India’s development strategy in recent years has been “India for India” and “Make in India.” A form of self-reliance, or “strategic autonomy,” India’s policy approach is a reaction to insufficient progress with prior policies that opened India’s economy to global investment.² Today’s measured approach to foreign investment is not indicative of India’s insularity but of a deliberate and judicious decision-making process regarding foreign investments.

This policy of prudential engagement has also led India to step back from China’s outward investment under the Belt and Road Initiative (BRI) platform. India cannot – and does not want – to respond to BRI with the scale of investment that China has committed. However, there is a new emphasis on outward foreign investment from India. The Indian government has encouraged international investments by reducing the restrictions on Indian companies investing abroad and substantially raising the annual overseas investment ceiling to establish joint ventures and wholly owned subsidiaries. There has been an evolution in the upper limit for overseas investments with fewer restrictions on approvals over time. Since 2003, Indian firms have been granted permission to invest 100% of their net worth overseas in foreign joint ventures or wholly owned subsidiaries.³  In 2010, the ceiling was increased to 400% of net worth.⁴

This article aims to explore India’s outward foreign direct investment (OFDI), focusing on China’s BRI initiatives in India’s neighbors, which include Bangladesh, Sri Lanka, Myanmar, Nepal, Afghanistan, and Pakistan. We analyze similarities and differences between India and China in terms of the timing, scale, scope, and number of OFDI projects and financial commitments, using monthly investment data for Indian and Chinese projects in India’s neighbors during the period 2011-2022.⁵ The two data sets we use report overseas investments by entities in India and in China by project and by host country, reporting the total amount of the investment. We argue that China is moving aggressively to influence countries in India’s neighborhood using large-scale investment projects under the BRI initiative as an investment platform, while India has not responded in a major way to this challenge.

China’s BRI Investments

Before the year 2000, China severely restricted its companies from investing abroad. The “Go Out Policy,” later called the “China Goes Global” strategy, was decided on in 1999 and formalized in 2000. Initially, only state-owned companies were approved for OFDI, but later, large private companies were allowed to invest abroad, followed by others who qualified. This loosening of the regulations was reversed in 2017, with certain types of investments, such as entertainment, hotels, and real estate, being restricted to focus OFDI on technology, infrastructure, and resources and to manage the overall outflow of capital.⁶ Chinese OFDI increased steadily, initially in emerging markets and subsequently in developed economies, including the U.S. and EU. According to the Ministry of Commerce, as reported by the Rhodium Group, China’s annual outward investment peaked in 2016 at $181 billion, including $158 billion in mergers and acquisitions. Mergers and acquisitions began to drop substantially after 2018. Still, in 2022, the Ministry reported $117 billion dollars of investments, including $24 billion of mergers and acquisitions.⁷

In 2013, President Xi Jinping launched One Belt One Road, later renamed in English as the Belt and Road Initiative, as a channel for much of China’s OFDI. According to a joint working paper by the Green Finance & Development Center and the Griffith Asia Institute, 148 countries have officially joined the BRI platform.⁸ A 10-year celebration of the BRI was held in Beijing in October 2023. Representatives from many participating countries attended. Xinhua, China’s news agency, reported:

Statistics show that the BRI has helped lift about 40 million people out of poverty in participating countries. It has also galvanized up to 1 trillion U.S. dollars of investment globally and created more than 3,000 projects and 420,000 jobs over the past decade.⁹

After many years of large-scale infrastructure and energy projects, the future focus of BRI is changing toward more green projects, with smaller and private sector-led investments. Beijing is also approaching other countries, such as Saudi Arabia,
to help finance the next stages. The number of projects and amounts invested have fallen substantially since 2016. This decrease in Chinese OFDI is partly due to a growing sovereign debt burden in the BRI countries.¹⁰

The Regional Context

India is surrounded by countries that have formally signed memorandums of understanding related to BRI, including Pakistan, Afghanistan, Bangladesh, Myanmar, Nepal, and Sri Lanka. (See Table 1.) Pakistan is one of the largest recipients of investment from China, which began many years before the official launch of BRI in 2013. Bhutan is the only neighbor that has not joined the BRI. However, even Bhutan, which does not have diplomatic relations with the PRC, recently began talks with China to resolve their border dispute, adding to India’s concerns.¹¹

Table 1. Timing of India’s Neighbors joining BRI¹²

Numerous corridors also connect the BRI countries with China and China to distant lands, including Europe. Table 2 lists the four corridors that concern India the most. The China-Pakistan Economic Corridor is one of the most established and has been a concern to India for many years. It provides easy trade access to China, bypassing the Strait of Malacca, and provides Pakistan with significant military benefits.

Table 2. Four BRI Corridors in India’s Neighborhood¹³

At the start of China’s “Going Out Policy” in 2013, Manmohan Singh was Prime Minister of India (2004-2014). Initially India saw economic integration with China as a way to promote development by moving the long-time bilateral border dispute to the background. The Singh government welcomed the promotion of regional connectivity. When the Modi government came to power in 2014 the approach to BRI changed. The response was to reject BRI and instead to invest in India’s own connectivity projects, and to revive others.

For example, Project Mausam was begun in 2014 to promote connection between countries in the Indian Ocean via communications, culture and trade. The “Cotton Route,” initiated in 2015, aimed to connect India with Russia in one direction, and with SE Asia and East Africa, in the other direction. The “Spice Route” initiative is led by the State of Kerela to connect with countries that were involved in the ancient spice trade. Another major project was the revitalization of the Chabahar Port in Iran. India built the port in the early 2000s, committed to renovate it in 2015, and began the work in 2017.¹⁴ These were seen as part of a renewal of India’s long-standing “Look East” policy, now referred to as “Act East Policy,” which was directed toward strengthening India’s relationships with countries in South and Southeast Asia.¹⁵

This approach of promoting India’s connections with its neighbors was strengthened after President Xi visited Pakistan in May 2015 to announce the development of the China-Pakistan Economic Corridor, which would connect Kashgar in Xinjiang, China, to the port of Gwadar in Pakistan. India strongly opposed the project, mainly because it would go through Pakistan-occupied Kashmir. The proposed corridor between China and Pakistan triggered a significant change in India’s perception of the security relations in the region. The border clash with China in 2020 was another major setback in relations between India and ChinaTable 3 and calculations using the two databases..

The timing of these connectivity projects is consistent with an interpretation of India countering China’s BRI initiatives in the region. India’s official statements regarding BRI suggest that its objections to the BRI arise from a lack of consultation regarding the strategy and process of project selection and formulation and concerns over the debt burdens of BRI participant countries arising from Chinese investments. Although Beijing welcomed India’s participation in BRI, which could have been signaled by India’s participation in the 2017 BRI Forum, India decided not to attend.

While large Chinese investments tied to the Belt and Road Initiative may improve infrastructure development and increase opportunities in the Asia-Pacific region, India has been increasingly guarded about China’s outward foreign investment motives. The scale and number of Chinese investments in India’s continental and maritime neighborhood are of particular concern. India’s cautiousness stems from a worry that China’s expansive OFDI may increase China’s political influence in the region.

