Geopo­lit­i­cal events and con­text sig­nif­i­cantly shape and define the pos­si­bil­i­ties for other actors (includ­ing most of busi­ness orga­ni­za­tions, and par­tic­u­larly start-ups).

Strat­for is one of the best source for high-quality intel­li­gence. A bit pricey, but no more than your usual news­pa­per sub­scrip­tion, and much more valu­able as an invest­ment. The fol­low­ing piece is both sharable and of some­thing that’s of inter­est for every­one: the future atti­tude of China.

By Rodger Baker

Some­thing extra­or­di­nary is hap­pen­ing in China, and we are not talk­ing about the Olympics. Rather, Chi­nese offi­cials have been clamp­ing down on visa appli­ca­tions and imple­ment­ing bureau­cratic imped­i­ments to new and renewed visa appli­ca­tions under the guise of pre-Olympic security.

In some ways, Beijing’s plan for a safe and secure Olympics appears based on the premise that if no one shows up, there can be no trou­ble. But plac­ing restric­tions on the move­ment of man­agers and employ­ees of for­eign busi­nesses oper­at­ing in China, even if for a lim­ited time as Chi­nese offi­cials have been at pains to reas­sure, makes lit­tle sense from the stand­point of gain­ing polit­i­cal and eco­nomic ben­e­fits from host­ing the Olympics. Some­thing just isn’t right.

The Post-‘70s Eco­nomic Framework

Since China’s eco­nomic reform and open­ing in the late 1970s, China’s eco­nomic pol­icy — and thus the basis for the over­all devel­op­ment of the nation — has been based on a sim­ple two-part frame­work. First, draw in as much for­eign invest­ment as pos­si­ble and use the money and tech­nol­ogy to strengthen China while using the sub­se­quent eco­nomic lever­age to secure China. And sec­ond, encour­age growth for growth’s sake to ensure an ever-increasing flow of money through the sys­tem to pro­vide employ­ment and social ser­vices to a mas­sive and urban­iz­ing population.

Key to this pol­icy has been cre­at­ing a very open envi­ron­ment for for­eign busi­nesses, which bring money, tech­nol­ogy and exper­tise and use their influ­ence with their own gov­ern­ments to keep sta­ble inter­na­tional rela­tions with China — hence reduc­ing inter­na­tional and eco­nomic fric­tions and increas­ing the effi­ciency of the sup­ply chain. For more than two decades, Chi­nese national strat­egy has thus revolved around the prin­ci­ple of encour­ag­ing invest­ment, joint ven­tures and wholly-owned for­eign enter­prises in China. There have been two foun­da­tions for this strat­egy: the evo­lu­tion of finan­cial facil­i­ties for trans­fer­ring and con­trol­ling for­eign money with a level of trans­parency near­ing inter­na­tional stan­dards, and the ease of move­ment of per­son­nel in and out of China.

It is this lat­ter point that recently has been hit the hard­est. Over the past sev­eral months as the Bei­jing Olympics drew nearer, the Chi­nese gov­ern­ment has effec­tively frozen up most finan­cial reform plans. It also has issued a raft of new secu­rity mea­sures not entirely unlike other host cities in the post 9/11 secu­rity envi­ron­ment. But China has gone sev­eral steps fur­ther than its pre­de­ces­sor hosts, plac­ing offi­cial and bureau­cratic imped­i­ments on visa appli­ca­tions. This not only has tar­geted poten­tial “trou­ble­mak­ing” rights advo­cates, it has also impacted for­eign busi­nesses rang­ing from invited guests to the Olympic games to man­agers and employ­ees of for­eign com­pa­nies in China.

