Friday, July 19, 2013

The China Conundrum

I was also quite positive on the China equity story earlier on, closer to the time of the inception of this blog, before the Beijing Olympics. But after 5 years, I now realized it could be a big mistake to buy China because it is a country that has lost something important and it could take a long while to find it again. There isn't a good single word to describe this, is it morality? Or the good in mankind, or a sense of righteousness? Whatever. This is not just about cutting queue and stealing buffet food. We are talking about melamine milk, flushing babies down toilets, running over injured people a 2nd time to make sure they die because if they don't, the monetary compensation imposed on the driver would be more damaging.

I am sure most would agree that China has some serious issues here.

Yes other big nations have their fair share of such moral issues. US has serial killers, Japan has panties stealers and Germany has that real life Hannibal Lecter who ate someone alive but I think China brings immorality to a whole new low.

I believe the cultural revolution was a big reason. When a whole generation was taught to betray their parents and families, Confucianism was burnt and intellects witch-hunted, one could expect what happens to the society at large. Together with intense competition brought about by its sheer population, lack of the rule of law, well, you basically have to join the dark side and become evil to survive. Morals come after you stop the stomach grumbling.

As a result, we have the China today. The name of the game: corruption, deceit and counterfeit. Nothing works if you go by the book, be righteous, honest and noble. But with these three traits now defining the nation, it is hard to see how the Middle Kingdom can progress from here.

First and foremost, China cannot reform, because corrupted officials would stand in the way. The whole system is rotten and it will take multiple standard deviation miracles to change the under-the-table ways of doing things quickly. Secondly, China cannot build world class companies or global brands because a good brand represents trust and quality. Deceit is the anti-thesis of building a legacy, hence there are no respectable Chinese brands today, even 30 years after Deng Xiaoping opened up China. The Chinese themselves don’t buy their own cars, shoes and watches for goodness sake! Last but not least, obviously China cannot innovate with counterfeit. Why would innovators want to stay in China knowing that what they create would be lost in a blink to copycats?

During the Beijing Olympics, it was often touted as the start of China's great leap from a developing to developed country. Japan went through that after the Tokyo Olympics in 1964 that and enjoyed 20 years of good growth until everything culminated in the 1989 property bubble. 1980s was Japan's decade. Japan Inc ruled the world! A lot of money could be made if you invested in Japan in 1964 (let's not talk about Japan after 1989, that's story for another day). So 1964 to Japan should be 2008 to China, but sadly there might not be a 1989 for China. The China story could have already ended in 2008.

Why? Corruption, Deceit and Counterfeit.

The great Deng Xiaoping pointed out correctly that the nation cannot embrace capitalism all at one go. Some will get rich faster. But with the unholy trinity of corruption, deceit and counterfeit plaguing the system, it just complicates the issues. Logically speaking, those who have gotten rich first would be the smarter folks who managed to climb up successfully. Albeit a significant portion of those would be people whose core "values" ARE corruption, deceit and counterfeit. Smart doesn't mean virtuous. Now we don't want them to reform China, do we.

So we are left with others who slightly more righteous and has slightly more integrity, humility, honesty, tenacity and all the other right "ty"s. But they want to leave China as they cannot stand the ungraciousness and ruthlessness of the society.

Even top leaders send their kids overseas and are well prepared to be able to leave the country any time. The very people capable of redeeming China from the dark side are not committed. It will take a long, long time before China can ever embrace Confucianism and recover all the right attributes. Maybe like 50 years or more. But it is good sign that the current top leaders like Xi Jinping and Le Keqiang are embarking on this right now, trying to eliminate corruption and punishing opposers.

If we try to put the countries on a global spectrum from gracious societies to mean societies, we might get something like the following:

Gracious --------------------------------------- Mean
Nepal, Japan, UK, Singapore, France, US, HK, China

Totally arbitrary, global readers please don't get upset to see your country in the mean zone. I would like to highlight that while the US may not be overwhelming gracious as a society, the underlying core values such as freedom of ideas, trust and integrity, meritocracy are what defines the country and makes it strong. Hence US is still the most powerful nation today.

So if China can reach the level of the US in 50 years, it would already be a great accomplishment. This would mean I might see Chinese companies innovating like Apple, Facebook, Google when I am like 80 years old. And they would also be building lasting brands like Colgate, Tiffany, 3M, companies blazing trails today. Alas, I think this is a very tall order. Most probably not achievable in my lifetime.

To end this, I shall leave you with one of my favourite quote which I got from Charlie Munger but originally from George Bernard Shaw:

"Don't wrestle with pigs, because even if you win, you get dirty and muddy and the pig likes it."

This is a policy I try to live by. If the game gets dirty, then get out. Don't wrestle with pigs. And there are lots of pigs walking around wearing suits. The bulk of them in China.

I can imagine why successful Chinese would want out. If you are naturally mild and good natured, to survive in China, you have to be mean. By trying to be mean, you change yourself and become a pig. Good people don't want to be pigs. For China to be a true global powerhouse like the US, it has to punish the pigs, clean up the mudhouse and replace corruption with integrity, deceit with honesty and counterfeit with quality.
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