In the next section, we examine Chinese and Indian investments in India’s neighboring nations to understand if India’s investments are a reaction to China’s BRI investments. As noted previously, we focus on the following neighboring countries: Bangladesh, Sri Lanka, Myanmar, Nepal, Afghanistan, and Pakistan. While India has no investments in Pakistan according to our database, China’s investments in Pakistan are important in understanding China’s political, military and economic motives.

Regional Outward FDI

At the regional level, as seen in Table 3, China has made a small number of very large investments in India’s neighbors. From 2011 to 2018, China steadily increased the number of investments from 14 to 26 in these nations. The value of these investments totaled $6.3 billion in 2011 and climbed to $27 billion by 2015, and then dropped to $14.65 billion by 2018.There was a significant drop in Chinese investments to $7.3 billion from 2019 to 2020, coinciding with the pandemic. Post-COVID, China’s investments in these nations declined steeply, both in the number and value of investments, with only 12 investments valued at $2.3 billion in 2022. The 2022 level was even lower than the pre-BRI level of Chinese investments in these countries.

An examination of China’s investments in India’s neighboring nations shows that over 53% of China’s OFDI went to Pakistan, 27% to Bangladesh, and 10% to Sri Lanka, with the remaining 6% going to Myanmar, 3% to Nepal, and less than 1% to Afghanistan. The largest Chinese investment, both by number and value, was in Pakistan (87 investments worth $57.7 billion), with about half that value in Bangladesh (64 investments at $29.2 billion), followed by Sri Lanka (31 investments at $10.98 billion). China’s 19 investments in Myanmar were at $6.23 billion, 18 in Nepal at $3.51 billion, and two in Afghanistan at $0.61 billion.¹⁶

As Table 3 indicates, over the period 2011-2022, India made hundreds of small investments in its neighboring nations while never remotely approaching the amounts that China invested in. A large drop in India’s OFDI in 2014 coincided with China’s anticipated introduction of the overall BRI policy and the Modi government’s election in India that year.

India’s pattern of OFDI, measured as the percent of the total value of investment, primarily focused on Sri Lanka (52%), Myanmar (21%), and Bangladesh (21%), followed by a little over 6% in Nepal and less than 0.2% in Afghanistan. The number of India’s investments was highest in Sri Lanka (1197), followed closely by Bangladesh (1094) and about half the number in Myanmar (575), and fewer in Nepal (328) and Afghanistan (14). India’s focus on Sri Lanka contrasts with China’s relatively small investments.

Table 3: Total Number and Value of Investments by year in neighboring countries

*In USD Billions

Note: Neighboring countries include Bangladesh, Sri Lanka, Myanmar, Nepal, Afghanistan, and Pakistan

While some India government policies have directly encouraged Indian OFDI, other events within India during this period may also have spurred Indian OFDI, which is mostly private capital seeking profits. For example, the demonetization in 2016 and the introduction of the Goods and Services Tax in 2017 may have made Indian exports more expensive, incentivizing domestic firms to look for alternate investment options. Given India’s increasing technology prowess and the fact that OFDI technology spillovers are significantly positive in India, this further incentivizes firms to look outside India for investment options to complement exports.¹⁷ The rapid decline in the economic growth rate in India from a little over 8% in 2016 to approximately 4% in 2019 may also be a reason for Indian firms to seek investment options abroad to diversify their portfolios. Around the 2014 through 2019 period, the Indian financial sector faced one of its worst crises due to many non-performing assets in the banks, which hamstrung lending.¹⁸ Moody’s downgrading of India’s economic outlook from “stable” to “negative” in 2019 may have also incentivized Indian firms to invest outside India to hedge their bets and move their production abroad, increasing OFDI.¹⁹

Conclusion

Indian and Chinese entities have increased investment in South Asia. OFDI incentives differ between the two countries: private firms lead the way in India, while in China, it is the government. The BRI is the most apparent, explicit tool that China is using to increase its influence in the region, but even more importantly, to build infrastructure to be able to acquire resources from afar.

India’s policymakers and leaders are aware of China’s growing presence and are considering ways to respond. While the Indian government has initiated several projects, such as the Spice and Cotton Routes, Project Mausam and the revitalization of Chabahar Port in Iran, they are significantly smaller than China’s investments in terms of the number of OFDI projects, their scale and scope. India has indicated an interest in improving regional interconnectivity, which is similar to the goals of many of the BRI projects. However, the lack of transparency and the scale and geopolitical aspects of BRI have made India cautious about joining the BRI.

India has long maintained economic, political and military alliances, particularly with Bangladesh, Sri Lanka, and Myanmar. Given this, China’s value, type, and sectoral investments in these three nations may particularly draw interest from India about China’s OFDI motives. Given that these three nations are among the BRI nations, India’s investments in them may also be strategic from geopolitical and economic points of view.²⁰

However, our analysis indicates that while China is likely using BRI as a strategy to increase its presence and influence in India’s neighboring countries, the Indian government has yet to respond in a significant way to China’s moves. We also do not see any patterns of increased Indian OFDI in response to its neighbors joining BRI.²¹

Indian companies have invested in the region, primarily in Sri Lanka, Bangladesh, and Myanmar. However, our data show no priority for OFDI in neighboring countries or specifically in response to BRI. We do not find any OFDI response to BRI measured by timing or investment size.

Most Indian OFDI is driven by private sector companies that make investment decisions that align with their profit strategies. They have initiated many small projects and often favor Western, developed countries. In contrast, Chinese OFDI includes considerable investments by state-owned enterprises and potential governmental influence over the location and scale of OFDI. Chinese projects tend to be very large, funded by loans offered to the host countries by state-owned financial institutions, and led by state-owned companies. Finally, while not large in scale as measured by financing, India’s small, numerous, privately funded projects in this region may prove more sustainable with long-term positive impacts than China’s large-scale investment schemes.

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Vijaya Subrahmanyam’s piece explains how China’s new digital currency differs from commonly used virtual payment systems. She argues that the e-CNY, issued by the People’s Bank of China, has the potential to be a global leader in digital currencies and push financial inclusiveness across China, but also creates new ways for the government to control society.

Xiangyuan Li and Haizheng Li analyze the pandemic’s impact, particularly the government’s strict Zero Covid policy, on China’s economy. The results are not good. They point out long-term economic challenges, which were known before, but argue that the pandemic will lead to even slower growth than expected, along with some unexpected negative outcomes.

In his piece on foreign policy and U.S. public opinion about China, Tom Petersen shows that public attitudes toward China have shifted dramatically negatively. China now outranks North Korea, by far, as the biggest worry in people’s minds. He argues that this shift gives policymakers the room to act decisively to counter China’s potentially destabilizing actions regionally and globally.

Reflecting on rural life, Jin Liu reviews the now-banned movie Return to Dust. Although a slow-moving, artsy film, it was well-received by Chinese audiences for several months. Then the film disappeared from theaters. Jin explores the film’s themes, relating them to the rural transformation occurring in China today. Rural life is disappearing as farmers are pushed off the land and into town apartment towers. Her characterization of the protagonist as “China’s last peasant” helps us grasp the powerful message of this film.

