The Chinese Puzzle

If you want a little insight into why the Chinese often seem to view things differently from the way Americans do, it just might be because they literally see things differently; at least that’s one of the theses of a fascinating book called The Geography of Thought : How Asians and Westerners Think Differently...and Why, by Richard Nisbett. The book traces differences in Eastern and Western ways of perceiving themselves and the world, and points out ways in which these varying perceptions affect many aspects of life.

I won’t go into the reasons for this here, except to note that an essential element of Chinese thinking is the necessity of maintaining social harmony. The Chinese government is absolutely committed to maintenance of public order — not only because that is the Chinese way but also because, since its “reform and opening-up” 30 years ago and the abandonment of the centrally-planned system usually associated with Communism in favor of capitalism, the government’s main claim to legitimacy has been the steadily rising standard of living. China needs to keep industrial production high and incomes rising in order to maintain domestic order.

But now that rise is no longer so steady. With the worldwide economic slump have come unemployment and business failures. On Nov. 8 a government official told reporters that an estimated 600,000 migrant workers had left southern Guangdong due to unemployment in 2008 and moved back to the countryside, where they face slim prospects. A story dated Jan. 9 by AP writer William Foreman reported that in that same period “62,400 enterprises and branches of companies closed in Guangdong, 4,739 more than in 2007.”

China works hard, as Japan did, to keep its current account balance as high as possible. This used to be called mercantilism, which we may remember from our school days with respect to British behavior toward the American colonies. There are plenty of de jure and de facto ways to do this, including high taxes and heavy-handed regulations on imports of finished goods and subsidies (both overt and covert) for exports. I can see two reasons for China to do it, and they’re both called power. A big chunk of the surplus money has gone to strengthening the Chinese military, which will lead to ever-increasing ability to project power regionally. The other source of power is financial: as of October of 2008 China’s currency reserves had reached almost $2 trillion. Of course in September a fifth of that, up to $400 billion, were in Fannie Mae and Freddie Mac debt (and we know what happened to them), but that still leaves a ton of money, much of it invested in U.S. government securities. China’s willingness to finance American debt puts it in a strong position; if it should decide to stop buying American debt we would be in for an even more difficult time, although China would be as well.

There is an excellent article on coming changes to the Chinese economy in the Jan. 12 issue of Time magazine that suggests one path for China is to work to increase domestic demand, try to encourage the service sector, and move manufacturing from low-tech commodity goods to high-tech manufacturing. “The closures of the low-end manufacturers,” said the AP story, “will make room for high-end industries, especially carmakers, petrochemical firms and companies specializing in technology and services.”

American companies have been moving in this direction for while now, setting up high-tech facilities in China. For example, in 2007 Emerson Process Management opened two technology centers in Tianjin to help meet the rising demand for control-valve and valve-automation products for the growing process manufacturing industry in the Asia Pacific region. And the same year Flowserve Corp. opened a new pump, valve and seal manufacturing facility in Suzhou. The facility supports the company's existing China operations in Beijing, Shanghai, Dalian and Shenzhen by providing pumps, valves, seals and services to the oil and gas, power, chemical processing and water sectors as well as other industries.

And this is where there may be an opportunity for American manufacturers. We have a head start in automated manufacturing (the Chinese have tended not to automate manufacturing processes that could be more economically done with low-wage labor), and they have a long way to go in matching our expertise. If we make the most of it, and build up our capacity, we may steal a march on China.