reclamation of some of the islands in the South China Sea, which I don’t know well, the Chinese story I read in the newspaper said that ‘oh, you know, Vietnam, maybe Taiwan and the Philippines, did all of that in earlier times. We did this more recently. Why is our practice a problem now, when it was not a problem for the other nations in the past?’ The Chinese may think the US has double standards when it comes to this issue.

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Dr. Schell: You mentioned the role of innovation and that China is good at copying things. I think that actually China may be a bit more innovative than that, but I’m wondering if you look at innovation here in the United States or perhaps in Europe and in China, what do you see as the differences and what is the limit in terms of innovation that you perceive in China? How far up the spectrum can we expect China to go in the next few years in terms of innovation?

Dean Xiang: In the past, China’s economic drivers have been very different from the drivers of the US economy. In the US, you need technology to support innovative companies, like Google, Facebook and Apple. But in China, much of the development is coming from deregulation. We still have many sectors that can be deregulated: financial services, telecoms, culture and creative industries, sports, and healthcare. So China can continue to develop its economy without innovation, but with deregulation.

Also, it has been much easier to copy than to innovate. In the past, the really successful businesspeople in China are the ones who have been concentrating on imitations, not innovations. Imitation was by far the most dominant strategy in China, at least in the past.

But in the future, some of the sectors are so globally competitive. Automotive, for example, is by far the largest market, and to survive in that market you have to innovate. You don’t need the government to push, you don’t need anyone like me to tell them “you need to innovate.” They know what they need to do to survive. They’re smart people. So don’t push them too hard. I think they know what they’re doing.

I’m very positive China will become a key center for innovation. The simple fact is when you become the largest market, you have to innovate to survive.

Today we’re so globalized. When you have the largest market, when you have this money, the top talents, processes and capabilities will come to China. This has already been taking place over the past four or five years. The top talents come to China to innovate. One reason why the US was so dominant in innovation was that not only did it have great infrastructure for innovation, also having the largest increment in the global economy was absolutely essential. When you have the market, you have the talents. They will come.

Dr. Schell: Then reflect for a minute on what you think the role is in this whole sort of very mysterious process of innovation of education. How does the system of education in China and outside of China differ? Also I think we really have to factor into this equation the role of government restrictions on certain kinds of information, how that affects people’s ability to be creative, open, think broadly and innovate.

Dean Xiang: I think for the Chinese educational system we have had a lot of setbacks and we will probably not be good at producing a student who is truly innovative. But if you see 60-some million Chinese living overseas, and Chinese students represent a large source of foreign students for any major university, and you see close to 100 million Chinese people traveling around the globe, I think it all will mitigate some concerns.

And also the innovation in China will not just be innovation by the Chinese people or Chinese companies, per se. You go to Silicon Valley, the innovation may come from Chinese, Indians, Italians or Russians.

I see things like this taking place in Shenzhen now. You see scientists and engineers from around the globe coming there because that’s where the money is and that’s where you can realize your dreams and leverage your insights and wisdom. This ability to innovate will come from around the globe.

As far as restrictions on the flow of information, in particular Google and Facebook: If you consider so many Chinese students studying around the globe, and you have a guy like me spending 75 percent of my time outside of China, this restriction of flow of information on a person like me is very, very limited. I can WeChat to 500 people easily, even if it’s taken down 10 minutes later, it’s there. It’s there. That’s the beauty of social media.

So I think social media has had a profound impact on the way the government is functioning. A profound impact.

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Dr. Schell: So if you look at the long term, one does not have to be an economist or the dean of a business school to know one truth about economies: that is, they are cyclical, almost invariably. China has had one hell of a good run, really since 1991-92. What do you think will happen, and China remember is also very reliant on the global economy, so if there is a significant downturn: Do you believe that the system as it is presently constructed has the tools to ameliorate that problem, or if it does run into a serious downturn, do you think it has the resources both spiritually, valuatively, institutionally and every other way to sustain itself?

Dean Xiang: Over the long term, I am positive. I’m not saying that China’s reemergence as a superpower will be a smooth-sailing one. Look at the US, and you have the 1929 crash, but they bounced back. All the fundamentals are there. The population dividends will continue to be a driver, and China, like the US, we’re the two nations that truly embrace this neoliberalism and globalization. We have a lot in common, we have differences, but we have a lot of commonality as well.

There could be a hiccup, but China will bounce back. The fundamentals are there.

Dr. Schell: So that raises a very interesting question and again one which I often find myself quite mystified by. In your view, where does China’s sort of enormous energy come from? I think anyone who goes there, whether you’re talking to entrepreneurs, ordinary workers, anyone, even the government, is incredibly energetic. What’s the source of that?

Dean Xiang: I really don’t know but you know, I had a conversation in 2006 with the then-ambassador to China from France, and he asked me, “How do you see the future of China’s economy?”  I said: “Positive.” He asked me why and I said, “We are willing to work so hard for money.” That’s it!

Deng Xiaoping let the genie out of the bottle. It’s so simple. Classic entrepreneurship. We’re so entrepreneurial. We’re not very good at innovation today, but we’re so entrepreneurial. We have so much drive to make money.

Dr. Schell: OK well let me then put it slightly different. We were talking before this session about how, in traditional China, entrepreneurs were not respected. They were at the bottom of the pyramid. They were considered rather dirty and irrelevant. The real respect went to those who studied the classics, got educated, got degrees and went on to the officialdom. So how did China get so entrepreneurial? Especially after Mao Zedong?