Similarly, Marin Ekstrom explains the assault on linguistic and cultural identity in the autonomous region of Inner Mongolia. Despite being considered a “model minority” by Beijing, in 2020, the central government began requiring schools to use Mandarin Chinese exclusively instead of the traditional Mongolian language. This policy has been extended to TV shows regarding language, as well as replacing Mongolian themes with Chinese cultural and historical programming. Ekstrom cites evidence of resistance to Beijing’s encroachment on minority rights but sees it as another tool of central authority across China.

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Based on my experiences in China over the years, I saw a growing shift toward practicality, but today we see another reversal — to the reestablishment of 体 as primary. Along with that reversal, foreigners’ role in China’s development is also changing. 

Living in Nanjing in the Early 1980s

In 1982, I was one of the early international students to go to China to do research. Graduate students from several countries had already been allowed to study there, and the U.S. followed a few years after normalizing relations in 1979. I was the second or third cohort from the U.S. to be sponsored by the Committee on Scholarly Communications with the PRC.² My project was to analyze Jiangsu Province as a case study of the effect of central policies on local development. Since reforms were so new, I first researched the Mao decades and later extended my analysis to the reform period. 

Data was essential to my project, but it was also problematic. The government classified economic data as a state secret. Some scholars had been detained for having data. A conundrum, indeed. At least I had the U.S. government behind me in this endeavor. My strategy was to create tables with the headings of the information I wanted to collect and have the respective offices fill in the blanks. In hindsight, it was perhaps wishful thinking that this approach would succeed. As it turns out, there was a major effort across China, at all levels of administration, to put together data yearbooks. Because of this, officials did, in fact, fill in (at least some) of my data tables.

Since my focus was Jiangsu Province, I applied to do my research at Nanjing University (Nanda) in Nanjing, the provincial capital. I lived in the university’s foreign compound with about 150 other students and faculty from around the world, some of whom had Chinese roommates. We had heat and hot water several hours a day, and food that was substantially better than the regular university canteens, but life was quite harsh relative to what we were used to.

The Economics Department was technically my host, but they did not invite me to meet with them or any students studying economics at any time throughout the two years I was there. However, I could audit courses, which I did. In the last semester of my stay, I finally met one of the professors. Professor Zhu was responsible for helping me make contact with the officials I wanted to interview in Nanjing and several other cities in the province. Professor Zhu spoke English, as he had worked in international trade, while most other professors did not. I was learning Chinese but needed help with translation during the interview process.

In 1982, western foreigners studying or doing business in China was a new development, allowed to support the leadership’s economic reform efforts. We were treated hospitably and with respect. But there was an underlying tension, perhaps suspicion, that foreigners could contribute to China’s reforms and development, but may also be dangerous. The university administrators were responsible for our well-being and so were careful to keep a close eye on us. Anyone who wanted to visit us had to register and show ID. Our mail was read. Our boxes were opened. If we wanted to travel outside the city limits, we needed to apply to the university and the local police station for permission. Just riding our bikes within Nanjing, we would find signs at the boundaries of the city that said foreigners could not go further.

Daily life was challenging, and our environment was restricted and monitored, but we felt there was a good chance that society would move toward more openness. Unfortunately, the opposite is true today. While daily life in China is quite comfortable for most by now, the signs are that the society is closing again. For example, the universities are under pressure to use textbooks by Chinese scholars, and not those written by foreigners. Authorities monitor classrooms with video cameras, and professors can quickly get into trouble for saying something that questions or counters the Party’s line.

Change and Backlash³

Two incidents occurred while I was in Nanjing that reflected the tensions and disagreements about the changes afoot in those early days: first, the “Spiritual Pollution” campaign and second, a demonstration at Nanda. People desired change, but not surprisingly, they also wanted to choose the reforms that benefited them the most. And China’s age-old dance between importing foreign ideas (用) and finding a Chinese solution (体) was also at work.

The Spiritual Pollution Campaign

The Spiritual Pollution campaign in the early 1980s was a backlash against the dangers of China opening too fast and of adopting ideas that went against the strategy of maintaining stability by the political elites. Today, the pressures on professors, students, and citizens to conform to the leadership’s view of China’s path is reminiscent of these early years. The difference is a new looking back rather than looking forward.

The Spiritual Pollution campaign’s main message was that socialism could not be criticized. Intellectuals were discussing the existence of alienation under a socialist system. Markets may be possible under socialism, but alienation is not. Thus “dangerous” ideas, such as those of Sartre, were to be criticized if discussed at all. People who had written pieces favorable to Sartre, or discussed alienation, were asked to write their ideas anew. Specifically, at Nanda, one professor was criticized for an article he had written on Hu Shih, a well-known Chinese academic who had studied and promoted pragmatism.⁴

While targeted primarily at harmful ideas in intellectual circles, the campaign also touched on areas of laxity and unethical behavior. For example, Party spokespeople and written editorials criticized books and magazines for printing stories about love affairs and other situations deemed “indecent.” Also suspect was long hair, facial hair, and revealing attire. One rumor was that all city workers in Beijing were subject to hair and dress regulations.

It was understood, of course, that a main source of these bad influences was foreigners and their decadent societies. Reforms had meant China had much more contact with the international community, and some of this contact was deemed harmful. Being a foreigner in China, then, raised interesting contradictions. Our dress and culture were indecent (even if desired), but our technology and markets were necessary to modernize China. Ironically, this situation is back in spades in China today.

The most immediate problem for us at that moment was judging whether this campaign was severe enough to cause trouble for the Chinese with whom we associated. Our experience was that the Chinese were not worried—aside from the few targeted intellectuals—and that the campaign did not involve us in their minds. People said that indecency was not desirable in books, magazines, and films, but nonetheless, everyone was informed of the details of the latest “indecent” story. But Chinese friends did not stop seeing us, and on the surface, at least, only the amount of gossip changed.

At the university, however, there were required meetings for students, faculty, and administrators to discuss the message of the campaign. These meetings were reminiscent of the numerous campaigns before. In October 1983, the Foreign Affairs Office asked us if we would like to discuss “spiritual pollution.” We agreed, thinking we could ask what this meant for us and if the restrictions on our contact with Chinese people would increase. Instead, the meeting consisted of a two-hour speech on the question of alienation delivered by a university official in perfect line with recent People’s Daily editorials. By December, after going through the motions, we all — Chinese and foreigners – had forgotten that “pollution” had been a problem.

The Nanda Incident

Another reaction to China’s reforms occurred during three days in May 1984. This event began on campus but eventually involved the provincial government, a central investigation, and the international news media. The catalyst for this incident was the status of Nanjing University, but the key issues were the students’ right to demonstrate and factionalism on campus. Earlier in May, the Ministry of Education chose 10 institutions to receive more autonomy and an extra 100 million yuan each to help them quickly implement their educational reform and improve programs. To the dismay of the university community, Nanda was not among this privileged group.⁵

On May 28, posters appeared on campus criticizing the university leadership for lack of concern for intellectuals and the overall quality of the university. The former university president, Guang Yaming, had been transferred and not replaced, leaving Zhang De, the Party Secretary, in charge. The Party Committee was powerful within Nanda’s administration, and removing Guang gave the dominant party group free rein. One of the confrontations between Guang and the Party Committee had been over the status of intellectuals. To improve the situation of professors in line with current reform policy and compensate them for poor treatment during the Cultural Revolution, Guang wanted to add their years spent in school to their work time to increase the years counted in seniority. Since seniority determined access to housing and other perks, this change would mean professors would benefit at the expense of other university employees. This change was not in the interests of the Party Committee, and they succeeded in getting Guang transferred.