Busi­ness and the New Visa Hassles

The visa restric­tions in par­tic­u­lar have been a source of angst for for­eign busi­nesses and busi­ness asso­ci­a­tions. Many smaller oper­a­tions may cir­cum­vent Chi­nese reg­u­la­tions and travel on tourist visas (pro­vided they can still obtain them). And there are ways around the tighter reg­u­la­tions or bureau­cratic hur­dles if one has the right con­nec­tions or the will­ing­ness to apply sev­eral times or from dif­fer­ent loca­tions. But multi­na­tional cor­po­ra­tions are less will­ing to jeop­ar­dize their oper­a­tions by skirt­ing the laws. Instead, they are mak­ing their con­cerns known to Bei­jing and hop­ing that restric­tions are eased in Sep­tem­ber, as Bei­jing has rumored and hinted will occur.

In gen­eral, these visa restric­tions have been brushed aside by for­eign observers as sim­ply para­noia on China’s part regard­ing protests or ter­ror­ist attacks dur­ing the Olympics. In many ways, how­ever, this makes lit­tle sense. First and most obvi­ous, the Olympics were sup­posed to high­light the open­ing of China — not restrict the very peo­ple who have made China a key part of the global econ­omy. Sec­ond, impos­ing tight restric­tions in Shang­hai, the cen­ter of the Chi­nese foreign-domestic eco­nomic nexus, makes lit­tle sense on grounds of Olympic secu­rity since Shang­hai is play­ing only a minor role in the games com­pared to Bei­jing and Qing­dao. (Think shut­ting down visas to New York dur­ing the Atlanta games in the name of secu­rity, though Shang­hai admit­tedly is host­ing some soc­cer matches.)

Shut­ting down busi­ness visas to keep ter­ror­ists out makes lit­tle sense any­way — it is hard to imag­ine Uighur mil­i­tants trav­el­ing on busi­ness visas as rep­re­sen­ta­tives of for­eign multi­na­tion­als. Fur­ther­more, by restrict­ing busi­ness visas — even if not across the board in a coher­ent fash­ion — China is putting a mas­sive strain not only on the abil­ity of busi­nesses to trust Chi­nese reg­u­la­tions and busi­ness rela­tions with the gov­ern­ment, but also on the flu­id­ity of the global sup­ply chain. Shut­ting down or imped­ing visas affects much more than delay­ing the move­ment of a sin­gle indi­vid­ual into China; it impacts the abil­ity of multi­na­tional cor­po­ra­tions to move, replace or sup­ple­ment man­agers and deal­mak­ers in China. A delayed visa appli­ca­tions of just three months still rep­re­sents an entire quar­ter that multi­na­tional cor­po­ra­tions can­not reli­ably man­age their busi­nesses oper­a­tions in China, and that doesn’t take into account the visa back­log when restric­tions are loos­ened or lifte

d.

Dis­rupt­ing an inte­gral part of the global econ­omy for a full quar­ter because of an inter­na­tional expo­si­tion makes lit­tle sense. The Ger­mans in 1936 didn’t do it, the Rus­sians in 1980 didn’t — no one has. One doesn’t sim­ply shut down inter­na­tional busi­ness trans­ac­tions for three months or more to stop a ter­ror­ist — and par­tic­u­larly not China, which depends on for­eign direct invest­ment. This is not sim­ply an incon­ve­nience for some peo­ple: It is the impo­si­tion of fric­tion on a part of the sys­tem that is sup­posed to be fric­tion­less. And it is not merely indi­vid­u­als who are affected, but the rela­tions between mam­moth companies.

A Period of Erratic Policies

China’s behav­ior has been erratic for sev­eral months now, if not for the past few years, with the imple­men­ta­tion of new and often con­tra­dic­tory secu­rity and eco­nomic poli­cies. These have all been brushed aside as some­how related to prepa­ra­tion for the Olympics. But they are in fact anom­alous. China’s behav­ior is not that of a coun­try try­ing to show its best side for the inter­na­tional com­mu­nity, nor that of a nation sim­ply con­cerned about poten­tial ter­ror­ist or pub­lic rela­tions threats to the Olympic games. In another two months, after the Olympics and Par­a­lympics have ended, it will become clearer whether this was a spate of exces­sive para­noia or a reflec­tion of a much more sig­nif­i­cant cri­sis fac­ing the Chi­nese lead­er­ship — and the evi­dence increas­ingly points toward the latter.

