The Chinese Puzzle

Hong Kong 2013Hong Kong is different than it used to be. It is Chinese, not British. By my observation, the share of English-speaking workers has diminished markedly since the colony was handed back to China in 1997. It would have to be corroborated by others, but on my recent visit, my fourth, it also seems that Chinese workers project a distinct sense of wariness in dealing with an American. The coolness was everywhere.

Without a doubt, Hong Kong remains a powerful and developing financial and trading hub. The scale of its modern container terminals is jaw dropping compared to Manila’s puny docks. The elaborate road, bridge and train infrastructure is dazzling. Long tunnels and enormous cabled bridge spans are downright artistic. Subways and under-harbor roads unify Hong Kong and Kowloon as one city. The divide used to be stark.

The Harbor City Mall in Kowloon, with over 700 shops, is the world’s largest, and I’d guess its richest judging from the elegance of the stores and the chic modern dress of the shoppers. We casual tourists stood grubby along the miles of aisles of flashy jewelry and clothing stores.

There is money in Hong Kong.

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Happy Hong Kong

High rise apartment buildings rise like weeds. The city, with 7 million residents, is much smaller and more compact than Manila. It is a vertical city, almost a Sim City. However, I think Manila has more towers going up right now, and may soon find itself looking a lot like Hong Kong, with rows of stacked homes, 40 to 50 floors per structure, replacing non-economic houses and older apartments. Better start double-decking Roxas or slapping an overhead rail line there.

How about a tunnel under the Bay to Subic, eh, or a bullet train to Clark?

I N F R A S T R U C T U R E.

Think big.

But this is all simply a lead-up to what I actually want to talk about. Set Hong Kong aside.

When we arrived home, the following headline in the Inquirer, on-line, caught my eye:

Here are a few pertinent excerpts from the article:

  • Chinese businessmen are urging the Philippines to further open its market and to actively promote its business opportunities and famous brands to attract investors, the Philippine Exporters Confederation Inc. has reported.
  • Philexport said Xu Ningning, executive secretary general of the China-Asean Business Council, had said in a meeting with local business leader that the two countries might further open their markets under the framework of a China-Asean free trade area.
  • Yu Ping, vice chair of the China Council for the Promotion of International Trade (CCPIT), said both countries were highly complementary in the areas of agricultural technology, industrial development, tourism and education.
  • In 2012, bilateral trade between China and the Philippines reached $36.37 billion, increasing 12.8 percent year on year. This growth rate was higher than the 6.2-percent expansion in China’s foreign trade.
  • The two countries also enjoyed two-way investments of $195 million last year. Philippine investments in China reached $130 million, while China invested $65.45 million in the Philippines.

Well, I believe that to be true, that the Philippines and China could be very compatible, mutually benefitting, trade and investment partners.

But take the call for open and vigorous trade and investments and place it side by side with Chinese belligerence over land and seas within the Philippine Exclusive Economic Zone, and the rampant smuggling and illicit fishing going on, and one is inclined to go into a twitch fit. It makes no sense. It’s a puzzle for sure.

Which China can we trust? The free-trade China? The occupier China? Or neither?

China says it wants bilateral negotiations with individual nations over territorial issues. But this seems somewhat insincere, as China has taken no initiative to try to solve the territorial conflict in a mutually agreeable way. Rather, that position seems to be a negotiating ploy, a less than sincere strategy to divide other nations and conquer them. Economically speaking, of course. China certainly acts the tough guy. The spiel from the trade guys reads a lot like “good cop” against the military’s “bad cop”. It is the military that categorize the Philippines as “running dogs” of the US and that places the Philippines on a short list of “kill” targets along with Japan and Viet Nam.

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Xi Jinping

I wonder what would happen if President Aquino called the bluff. What if he got noisily on an airplane to China to deal directly with Xi Jinping, President of the People’s Republic of China, on the West Philippine Sea situation. Maybe President Aquino would lay out something like the following mutually beneficial deal:

  • The sea minerals and fisheries are to no one’s benefit if they can’t be developed, and neither nation can do anything harmoniously and confidently unless an agreement is struck. An agreement must be struck.
  • The Philippines cannot under any legal framework agree to territorial boundaries other than those stipulated by the United Nations (UNCLOS). The 200 nautical mile Exclusive Economic Zone (EEZ) is non-negotiable.
  • The Philippines will agree to making certain areas within the EEZ available for development or resource extraction by China within the framework of Philippine law, supervision, and audit, and with profits shared proportionate to the investment by the respective parties.

That’s the deal.

If China fails to produce a reasonable counter-proposal other than “It’s ours, so shut up!”, then we know for sure that the only way to keep the Chinese out of Philippine territory is militarily.

If China can read those disastrous tea leaves, too, maybe they will consider the Philippine proposal, for their whole economy is at stake here.