After Guang left, three separate elections failed to fill the position. The students accused Zhang of being instrumental in preventing the election of a permanent, reform-oriented president, and they demanded the return of Guang. According to one account in the Hong Kong paper, Pai Hsing, the Party Committee tried to appease the students by agreeing to meet with them to discuss their proposals, but the students rejected this.⁶ The paper also implied that the students decided overtly to demonstrate their displeasure when the Party Committee asked the Nanjing Armed Police to patrol the campus.

From the beginning, in addition to the university’s status, a key issue was the rights of students to disagree with, and try to influence, the university administration. This aspect of the conflict was reminiscent of the Cultural Revolution, i.e., when the bureaucracy blocks established methods of change, then challenged the bureaucracy. The students drew on China’s Constitution to support their right to demonstrate. The university also drew on the Constitution to argue that the demands for reform were correct but that the students’ method of dissent was disruptive and illegal. The students were to meet formally with university officials and not write posters or demonstrate. This position was repeatedly read over the loudspeaker in the evenings when people would gather. Besides this action, however, the university did nothing directly to stop the activities. The students ignored the instructions and put up many large and small-character posters. The lights on the outdoor bulletin board were left on all night so people could read and discuss them.

By the second day, the criticisms in the posters had moved from generalizations about poor leadership to criticizing Zhang by name, pointing to the influences of “leftism.” The activity and excitement on campus then built quickly. Students wrote more posters and discussed the issues late into the night, and people crowded the streets in the evenings. During these events, international students mingled freely among the crowds.

On the third day, a rumor spread that there was to be a demonstration involving a march from campus to the provincial government buildings about two miles away. The students felt they had met a dead end in dealing with the university and decided to take their complaints to provincial leaders. That evening the number of people on the campus streets swelled to make quite an event. Peddlers were selling spiced eggs and ice cream; people brought their children; and the loudspeaker was repeating its message, apparently to non-listening ears.

Eventually, we heard that people had gathered just outside the gate and began to walk, picking up people as they went. I and a few others rode our bicycles to catch them, but not knowing their route, we went straight to the provincial government buildings and waited. The atmosphere was tense, but no one said anything to us. Minutes later, the marchers arrived. The group was orderly and quiet but was large by then, with well over a thousand people. For a few moments, it seemed there would be a confrontation. Public security was blocking the major intersection, but the group did not slow its pace. Then, just before the group reached the blockade, the police moved aside.

For the next hour, little happened. I was standing in the back on a cement wall overlooking the square. The gates to the government complex opened and closed several times. I heard later that the provincial officials asked the students to send representatives inside, but people were reluctant to volunteer. Eventually, several people volunteered to negotiate, and a meeting between the students and the government was set for the next day. After some time, the crowd thinned out and the demonstration ended.

We never knew whether that meeting took place or not. However, the next day the university abruptly ended all activities relating to dissent on campus. The bulletin boards were now kept unlighted, posters were forbidden, security checked IDs at the university gate, and university officials questioned the student leaders. The incident was over.

Two other things of importance related to the Nanda incident happened. First, during the first two days of activity on campus, the situation was reported by Voice of America; and second, Beijing sent an investigation committee shortly after the demonstration, which further curtailed discussion and increased rule enforcement on campus. Perhaps if the international press had not reported news of the event, Beijing would not have become so directly involved in provincial and university affairs.

On the one hand, foreigners’ knowledge of what is going on may increase the impact of a protest by adding pressure to resolve the issues. On the other hand, officials may fear how foreigners will interpret and report the incident and, therefore, may react by quickly ending the dissent and punishing the Chinese people involved. Another aspect of the position of foreigners in China is that we are all under suspicion of being spies. During this incident, a rumor that Voice of America had reported it during the first two days did not allay these suspicions. Even the foreign community was surprised at how quickly this incident became known beyond the university. As this experience suggests, our presence alone may cause problems of which we are unaware.

We had no way of knowing at the time that student protests would put such monumental pressure on the Communist Party and Chinese government. Early protests like this were precursors to events that led to the violent Tiananmen Square crackdown in 1989. Such protests are difficult to imagine in Xi Jinping’s China today.

A New Day

Over the period I lived in Nanjing, the restrictions eased slowly, and people were more relaxed about talking with us. More cities were opened to foreign investors and travel, although only certain hotels could host foreign visitors. Over time, China continued to relax restrictions across society. In contrast to the lack of contact with peers at Nanda in the early 1980s, I developed deep friendships over the years and fruitful academic exchanges and collaboration. I traveled alone, with my husband, with friends, and with student groups, visiting every province and region in China. We were free to explore and learn by talking with whom we wanted.

Now, under the leadership of President Xi Jinping, China’s trend toward opening is reversing – abandoning 用 for a new type of 体. Covid-19 is the most apparent reason for restricting society, but it also provides a convenient excuse. Behind the currently closed borders is a growing narrative that China no longer needs foreign ideas, skills, or capital. Western values are critiqued and rejected, replaced by a mix of Confucian and modern Chinese thought. The term “spiritual pollution” has returned to conversation. The leadership harshly critiques any expression of alienation, such as the “lying flat” trend of young people who talk about doing as little as possible to get by since success, as customarily defined, is so elusive.⁷ Even English is being downplayed after a spectacularly successful push to teach it across the Chinese education system. Moreover, authorities expect Chinese academics to conduct research in support of China’s policies and do it with decreasing collaboration with western scholars.

While economic development continues apace, the range of allowed debate is narrowing, along with individual freedoms as the CCP returns to its Marxist, socialist roots. President Xi talks of pushing China into the next stage of socialism with “common prosperity.” In the past, we heard Chinese people sometimes say the CCP stood for the Chinese Community Party – a reference to a gentler party leading social progress. Today, the Party is returning to sticks over carrots and is increasingly feared. One can only guess that President Xi sees taking the socialist mantel as his way of maintaining his and the CCP’s power for years to come.

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Book Review: Desmond Shum, Red Roulette (Scribner, 2021); 310 pp. hardback

Billed as a “tell-all” about the scandals of the Chinese Communist Party as it led China’s re-entry into the global system, this tale is a page-turner of policy shifts and intrigue, including the mysterious disappearance of the author’s wife.  Shum’s main takeaway is that the CCP only cares about its power and protecting the top cadres’ children, who will carry on and protect the current leaders in their retirement.  At the core of what Shum calls the “red aristocracy” are the original cadres who fought along with Mao Zedong, and the “princelings,” their offspring. China’s economic success, Shum argues, was achieved by connecting entrepreneurs to these political elites, an arrangement that served the interests of both.  In Shum’s view, that arrangement has run its course, as President Xi, one of the princelings, pushes Chinese socialist values while condemning western ones.