As men­tioned, China’s eco­nomic poli­cies in the reform and open­ing era have been based on the idea of growth. This in many ways sim­ply reflects the Asian eco­nomic model of main­tain­ing cheap lend­ing poli­cies at home, sub­si­diz­ing exports, flow­ing money through the sys­tem and focus­ing on rev­enue rather than prof­its. In essence, it is growth for the sake of growth. This was the pol­icy of Japan, South Korea, Indone­sia, Malaysia and Thai­land. And it led each of those coun­tries to a final cri­sis point, strik­ing Japan first in the early 1990s and the rest of the Asian tigers a few years later. But China man­aged to avoid each of the pre­vi­ous Asian eco­nomic crises points, as it was on the lag­ging end of growth and invest­ment curves.

Fol­low­ing the Asian eco­nomic cri­sis, China fully recov­ered from the inter­na­tional stigma of Tianan­men Square and became the global eco­nomic dar­ling. By the time the 21st cen­tury rolled around, China was already tak­ing on the man­tle of the Japan­ese and other Asians. It began to be labeled both an eco­nomic mir­a­cle and a ris­ing power; a future chal­lenge to U.S. eco­nomic dom­i­nance with all the polit­i­cal ram­i­fi­ca­tions that brought. Were it not for 9/11, Wash­ing­ton would have squared off with Bei­jing to pre­vent the so-called China rise. The reprieve of inter­na­tional pres­sure that came when U.S. atten­tion turned squarely toward Afghanistan and then Iraq freed China’s lead­ers from an exter­nal stress that could have brought about a very dif­fer­ent set of eco­nomic and polit­i­cal decisions.

With the United States pre­oc­cu­pied, and no other major power really chal­leng­ing China, Bei­jing shifted its atten­tion to domes­tic issues, and its review quickly revealed the stresses to the sys­tem. These did not pri­mar­ily come from “split­tist” forces like the Tibetans or the Falun Gong, but rather from the eco­nomic poli­cies that had brought China from the Third World to the cen­ter of the global eco­nomic sys­tem. Bei­jing is well-aware that should it con­tinue with its cur­rent eco­nomic poli­cies, it will face the same risk of cri­sis as Japan, South Korea and the rest of Asia. It is also aware that grow­ing inter­nal chal­lenges — from the spread and inva­sive­ness of cor­rup­tion to geo­graphic eco­nomic imbal­ances, from ris­ing social unrest to mas­sive dis­lo­ca­tion of pop­u­la­tions — are caus­ing imme­di­ate problems.

Eco­nom­ics from Mao to Hu

Mao Zedong built a China designed to be self-sufficient and mas­sively redun­dant. Every province, every city, every fac­tory was sup­posed to be a self-contained unit, mak­ing the coun­try capa­ble of weath­er­ing nearly any mil­i­tary attack. Deng Xiaop­ing didn’t get rid of these redun­dan­cies when he opened the econ­omy to for­eign invest­ment. Instead, he and his suc­ces­sors encour­aged local offi­cials to work to attract for­eign invest­ment and tech­nol­ogy so as to raise China’s eco­nomic stan­dard more rapidly. By the time Jiang Zemin was in power it had become clear that the region­ally and locally dri­ven eco­nomic poli­cies threat­ened to throw China back into its old cycle of decen­tral­iza­tion — and, ulti­mately, com­pet­ing cen­ters of power. Attempts by Jiang to cor­rect this through the Go West pro­gram, for exam­ple, came to naught after meet­ing mas­sive resis­tance in the wealthy coastal provinces. The cen­tral gov­ern­ment accord­ingly backed off, shift­ing its atten­tion to reclaim­ing cen­tral­ized aut

hor­ity over the military.