The problem with the proposal for China is, of course, that Philippine law requires that at least 60% of ownership of a business enterprise reside with Filipinos. But here is where some ingenuity could be applied, akin to our previously expressed “foreign investment” solution that separates management responsibility and profit allocation from financial ownership. Take the following simple investment model:

  • COMPANY OWNERSHIP: 100%
    • Owned directly by the Philippines: 20%
    • Owned directly by China: 40%
    • Owned by the Philippines, representing investors from China: 40%

China manages the project (the President and Chief Operating Officer is Chinese). The Philippines oversees resource management and financial integrity through the Board of Directors (the Chairman of the Board  and about half the Board are Filipino). Net profits are shared 80% to Chinese investors and 20% to Philippine investors.

You say this is an awkward arrangement? So is having union membership on Ford’s Board. Rational business people figure out ways to deal with conflicting interests because they MUST to get value out of the business opportunity.

So structure the joint development framework in a dry, business-like way that gets the politicians, nationalists, and war-mongers out of the picture.

This business-like perspective is important.

Because the main alternatives would seem to be: (1) no development, or (2) war.

Comments
7 Responses to “The Chinese Puzzle”
  1. edgar lores says:

    1. If the Chinese mind is a puzzle, the Filipino mind is crazy by comparison. Would a Chinese cart a bed around on his back to sell it? I don’t think so.

    2. On reflection, there must be a single set of drivers between the two faces that China presents, the free-trade China and the occupier China.

    3. Both faces are expansionary; both are concerned with economics (market and resources); both are concerned with the current and future material well-being of people.

    4. I would characterize the conceptual cultural traits behind these two faces as:

    o Permanence (vs. impermanence)
    o Domination (vs. suppression)
    o Stability (vs. Chaos)

    5. Permanence. The Chinese will to Life is extraordinary, perhaps only exceeded by the Egyptian pharaohs. Evidences:

    o In history: Emperor Qin Shi Huang and his terracotta army
    o In health: Holistic medicine and long noodles for long life in birthday celebrations
    o In religion: Eclectic approach of hedging bets to eternal life by giving offerings to different gods of different religions

    6. Domination. The master-slave syndrome of the Filipino is more pronounced in the Chinese. The concept of ‘face’ underscores this trait, which is the maintenance of high self-regard that demands social recognition.

    o In history: Successive ruling dynasties up to now in the one-party communist regime
    o In conquest: Tibet and the people and cultural genocide
    o In status symbols: Mercedes-Benz cars and gold-plated toilet bowls
    o In behaviour: cheating and kowtowing

    7. Stability. The quest for psychological and social stability has always been externally driven in the Chinese by a dominating government and by rigid social constructs and tradition. (Filipinos are also externally driven, less by a weak government, more by religion, the family construct and tradition.)

    o In history: The suppression of the people in successive dynasties from early times up to now
    o In social constructs: The rigid family structure of ancestor worship; first elder brother, second elder brother, etc; first aunt, second aunt etc.
    o In physical constructs: The Great Wall of China

    8. All positive traits are intended to overcome their corresponding negative traits. What is ironic though is that they often invite, rather than overcome, their counterparts. Rather than permanence, domination and stability, the Middle Kingdom has been overrun by ‘foreigners’ (Mongols, Manchus and Western powers) and has undergone cataclysmic changes. It has never been a gentle society. It has been a civilization marked by unconscionable cruelty. Rule by fear on one hand and a materialistic outlook on the other have been its hallmarks.

    8.1 The bright side of its strong will to Life is characterized by (a) the diversity of products, practices and beliefs and (b) the will to excel as seen in the early exposure of the young to the arts and in the world renown of pianists like Lang Lang and Li Yundi. Sadly it also seen in the ongoing and planned destruction of Buddhist culture and artifacts in Lhasa (Tibet) and in Mes Aynak (Afghanistan).

    8.2 As has been noted before, the Chinese are supreme copiers but not innovators. Their absorption and mastery of computer technology has been outstanding. (From personal experience, I know the best computer analysts, programmers and technicians have been Chinese; their ability to manipulate abstract concepts is deeper than ‘shallow’ Filipinos, although both races have been Nobel Prize laggards considering their respective populations. There have been 11 Chinese laureates but only two were affiliated with China at the time of their ‘soft’ awards: one was for Peace and the other for Literature. The other 9 were mostly ‘hard’ awards in Physics (6), Chemistry (2) and Literature (1).)

    8.3 Among the many Chinese inventions, three have stood the test of time. One has to do with killing, and the other two have to do with… er, eating. The first is gunpowder. The second is the simple but impractical chopsticks. The third and most widely used is paper, especially toilet paper.

    • Joe America says:

      What a wonderful leap from the article which aimed for pragmatism, to the deeper constructs that might actually lead to a SUCCESSFUL pragmatism.