Shum was born in Shanghai in 1968 but moved with his family to Hong Kong, which was not easy to arrange, especially because Shum’s father did not come from a “good” background — people who supported the CCP once they won the civil war in 1949.  Shum’s grandfather had been a lawyer in Shanghai, which made him a capitalist and therefore a bad element.  His father ended up in a low position teaching Chinese at a Shanghai teachers’ training school and met his mother there.  But his mother had relatives in Hong Kong who helped her get to the British colony. But it took years of cajoling authorities to let his father join her in Hong Kong. 

Ironically, once China began to reform, Shum’s mother and father willingly moved back to Shanghai to make fortunes.  Shum’s father had a successful stint with TysonFoods in Hong Kong, and the company sent him to Shanghai to build its China market. Shum moved back to China as his company’s representative in Beijing in 1997.  He lived as an expat gaining business experience but without much success.

Shum’ business career took off when he met Whitney Duan (Duan Zong) in 2001. They became business partners, eventually married and later had a son.  The book opens with the fact that Whitney disappeared in 2017, and that Shum had not heard from her or received any news about her since.

Whitney, who was born in Shandong Province in 1966, started a company called Great Ocean.  As a Christian, she vowed never to get ahead by being corrupt.  However, she was adept at cultivating relationships with people at the highest levels of the Chinese leadership.  She became especially close to Auntie Zhang (Zhang Beili), who was the wife of Wen Jiabao.  Wen rose in the political ranks to become Premier from 2003 to 2012.

Through their tirelessly cultivated connections, Shum and Whitney were able to obtain valuable pieces of land and permission to build major projects, including the cargo area of the Beijing Airport and a large office-condo complex nearby.  Through their development company and access to other sure-bet investments, they were able to make hundreds of millions of dollars over the years.

Three aspects of Shum’s story are especially intriguing.

First, he provides a clear description of how connections, guanxi, work and offer rewards in China. In the Chinese context, guanxi — like networking in the West — does not mean corruption, but Shum argues that to do any business in China one must curry favor with the Communist Party.

Second, one can see how business changed as reforms advanced and the business environment evolved due to new regulations, infrastructure buildout, rising incomes, and interaction with global markets.

Third, Shum’s description of the changing environment matches nicely with a recent article explaining the man behind the big ideas of the top leadership in the CCP: Wang Huning (https://palladiummag.com/2021/10/11/the-triumph-and-terror-of-wang-huning/).

Shum describes the capitalist experiment as alive and well in the early 2000s, but he saw the backlash against liberalism picking up steam in the mid-2000s. In the early 2000s, state-owned enterprises were being listed on the New York Stock Exchange, private companies had some access to bank loans, the housing market had taken off, and the middle class was growing and spending. People like Wang Qishan, a reformer, had risen to power. Wang was vice premier in 2008 under Wen Jiabaon and a close friend of Whitney’s. 

By 2006, however, there were signs that capitalism was not going to work in China after all, which only accelerated with the global financial crisis in 2008. Changes that followed made it harder to do business, such as requiring private and joint venture firms to have Party committees, and regulations that gave state enterprises advantages over private firms. About that time civil society also began to feel increasing pressure to conform to Party demands.

Overall, Shum argues that despite the seemingly capitalist “experiment,” the leaders never intended to end the Communist system.  For example, listing state enterprises on stock exchanges was not a move to privatize them, but rather a way to strengthen these companies to compete globally with the private sector.  The shift to reassert Party control over the economy and society had begun.  The Party leadership ladder changed too — less moving up the local ranks (as these people were difficult to manage) and instead bringing in loyalists from other regions.

Shum suggests that he and his business friends did not want to overthrow the Party. They did want a more open system.  He and others willingly donated some of their vast wealth to support education and other social improvements. But Shum increasingly saw private companies and entrepreneurs being used by the Party, and that long-term, private investment was not a realistic option.  Get in, make money, and sell out as fast as you can — that became the goal.

China’s successful economic growth and the improvement of the state sector meant the Party did not need the private sector as it did before. Hence it was no longer essential to have lax Party control over business. Shum argues that repression and control are the foundations of the Party, and this has not changed with the modernization of China under reforms.  In 2012, Document No. 9 titled “Briefing on the Current Situation in the Ideological Realm” appeared. It warned of dangerous western values such as free speech.  The situation has continued to worsen since then.

Just before the publication of Red Roulette, Shum received a call from Whitney. As described in a segment of Australian 60 Minutes on September 26, 2021 (https://www.youtube.com/watch?v=bOtVMFPjNUA), she had been at least temporarily released from detention, where she had been cut off from all news of her family, China, and the world.  She asked Shum not to publish the book and said if he did, he and their son would be in serious danger.  She called a second time as well, but Shum chose to tell their story to help the world understand the challenges of the business environment in China and the political realities behind it. Not everyone deals with such extremes of corruption and power in China as described by Shum, especially if they are located outside of Beijing. But this story helps put into perspective some of the current policies in China today, such as the anti-corruption campaign and President Xi’s move toward reestablishing socialism as the Party’s most salient goal. The bottom line is that the Party, led by President Xi, is trying to ensure that it stays in power for the long haul.

The post Book Review: Red Roulette by Desmond Shum appeared first on China Research Center.

At the same time, China’s spectacular economic rise has an ominous side as it secures control over the South China Sea with a navy that increasingly rivals the U.S.  China also has begun to behave in more belligerent ways toward its neighbors, for one thing by instigating skirmishes on the India-China border. And some of China’s domestic policies, such as increased digital surveillance of citizens, treatment of the Uyghurs in Xinjiang, and rising nationalism, have led to wariness of China’s authoritarianism.

These developments beg the questions: How can we define the China model, and in what ways has it been successful or not? In this essay, I review three recently published books with these questions in mind:

Dexter Roberts, The Myth of Chinese Capitalism: The worker, the factory, and the future of the world (St. Martin’s Press, 2020)

Scott Rozelle and Natalie Hell, Invisible China: How the urban-rural divide threatens China’s rise (The University of Chicago Press, 2020)

Thomas Orlik, China: The bubble that never pops (Oxford UP, 2020)

The Migrant Dilemma

In The Myth of Chinese Capitalism, Dexter Roberts argues that rural migrant workers have been the bedrock of China’s growth model since economic reforms began in 1978.  Following Guizhou villagers who worked as migrants in Guangdong, Roberts provides personal examples of the challenging lives these migrants have faced.

One of the most serious challenges, and one Roberts spends a lot of time on, is the household registration system, or hukou.  Chinese citizens are assigned official residences tied to their rural or urban places of birth.  Many aspects of a person’s life are then also tied to whether they have a rural or urban hukou, such as access to education and health care, permission to marry and have children, and the right to purchase a home. This social structure prevents rural citizens from achieving a better urban life or even sending their children to urban schools while they live and work in the cities as migrant workers. Meanwhile, in the countryside, the lack of property rights over land stifles their options at home because they cannot sell land and use the profits for other pursuits. As Roberts describes it, the lack of reforms in the labor and land markets hits rural migrants the hardest. He sees capitalist market reforms as falling short of the rhetoric, and hence, the “myth.”

From Roberts’ perspective, the economic model’s fundamental characteristic is an urban bias created by state policies that systematically hurt, however inadvertently, non-urban hukou holders. Roberts’ analysis suggests that the development process has been extremely beneficial for urbanites, but that constraints on rural citizens will need to change for progress to keep spreading to the rest of society.