Hu Jin­tao has sought once again to try to address the prob­lem of the con­cen­tra­tion of eco­nomic power in China’s coastal provinces and cities through his Har­mo­nious Soci­ety ini­tia­tive. The idea is to redis­trib­ute wealth and eco­nomic power, regain cen­tral author­ity over the econ­omy, and at the same time reduce redun­dan­cies and inef­fi­cien­cies in the Chi­nese econ­omy. With min­i­mal exter­nal inter­fer­ence, Hu was able to test poli­cies that by their very nature were going to sac­ri­fice short-term social sta­bil­ity in the name of long-term eco­nomic sta­bil­ity. Growth was replaced by sus­tain­abil­ity as the tar­get; longer-term redis­tri­b­u­tion of eco­nomic growth engines would replace short-term employ­ment and social stability.

This was a risky propo­si­tion, and one that met strong resis­tance in China. But the alter­na­tive was to sit back and wait for the inevitable eco­nomic cri­sis and the social reper­cus­sions thereto. In some ways, Hu was sug­gest­ing that China risk sta­bil­ity in the short term to pre­serve sta­bil­ity in the long run. But Hu didn’t antic­i­pate the mas­sive surge in global com­mod­ity prices, par­tic­u­larly of food and oil. This was com­pounded by increased inter­na­tional scrutiny over China’s human rights record ahead of the Olympics, nat­ural dis­as­ters hit­ting at the avail­abil­ity and dis­tri­b­u­tion of goods, a rise in domes­tic social unrest trig­gered by local gov­ern­ment poli­cies and eco­nomic cor­rup­tion, sev­eral attempted and suc­cess­ful attacks against China’s trans­porta­tion infra­struc­ture, and the upris­ing in Tibet. Thus, the already-risky poli­cies the cen­tral gov­ern­ment was pur­su­ing sud­denly looked more destruc­tive than con­struc­tive from the point of view of con­tin­ued rule by the Com­mu­nist Party

of China (CPC).

The global eco­nomic slow­down was the exter­nal impe­tus China feared — some­thing that could under­mine the flow of cap­i­tal and leave Bei­jing unable to con­trol the out­come of a reduc­tion in the inflow of cap­i­tal. At the same time, the inter­nal social ten­sions trig­gered both by Hu’s attempts to reshape the Chi­nese econ­omy and by the slow pace of those changes cre­ated a cri­sis for the Chi­nese lead­er­ship. It was hard enough inter­nally to con­trol a mea­sured eco­nomic slow­down to reshape the eco­nomic struc­ture of China, but quite another thing alto­gether to have such a slow­down imposed on China from out­side at the very moment social sta­bil­ity was in a crit­i­cal state at home.

A Gov­ern­ment in Crisis

China’s rapid and con­tra­dic­tory eco­nomic and secu­rity poli­cies, ris­ing social ten­sions, and seem­ingly coun­ter­pro­duc­tive visa reg­u­la­tions appear to be signs of a gov­ern­ment in cri­sis. They are the reac­tionary poli­cies of a cen­tral lead­er­ship try­ing to pre­serve its author­ity, sta­bi­lize social sta­bil­ity and post­pone an eco­nomic cri­sis. At the same time, we see signs that the local gov­ern­ments, and even organs of the cen­tral gov­ern­ment, are putting up steady resis­tance to the announce­ments com­ing from Bei­jing. Slap­ping restric­tions on for­eign busi­ness­men may make lit­tle sense from a broader busi­ness con­ti­nu­ity sense, but if the point is to begin break­ing the backs of the local gov­ern­ments — whose strength lies in their rela­tions with for­eign busi­nesses — then the moves may make more sense.

If the cen­tral gov­ern­ment has reached the point that it is will­ing to risk its inter­na­tional busi­ness role to rein in way­ward local offi­cials, how­ever, then the Chi­nese lead­er­ship sees a major cri­sis loom­ing or already under way. It is one thing to toss out a few local lead­ers and replace them, quite another to under­mine the struc­ture of the Chi­nese econ­omy for the sake of regain­ing con­trol over local offi­cials. But if Chi­nese his­tory since 1949 (and really quite a ways before) is any guide, the core of the CPC lead­er­ship is will­ing to sac­ri­fice social and eco­nomic sta­bil­ity to pre­serve power. One need only look at the Great Leap For­ward, the Cul­tural Rev­o­lu­tion or the crack­down at Tianan­men Square for evi­dence of this. Rev­o­lu­tion is not, after all, a din­ner party, and main­tain­ing CPC con­trol is para­mount to the government.