      Any way forward in the Philippine/China sea conflict has to be framed in clear terms that benefit China. China lacks the inclination to act to the benefit of others, as is found in your descriptions, especially that of Chinese cruelty. China is a sorely self-interested party. Compassion for others is non-existent. China has no concern about PHILIPPINE interests. Any civility that exists is because China sees the US standing right behind her orphan colony, and it would be detrimental to China to get into war with the US, and because China has economic interests in good relations with the Philippines, the US, and the rest of the modern “outside” world.

      The article probably has another phase to go through, to add up the value of the resources in the contested areas, and to add up the value to China of good relations with the outer world. The penalty for Chinese incursions into Philippine territory has to be expressed much more sharply than in the past. Economic punishments need to identified and hardened, made real. In addition to working with the US on military coordination, it would benefit the Philippines to work with the US on economic penalties if China insists on occupying Philippine economic space.

      If China occupies Philippine territory, she needs to get fined big time. Not shot.

  2. Mariano Renato Pacifico says:

    The Philippine Puzzling economic confusion.

    UPDATE 1-Yen breaks through 100, Abenomics hits another milestone
    http://www.reuters.com/article/2013/05/10/japan-economy-yen-idUSL3N0DR0HY20130510

    Thai Baht Pauses rally as Central Bank eyes Japan
    http://forexblog.oanda.com/20130424/thai-baht-pauses-rally-as-central-bank-eyes-japan/

    WHEREAS, The Philippine Islands’ Philippine Media are trumpeting …
    Peso is 3rd best-performing currency globally
    http://www.philstar.com/business/2013/04/28/935664/peso-3rd-best-performing-currency-globally

    … and that is from Philippine Star … I have not scoured the rest of the brilliant ivy-school-graduate run Philippne Media …

    Philippines are proud of their currency as the 3rd best-performing currency globally while OTHER INTELLIGENT COUNTRIES ARE WORRIED OF THE STRENGTHENING OF THEIR CURRENCIES. Could brilliant Philippine Media and Central Bank be right and the rest are wrong? We will never know. IT IS NOT ONLY FUN IN THE PHILIPPINES miracle of Media is making the Filipinos believe that stgrengthening of the Peso is goot for the Islanders. Wheeeew!

    I so love PHilippines. Despite Fitch and S&P I am not investing in anyone of Makati Exchange blue chips. IT COULD BE JUST A MIRAGE ….. I’ll wait until we are pansit and catsup export-capable.

    • Joe America says:

      Hi, Mariano. The delay in publication of your comment was systematic, with the computer noting the multiple external links and shoving the message off to moderation. It reflects no editorial judgment on my part.

      It is interesting to me that the international business publications seem to be almost obsessing over the Philippines. It seems like there is an article avery few days among the global online publications, Reuters, Atlantic, Huffington Post, and others. A couple of the more recent ones reflect your skepticism and warn that the higher debt ratings need to be viewed through the lense of reality, and, in reality, the economy is thin and the political landscape is not settled.

      I have been arguing to my wife that a good business for her to get into is export of agricultural products. Now I wasn’t thinking of catsup, exactly, but I do note that tomatoes in our yard sprout rather like weeds. Water + sunshine = red tomatoes. I learned that from my father when I was a kid.

      • Mariano Renato Pacifico says:

        Pasting links automatically goes to moderation is the default like most sites to avoid taking readers to smut or virus-laden websites.

  3. andrew lim says:

    What worries me about China is its identity crisis. Its description of itself as “socialism with Chinese characteristics” is rubbish. The Chinese Communist Party dont want to open up its society that much and lose control over the country. It craves for economic and technological progress, but its societal progress is limited – freedom of the press, transparency, corruption is high, etc.

    The culture has not kept up with its economic progress.

    So you have a culture that was flourishing for thousands of years, then in comes the Communists and puts it to sleep for a long time, and now it has woken up, where does it want to go? My fear is that factions will struggle for control, and since China has not much democratic tradition to rely on , it can degenerate into a thug, if it is not already one.

    • Joe America says:

      Indeed, we tend look at China as one huge harmonious nation, which her authoritarian, centralized government projects, but she is actually comprised of many divided sub-cultures, both geographically and politically. The military holds a special place, entitled to unrestrained speech, it would seem.

      She is more like the Philippines under Marcos, perhaps. And the Philippines certainly still has its dynasty and olgarch power-brokers, and its geographic areas operating fairly autonomously and in disregard of national law (vote-buying). So I see parallels in societal structure and development.

      The question for China is, who really is in power? It’s hard for outsiders to grasp exactly how things work. (J, calling J . . . we need an assist here!) The military leadership talks almost like they represent the nation. Which is a tad frightening.

      The greatest hope is that economic progress in China will create a new weight, or weights, of rational behavior, almost as I argue that the Philippines will be better off when it has a large middle class pulling its social, political and economic weight in responsible directions.

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