He acknowledges that some things have improved for rural migrants, such as wages. Still, he emphasizes that without reforms allowing land sales by individuals and freedom for rural people to live where they choose, China’s development will not succeed because it will leave out too many people.

From an economic development perspective, China’s policymakers understand that moving up the value chain is the right way to go, even in rural villages, as Roberts describes. They promote innovation and entrepreneurship, using the state to push development goals through incentives and directives. However, leaving half of the population out could lead to failure.  And although Roberts does not say so explicitly, if ending the hukou system and state ownership of land would undermine Party control, these steps are not likely to be taken.  In an optimistic sign, the latest National People’s Congress in March 2021, approved some reforms of the hukou rules.   

Human Capital is Key

Invisible China: How the urban-rural divide threatens China’s rise, by Scott Rozelle and Natalie Hell, makes the case even more forcefully that China must pay attention to the health and well-being of rural citizens, or its growth may well stagnate. The authors fully recognize the impressive progress that China has made, leaving most people much better off than before the reforms began in the late 1970s. Poverty reduction has been real and widespread. However, Rozelle and Hell argue that the lack of adequate education and health, which are the basics of investment in human capital, for 70 percent of the labor force could leave China in the dreaded “middle-income trap.” Their conclusions are based on thousands of interviews and surveys over several decades.

The middle-income trap refers to the process of industrializing based on low-skilled, labor-intensive manufacturing and exports. Once wages begin to rise, workers cannot move to higher value-added, relatively more skilled jobs. This problem emerges when the workforce lacks the needed higher level of skills. The result is economic stagnation and social challenges such as unemployment that arises from that stagnation.  Mexico, Brazil, and Turkey are examples of initial development success stories that have failed to grow into high-income economies. In contrast, South Korea, Singapore, Taiwan, and Ireland were able to transition to higher-skilled manufacturing and services, and then on to innovation and become some of the world’s richest economies.

What makes the difference between countries that become high-income and those that do not?  Rozelle and Hell argue that the percent of the population with a high school or greater education level is the critical factor. They point out that countries that have succeeded in moving from middle to high income had over 70 percent high school attainment for decades (p.25-26).  And surprisingly, despite all of China’s successes and focus on education, only 30 percent of China’s labor force has a high school degree or higher today.

Many years of meticulous research led by Rozelle uncovered challenges such as myopia in elementary school children and poor nutrition affecting youth development, leading to large achievement gaps between rural and urban students. The result is a large, mostly rural, increasingly unemployed or underemployed population as the country moves to more sophisticated manufacturing and services as the drivers of growth.

Rozelle and Hell are hopeful that China can build an education system that will serve all citizens and match needed skills. They point out that China has been able to address seemingly intractable challenges over time. China’s focus on education has been extensive. The authors describe how investments in buildings, textbooks, teachers, and meals have greatly improved schools.

However, timing remains a problem. Since obtaining a proper education takes many years, rural youth are at least two decades away from achieving this, even if the existing challenges are solved now. There is also a matching problem.  Although China’s economy has been good at creating new jobs, Rozelle and Hell argue that there is a mismatch — skilled workers will find work, but unskilled workers may not. There simply are too many unskilled workers for the forecasted number of unskilled jobs. The authors estimate that perhaps between two and three million people may not be employable in formal jobs (p.48). If so, they argue, China will unlikely be able to move up the income ladder.

Dealing with Debt

Thomas Orlik looks at a different slice of China’s growth process — that of the financial sector — in China: The bubble that never pops. He argues that China has been able to overcome serious challenges time and again. Given the high debt levels that China has incurred, analysts wonder why the country’s “coming collapse” has not occurred yet.¹ However, Orlik views the reform process as working just the same. He documents the various parts of China’s enormous debt levels with extensive detail and yet sees the system continuing to thrive. Orlik argues that the strength of the system rests in part on the creativity of policymakers and the vast resources available to them through the country’s high savings rate managed by a single-party state.

For example, a major concern has been the high debt levels in “shadow banking,” which operates outside the formal banking sector. This sector emerged initially to help finance the many investments, small and private, that state banks shunned. Eventually, the state banks also participated in lending to this sector because the rate of return was much higher than with formal lending. This non-transparent, high-risk debt grew to an estimated 36 percent of China’s GDP by 2016 (p.43).   Policymakers were worried that a crisis in the sector might spill over to the formal economy, but they did not want to restrict lending for fear of seeing a major part of China’s growth engine disappear.

However, Orlik suggests that as part of China’s moves to control its debt levels, reducing shadow lending has been successful — without serious negative growth consequences. He argues that lending was kept open for productive projects funded within the traditional banking system even as funding was restricted for property speculation and emergency loans to companies near bankruptcy, which shadow lending largely funded by that point (p.133).

Another major part of the deleveraging process deals with the over-building of housing and real estate generally. Outsiders are shocked by the “ghost city” phenomena in China.  How can so much empty real estate be supported financially? A debt or financial crisis is certainly coming.

Contrary to other analysts’ gloom and doom scenarios, Orlik describes how Chinese policymakers have been tackling the real estate challenge while spurring growth. The policy’s thrust was to increase demand for housing to absorb inventory and help bolster developers’ profits to lessen their debt. When the developers have incentives to invest, they buy land from local governments, filling public coffers. To increase demand when there is an oversupply of apartments, policies such as favorable mortgage rates, access to urban residency permits, teardowns of slum housing, and subsidies have worked in many areas. Where housing is tight and prices are high, such as in Beijing, restrictions and incentives not to buy are used instead.  Orlik lauds the variability of the policies depending on the needs. The focus is on helping all stakeholders — buyers, banks, developers, and governments — by considering the interests of each. Orlik is clear that China’s approach has been government action rather than a market solution. He acknowledges that this approach has most likely led to inefficiencies but avoided the high costs of a major financial crisis.  

Defining the China Model

How can we describe the China model? Table 1 summarizes China’s economic system’s key elements based on these three books and my research on China’s economy.

The characteristics in Table 1 reflect a prominent role for the state in setting priorities and directing resources, but also a large role for the private sector. Sufficient savings to fund high investment underlies rapid growth rates. These characteristics are similar to those of other East Asian countries as they developed from low to middle income and then succeeded in becoming high income.

Table 1: Defining the China Model

 Is the “China model” special? Does China have tools that others do not?

High savings and investment are key, but this is not country-specific. As Roberts, and Rozelle and Hell, describe, China followed a typical development process of starting with low-skill, low-wage production and moving up the value chain over time. Granted, China has been consistent in pushing this process forward, while other countries seem to have a shorter time perspective and less political will. One might argue a difference is that China’s leaders have state control, secured by a single-party state, over land, labor and other resources. However, the high-income countries succeeded without as much control, authoritarian rule, or as many resources. Development can occur in a variety of ways.

From China’s official view, there is no “China model.”² Leaders claim to share methods of good governance and problem-solving that worked for China, with the underlying message that a country does not have to be democratic to succeed. East Asian high-income countries have shifted the balance from government to more reliance on markets as their economies have matured, and they have become more democratic. These shifts are not apparent in China and by some measures are in reverse today.