After each major rev­o­lu­tion or cri­sis, China even­tu­ally has recov­ered. The Cul­tural Rev­o­lu­tion was fol­lowed by diplo­matic rela­tions with the United States, Tianan­men Square was put aside as China joined the World Trade Orga­ni­za­tion and surged ahead in gross domes­tic prod­uct (GDP). Cer­tainly, there was change among the lead­er­ship and in the way the party dealt with poli­cies at home and abroad. But if there is the like­li­hood of loss of con­trol due to an impend­ing eco­nomic cri­sis, bet­ter to have some role in shap­ing the cri­sis to pre­serve the chance of main­tain­ing a role in the future polit­i­cal struc­ture than to sit by and try to clean up as things fall apart. The Party in fact has a long his­tory of tak­ing a self-generated crisis/revolution over an exter­nally or domes­ti­cally ini­ti­ated one.

It may be that the con­tra­dic­tory poli­cies Bei­jing is toss­ing around these days will sim­ply fade away after Sep­tem­ber and things will get back to “nor­mal.” But already, Chi­nese offi­cials are down­play­ing the pre­vi­ously hyped polit­i­cal and eco­nomic ben­e­fits of the Olympic games. They are now warn­ing that eco­nomic con­di­tions may not be so strong in the future, and at least inter­nally dis­cussing the dis­tinct pos­si­bil­ity that at least cer­tain regions of China are fac­ing the same eco­nomic crises faced by their men­tors Japan, South Korea and the Asian tigers.

Inter­nal Crises vs. the Economy

A recent arti­cle in the Global Times, a paper that addresses myr­iad top­ics of domes­tic and inter­na­tional sig­nif­i­cance and is read among China’s lead­ers, dis­cussed how eco­nom­ics is not the best mea­sure of strength. It referred to the over­all com­par­a­tive GDP and the size of China’s mil­i­tary in the late 1800s. Then, China was con­sid­ered at its weak­est, but from an eco­nomic or mil­i­tary per­spec­tive it could have been con­sid­ered com­pa­ra­ble to the global pow­ers of the day. This hints at the deeper inter­nal debate in Bei­jing, where true national strength and the role of the econ­omy is under dis­cus­sion. Assump­tions that China is only focused on con­tin­ued good eco­nomic ties with the world shouldn’t be taken as gospel — China has a track record of shut­ting down exter­nal con­nec­tions when inter­nal crises brew.

Numer­ous polices are being thrown around in fire­fight­ing fash­ion, includ­ing block­ing or at least hin­der­ing for­eign busi­ness move­ment in and out of the coun­try and tight­en­ing the flow of for­eign cap­i­tal in both direc­tions. They are com­ing in reac­tion to flare-ups in eco­nomic, envi­ron­men­tal, pub­lic rela­tions and social are­nas. Energy poli­cies are mak­ing less sense, imbal­ances in sup­ply and demand are grow­ing and seem­ingly con­tra­dic­tory poli­cies are being issued. Social unrest, or at least local media cov­er­age of such unrest, seems to be increas­ing; either is a sign of weak­en­ing con­trol. Local offi­cials are still fail­ing to fall in line with cen­tral gov­ern­ment edicts. Strate­gic state enter­prises like China National Petro­leum Corp., China Petro­leum & Chem­i­cal Corp. and the China Devel­op­ment Bank are all defy­ing state-council orders — and the State Coun­cil itself is appar­ently going head-to-head with major pol­icy bod­ies long given con­trol over eco­nomic policies.

Some­thing extra­or­di­nary is hap­pen­ing in China. And while not every­one may want that to be the case, and so have sought to use the Olympics to explain things away, the easy expla­na­tion sim­ply doesn’t make enough sense.

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