Dean Xiang: Definitely the merchants were considered the lowest class in that society in Chinese culture. Higher society would be the government officers, in keeping with the teaching of Confucius. That gives rise to the central element of the Chinese political system: The best and brightest will become government officers. That’s one reason our economy did well. They attract the very best and brightest. In the US, it’s very difficult. Very few of the top graduates think “Let’s go to D.C. to find a job.” It’s not their top priority.

But, yes, the merchants were discriminated against in every way possible.

Dr. Schell: They wanted their kids to be educated, take exams and become government officials, not become entrepreneurs.

Dean Xiang: Right, but after Deng Xiaoping’s opening up reform, he said, “Getting rich is glorious.”  And they had the influence of consumerism.

Dr. Schell: Yes, but where did that come from? How did Deng Xiaoping just suddenly wake up one morning after having been through the Cultural Revolution and having been Mao’s loyal ally in stamping out capitalist rotors? How could he wake up one morning and say this?

Dean Xiang: Actually he had a lot of difficulties. Remember, as you write in your book, he said, “Black cat. White cat. As long as it catches mice, it’s a good cat.” It took a person of his caliber and influence to say that and get away with it without ending up in jail.

Dr. Schell: Of course he’d already been in jail.

Dean Xiang: Good point. But when he said that he got away with it. By saying that, he mitigated the dominant ideology at the time and that gave way to our economy. Actually the serious development of the private sector in China only took place after 2002, 2003, about 12 years ago. At the start of 2002-03, the private sector had no trading rights, no banking credit, very few companies had the possibility of an IPO and capital market. So the private sector was discriminated against in every way possible. The government tried to choke them off and the private sector outsmarted them.

Dr. Schell: But you’re not answering my question. Where did this incredible impulse to be an entrepreneur and this extraordinary commercial energy come from?

Dean Xiang: I asked some of our alumni, and their answer was very simple: “We have been so poor for so long. We just want to make a heck of a lot of money.” And it’s served them well.

Dr. Schell: So in other words, might we say that because Mao Zedong kept the lid on things for a long, long time and stifled initiative, when Deng Xiaoping took the lid off and people could breathe again, they had this built up fund of energy?

Dean Xiang: Yes, all we needed was oxygen. And of course globalization helped. One might argue the Chinese government has not been able to discriminate against the private sector successfully. They tried everything possible but haven’t been able to choke them off.

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Dr. Schell: There has been much discussion over the past decade about whether there is in fact a “China model.” I think many Americans and Chinese alike look at the American system and look at Washington and think, “Uh-uh. That’s not working. That’s not what we thought it was. This isn’t the gleaming city on the Hill that democracy was once described as.” As you look at various democratic systems around the world and the China system wherever it’s going, how do you assess them? How do you evaluate them and compare them?

Dean Xiang: The way I see the limitations of Western democracy, including the US, is:

1. National debt is out of control.

2. The short termism of leadership: the 4-year-cycle, the 10-year-cycle.

3. The leadership deficit. Fewer and fewer really talented people will be willing to run for office. You don’t have the best and brightest.

Dr. Schell: At least you have to be something of an egomaniac to want to try.

Dean Xiang: I used to have a lot of hope in the US system to mitigate the money and the power going together. But look at the GINI coefficient in the US. When I was giving a speech in 2009, the GINI coefficient of the US was .448, for China .491. So we don’t do well with concentration of wealth and power.

When you look at Chinese history, you know that better than I do, we have had five major dynasties, roughly 300 years per dynasty. One reason for that is the money and power going together and people starting a revolution for regime change. The US has yet to complete its first 300-year cycle.

The Chinese system has some positive elements: Ruling by elite, the emphasis on experience and also the ruling party spends tons of money and resources developing the next generation of leaders. Not only the leadership academy in Pudong, state-of-the-art facilities, inviting speakers from around the globe. Sending many of them to the Harvard Kennedy School, to the Cornell School of Public Policy.

But the limitation of our system is that the government has too much power. You have corruption. It’s a key source of income wealth inequality. And we don’t have a way of solving this money and the power going together. So our system is not necessarily better than your system, don’t get me wrong. I think that we need to sit down to figure out what we can learn from each other.

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Dr. Schell: Let’s deal with this question of sustainability. This development in China which was so impressive, so rapid, certainly took place at the cost of the environment. Do you think now that, given China’s political system and economic structure, it is better equipped or less well equipped than say a Western country to deal with the environmental challenges it faces, which are extreme?

Dean Xiang: Well, one of the reasons Chinese companies did well is because we did not factor in the environmental cost.

Dr. Schell: Nor have we, I might add.

Dean Xiang: You have done it better. Europeans did not do it so well. Japan really set the best benchmarks to be followed. Accordingly, we sacrificed so much. Virtually all the multinational companies have moved low-value added, heavy polluting activities to China.

Can we do better in the future? For me, the most sensible option for China to move from the sweatshop to a true manufacturing giant is the German model. Training skilled workers and innovation, of course, but it will be difficult. China is the largest emitter of CO2 already.

Dr. Schell: Let’s end on that, though it’s a discouraging topic. Do you believe that President Xi and President Obama’s declaration that they want to actually do something about carbon emissions is going to bear much fruit?

Dean Xiang: China is No. 1 in emissions and the US is No. 2. I think we two nations have to do something for humanity. This is what I call the collective myopia of humanity. You look at political systems, economic systems, East, West, there are no long-term elements of consideration. If we keep on going like this, and we have this immensely powerful technology, and we do not start considering the long-term implications of our actions, the possibility of the end of humanity is there. I’m not exaggerating. I think China and the US, we have an unshakeable responsibility.