The maintenance of the Chinese Communist Party’s power is one reason. While the Party is not the focus of these studies, the authors acknowledge the Party as a key factor in China’s development. The Party can define national goals and marshal resources toward them, maintain law and order, and build national consensus through propaganda and surveillance. When the regime faces risks, the Party can act ruthlessly, unlimited by law.  But the Party’s legitimacy rests on continued economic growth and solving problems people care about, such as environmental degradation. To date, the Party has pushed development forward and avoided most challenges to its monopoly power using both sticks and carrots.

While the authors of these books document that China has many elements needed for success, each contains warnings about possible constraints going forward. Roberts argues more freedom for rural citizens will be necessary for China to continue to develop; Rozelle and Hell argue that China has underinvested in one critical ingredient: human capital; and Orlik, the most optimistic of the group, lists difficult structural transitions needed for the fifth cycle of growth driven by innovation. All the authors conclude that China’s long-run success is far from assured. However, they all also emphasize China’s willingness to be flexible, imaginative, and forward-thinking in dealing with challenges that arise. This political will to develop may be the most important lesson that countries can learn from China.

The post The China Economic Model in Global Context: A Review of Three Books appeared first on China Research Center.

Dr. Barry Naughton is the So Kwanlok Professor at the School of Global Policy and Strategy, University of California, San Diego.  Naughton’s work on the Chinese economy focuses on market transition; industry and technology; foreign trade; and political economy. His first book, Growing Out of the Plan, won the Ohira Prize in 1996, and a new edition of his popular survey and textbook, The Chinese Economy: Adaptation and Growth, appeared in 2018.

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Prime:  Dr. Barry Naughton is the China Research Center’s 2020 Annual Lecturer.  We are very pleased to have him here today.  Dr. Li Qi from Agnes Scott College and Dr. John Garver from Georgia Tech are also joining us. 

Dr. Naughton, what inspired you to earn a Ph.D. in economics and how did you come about your interest in China?

My interest in China came about first, unlike probably a lot of economists who study China. I became very interested in China and Chinese language in the 1970s for a lot of the wrong reasons really.  I had romantic illusions, both about the nature of Mao’s socialism in China and about the idea that China could present an alternative way of thinking.  So, I like to say I was attracted to both Maoism and Taoism at the same time. 

Prime:  Interesting, and why Economics?

In some sense econ had always seemed like a powerful way to look at the world and so once I decided to get serious about studying China, for me it was natural to go do further study in economics.

Prime:  What have been the most significant changes you have seen in Chinese society going back to your first visit?

My first visit was in 1982 and of course, tremendous differences in all areas, but I guess two dimensions seem most significant to me.  One is just the level of human capital and awareness and skills–at that time China was still so far behind the world in everything and now it’s caught up in most things.  But the other thing that was most striking to me when I first arrived in China was it became clear pretty quickly that people were still scared, that they had to watch carefully what they said and their interactions with foreigners.  And that surprised me: not the fact of it, but how clear and palpable it was.  And then in the 20 years after that, you saw that fear disappear and young people in particular became self-confident, interested, open-minded, exploring and it was such a wonderful change to see and I hope we don’t lose that.  I don’t think we’ve lost it yet but there has been some regression lately in the ability of the Chinese government and society to tolerate open-minded free thinking.

Prime:  Your topic today at the annual lecture focused on innovation and technological change in China.  What drew you to this topic and what have been the big takeaways?

Well, I’ve always been interested in the interaction between the government and the market in China and, of course, for so many decades that movement was toward more market and less government.  Then about 10 years ago the pendulum started to swing the other direction as the government found new instruments for intervening in the market and a new desire to shape China’s development in more of a high-tech direction.  So in some ways it was just a continuation of what I’ve always been interested in. But in addition, I was really struck by the fact that the image of a high-tech China had become the driving force that motivated so much of government policymaking not only in economic realms but also in international and strategic affairs and everything else.  It really seemed this was a key piece and we needed to understand it better, or at least I needed to understand it better.

Prime:  What do you think caused that pendulum to swing back?  I think it was under Hu Jintao really, not President Xi and it seems in hindsight somewhat stark that change and unexpected from our point of view.  So how do you read that?

Let me say as a prelude, one of the striking things is there is no abrupt turning point.  We see in so many different dimensions policy gradually stalling out and then very, very slowly moving in the reverse direction. So, it’s really hard to call a turning point.  From a purely economic standpoint, I think the most powerful explanatory factor is reform is costly and scary and so people don’t do it unless they have some kind of crisis, some kind of challenge.  And it’s easy to see in China from the ‘70s through the ‘90s the nature of the crises and how the government responded to it.  So I think one part of the answer is there were no crises in the early 2000’s and economic growth actually accelerated after China’s entry into the World Trade Organization, and everything seemed fine, so why take chances, why take risk, why reform?

But I don’t think that’s enough of an explanation.  I mean that helps, but I think there are a lot of things we don’t quite understand.  Clearly part of it has to do with forces in the Communist Party who always felt that the party needed to reinvigorate its mission and consolidate its power, and it’s funny, a lot of things that Hu Jintao did back then which seemed kind of romantic and backward looking but not very important now seem surprisingly important and foretelling, things that Xi Jinping has done much more intensively.  So, I think a lot of it is the nature of Communist Party governance and aspects of that that we underestimated.

Prime:  Would you tie that into the current administration’s approach of cracking down on liberalization and information as maybe the party feeling we have to be in control or we’re going to lose control? 

I wonder. It seems plausible, but first of all I have to say I don’t know. And the second thing is it seems that often when people go too quickly to the need to preserve power as an explanation, it gets a little—it starts to become making excuses for people.  I don’t feel at all like the fact that Xi Jinping, or Hu Jintao before him, think that they need to crack down in order to maintain social stability is either a good explanation or in any case an exculpatory factor. We could just as well say look at this society, it’s the most successful society by many metrics in the history of the world and the people on top of it say, oh we’re afraid that we’re going to be overthrown if we allow basic freedoms to people?  To me that is just such a weak argument.

Qi:  In terms of balancing market and government power, is it fair to say that recent economic events in western economies (such as the subprime loan crisis back in 2008) did not inspire confidence and aspiration in the typical market- dominated model, as China evaluates its own system that produced its proud achievements?

Sure, that’s totally fair, in terms of both a sense of pride, and the real things China has accomplished. And a sense of disappointment at the U.S. in the 21^st century, because even before the global financial crisis, there was the Iraq War (in 2003) where U.S. acted as the sole world superpower. In the end, even the economic cost-benefit calculation could not justify that decision for the US to intervene in Iraq. And it certainly showed the U.S. as an actor who is not committed to a rule-based global system.

Qi:  The doubt in the western model and system does not seem to come from only the top leaders, but is more widely shared now even among average citizens. I felt in the ‘80s and ‘90s, Chinese people generally and genuinely wanted to learn everything from the West because that represented higher productivity, more wealth and better ways of doing things. But now, even if we acknowledge that people’s views can be influenced by propaganda, there is this suspicion that American society and the way things are done there are not necessarily better anymore.

