In-Depth

by Malcolm Riddell

What the West Gets Wrong About China
4

Part 4 | ‘Myth 3: The Chinese Live, Work, and Invest Like Westerners’

Harvard Business Review

CHINADebate

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Rana Mitter | Oxford
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Elsbeth Johnson | MIT Sloan School of Management

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June 20, 2021
Part 4 | ‘Myth 3: The Chinese Live, Work, and Invest Like Westerners’
Part 4 | ‘Myth 3: The Chinese Live, Work, and Invest Like Westerners’
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Rana Mitter | Oxford

What the West Gets Wrong About China

4

BIG IDEA | ‘For much of its turbulent modern history, China has been under threat from foreign powers, both within Asia (notably Japan) and outside it (the UK and France in the mid 19th century).’
‘China’s rulers, therefore, see foreign engagement as a source less of opportunity than of threat, uncertainty, and even humiliation.’

‘China’s recent history means that Chinese people and the state approach decisions very differently from Westerners—in both the time frames they use and the risks they worry about most.’

  • ‘But because human beings tend to believe that other humans make decisions as they do, this may be the most difficult assumption for Westerners to overcome.’

‘Let’s imagine the personal history of a Chinese woman who is 65 today.’

  • ‘Born in 1955, she experienced as a child the terrible Great Leap Forward famine in which 20 million Chinese starved to death.’
  • ‘She was a Red Guard as a teenager, screaming adoration for Chairman Mao while her parents were being re-educated for being educated.’
  • ‘By the 1980s she was in the first generation to go back to university, and even took part in the Tiananmen Square demonstration.’

‘Then, in the 1990s, she took advantage of the new economic freedoms, becoming a 30-something entrepreneur in one of the new Special Economic Zones.’

  • ‘She bought a flat—the first time anyone in her family’s history had owned property.’ Eager for experience, she took a job as an investment analyst with a Shanghai-based foreign asset manager, but despite a long-term career plan mapped out by her employer, she left that company for a small short-term pay raise from a competitor.’

‘By 2008 she was making the most of the rise in disposable incomes by buying new consumer goods that her parents could only have dreamt about.’

  • ‘In the early 2010s she started moderating her previously outspoken political comments on Weibo as censorship tightened up.’
  • ‘By 2020 she was intent on seeing her seven-year-old grandson and infant granddaughter (a second child had only recently become legal) do well.’

‘Had she been born in 1955 in almost any other major economy in the world, her life would have been much, much more predictable.’

  • ‘But looking back over her life story, one can see why even many young Chinese today may feel a reduced sense of predictability or trust in what the future holds—or in what their government might do next.’

‘When life is (or has been within living memory) unpredictable, people tend to apply a higher discount rate to potential long-term outcomes than to short-term ones—and a rate materially higher than the one applied by people living in more-stable societies.’

  • ‘That means not that these people are unconcerned with long-term outcomes but, rather, that their risk aversion increases significantly as the time frame lengthens.
  • ‘This shapes the way they make long-term commitments, especially those that entail short-term trade-offs or losses.’

‘Thus many Chinese consumers prefer the short-term gains of the stock market to locking their money away in long-term savings vehicles.’

  • ‘As market research consistently tells us, the majority of individual Chinese investors behave more like traders.’
  • ‘This suggests that something distinctive to mainland China influences this behavior: long-term unpredictability that’s sufficiently recent to have been experienced by or passed on to those now buying stocks.’

‘That focus on securing short-term gain is why the young asset manager in Shanghai left a good long-term job for a relatively small but immediate pay raise—behavior that still plagues many businesses trying to retain talent and manage succession pipelines in China.’

  • ‘People who dotake long-term career risks often do so only after fulfilling their primary need for short-term security.’
  • ‘For example, we’ve interviewed couples in which the wife “jumps into the sea” of starting her own business—becoming one of China’s many female entrepreneurs—because her husband’s stable but lower-paid state-sector job will provide the family with security.’

‘The one long-term asset class in which increasing numbers of Chinese are invested—that is, residential property, ownership of which grew from 14% of 25-to-69-year-olds in 1988 to 93% by 2008—is driven also by the need for security:’

  • ‘Unlike all other assets, property ensures a roof over one’s head if things go wrong, in a system with limited social welfare and a history of sudden policy changes.’

‘In contrast, the government’s discount rate on the future is lower—in part because of its Leninist emphasis on control—and explicitly focused on long-term returns.’

  • ‘The vehicles for much of this investment are still the CCP’s Soviet-style five-year plans, which include the development of what Xi has termed an “eco-civilization” built around solar energy technology, “smart cities,” and high-density, energy-efficient housing.’
  • ‘Ambition like that can’t be realized without state intervention—relatively fast and easy but often brutal in China.’
  • ‘By comparison, progress on these issues is for Western economies extremely slow.’

‘Decisions—by both individuals and the state—about how to invest all serve one purpose: to provide security and stability in an unpredictable world.’

  • ‘Although many in the West may believe that China sees only opportunity in its 21st-century global plans, its motivation is very different.’

‘For much of its turbulent modern history, China has been under threat from foreign powers, both within Asia (notably Japan) and outside it (the UK and France in the mid 19th century).’

  • ‘China’s rulers, therefore, see foreign engagement as a source less of opportunity than of threat, uncertainty, and even humiliation.’

‘They still blame foreign interference for many of their misfortunes, even if it occurred more than a century ago.’

  • ‘For example, the British role in the Opium Wars of the 1840s kicked off a 100-year period that the Chinese still refer to as the Century of Humiliation.’
  • ‘China’s history continues to color its view of international relations—and in large part explains its current obsession with the inviolability of its sovereignty.’

‘That history also explains the paradox that the rulers and the ruled in China operate on very different time frames.’

  • ‘For individuals, who’ve lived through harsh times they could not control, the reaction is to make some key choices in a much more short-term way than Westerners do.’
  • ‘Policy makers, in contrast, looking for ways to gain more control and sovereignty over the future, now play a much longer game than the West does.’
  • ‘This shared quest for predictability explains the continuing attractiveness of an authoritarian system in which control is the central tenet.’
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