Who wants to be like Trump’s America?  Nobody in particular looks at Trump’s America and says I want our country to be like that.  Maybe some leaders in various places say I can adapt some of those techniques of leadership.

But I guess what’s funny about it is that there are lags in how anybody perceives their experience. Let’s say we pause in 2005 and we’re in China. First of all, we’ve accomplished so much in terms of economics, and we paid prices for it too (for example, we paid a big unemployment price and other dislocations).  But we got the payoff in terms of growth. So, you would think that that leads people to say, “the reforms were good, and the price paid was worth it.”  But generally speaking, that’s not the conclusion people came to.  They came to the conclusion that, as you said, therefore there’s a China way and it’s not the U.S. way, and it’s different and we should be proud of that.  Well, that’s true but there’s a subtlety there and part of that conclusion should have been that Zhu Rongji took some big risks and they paid off.

Another thing about 2005 is that Chinese society at that time was completely acceptable from a foreigner’s standpoint.  In other words, the criticism of China and human rights had pretty much disappeared, because I think Americans could look at China and say this is certainly not a democracy and it’s certainly not free speech, but there is this area that’s been carved out and everybody knows where the red lines are and within that area you can say a lot of different things and have a lot of different discussions, and who are we to pass any kind of judgment about that system? A system that seems perfectly fine, and they start to move away from it!

Prime:  Yes, but they talk a lot every year about what reforms are going to do.  So, the rhetoric about reforms hasn’t gone away, but not that much has happened.  Can you talk about that a little bit given the failure of the financial reforms, for example, which seems to be something they really do want to do but it hasn’t succeeded?

Yes, it certainly hasn’t succeeded.  On the other hand, they really seem to be trying to restart the financial reforms again now.  So, I think, you know, maybe the best thing that could be said about the trade war is it does seem to be creating a source of external pressure that maybe is substituting for that sense of economic crisis that was a reform driver before.  So, they do seem to be doing some things.  Now, the reforms are limited and uncertain and we’ll see what happens but at least there’s a feeling of movement again and so that helps. Of course, whether economic reform without political liberalization, without serious openness to the outside world can work, that’s a whole new set of issues way too complicated to address here.

Qi:  You had translated a lot of Wu Jinglian’s work.  It was so interesting to me because there is always this fascination and eagerness (at least from the China side) to learn about what American scholars are saying about China’s economy.   But we rarely see the same level of interests here in the U.S. to find out what Chinese economists were saying or their schools of thought about the whole economic system and the reform path.  Can you tell us a little bit more about your decision to translate Wu Jinglian’s work?

Sure. I’m delighted that you asked this.

To me it just seemed natural because he’s somebody whose thinking is interesting and whose personal role in trying to influence the policy process is really, really important.  He is not always right, of course.  There were so many different and contending ideas, but he was just there from the late ‘70s until very recently being super knowledgeable about what the existing policy and political context was and pushing and pushing and pushing.  How can somebody do that for 40 years without just making you have an enormous respect for them?  I do think there is a revival of interest especially in the ‘80s when it was so open and there were so many people and debates, some were really intense and involved actual bad feeling, but now a lot of people seem to want to retrieve their role and claim some credit for all the good things that happened.  At the time the key thing was the focus on moving forward.  But now looking back on it, we saw so many different dimensions, different views and realities.

Prime:  Not top down.

Yeah, that’s right.

Prime:  Coming back to innovation, China is really focusing on this right now as are many countries, but they don’t talk about innovation in terms of reforms, so there seems to be a distinction.  Can you talk about that?

That’s a really, really important observation.  I mean it’s funny, when you go back to the 2006 Long Term Plan on Science and Technology, which in retrospect we can see was very clearly the beginning of this accelerating industrial policy push, but when you look at the document and when you look at how Westerners interpreted it at the time, it actually seemed to be pretty reformist.  It was as much about creating a richer innovation ecosystem supporting intellectual property rights to a certain extent.  Remember they were much worse off then, overall, with respect to funding, research and development, and innovation outcomes.  So, a lot of that has been achieved but what hasn’t been achieved is creating a more competitive, open environment for innovation.

Look at the tech giants like Alibaba and Tencent that were formed in the 1990s through international capital markets.  They’re not industrial policy products at all and so, yes, it’s been very disappointing to see the inevitable erosion of market forces in the innovative sectors because of this bigger state presence.  Even when people still want to participate in certain innovative sectors within China, they find, well, I have to compete with the government who has very, very deep pockets.  I saw a result that I haven’t been able to trace so I’m not 100 percent sure it’s right: the government share of the venture capital market in China declined until 2014 and then turned around and started to increase significantly since then.  So absolutely there is a reversal happening where the government is squeezing out certain types of innovators and squeezing out market forces from the high-tech sector. 

Garver:  Is there still a voice for market-based reform that argue trends like these are bad?

Oh, definitely there’s a voice but it’s muted.  You don’t see it trumpeted in the official media and therefore in the public discourse.  There are lots of people who feel this way but, of course, those people have to be careful because they probably have some investments of their own and in this environment, you have to have a government partner so the voices aren’t heard as clearly and coherently as they should be.

It’s more intimidation that they are careful to modulate the way they express their views.  I think if you get together a couple of people from high tech sectors and banking sectors after dinner having a couple of drinks, they’ll be very, very critical, but you’re not going to see a really coherent article in the press.

Qi:  In reflecting on 40 years of reform, what is still the weakest link?  You can argue, for example, some of the product markets are very market driven and competitive.  Would you say the financial decision-making and the allocation of resources is still the weakest link?

Yeah, definitely.  Not just the financial sector but the banking sector in particular. You can’t help but notice that in the last year-and-a-half there’s been progress in the financial sector liberalization but not so much in the banking sector.

Prime:  It is striking that investment hasn’t fallen which was one of the goals in terms of a share of GDP.  It’s actually risen and as it’s risen, growth has slowed.  So just simple macro math says efficiencies have gotten worse and worse, so how can any economy sustain that or for how long? 

Well, it depends how they handle debt, right?  I mean you can sustain—I mean, again, sort of the Iraq War, what did we spend, $2 trillion on the Iraq War?  What did it get us?  Nothing.  Does that mean our economy will collapse?  No.  It just means we’re worse off because that money was raised through taxes and to a certain extent through national debt.  So as long as those markets are healthy you can do that for a long time.

Qi:  In terms of misallocation of resources, why not invest more resources on Chinese people and public services (such as public health and education)? Penny and I had a paper that showed, rather than always boosting GDP via investment, there were important benefits of investing more in public services. You also mentioned that total factor productivity had been declining or disappeared, why not invest more in public services?

The basic premise of economics is that there are trade-offs for everything and that implies that you’re operating efficiently when the marginal return is the same across different sectors. But that doesn’t seem to be at all true in China right now.  It seems that the marginal return to government investment in health care and elementary education will be far higher than the marginal return to semiconductor labs and other kinds of industrial policy.  So absolutely I think there is a clear evidence of misallocation.

Prime:  Barry, from your vantage point, how do you see U.S.-China relations today and going forward?

Well, I think there’s no question that relations are getting worse and I think they’ll continue to get worse.  I mean the first phase of the trade agreement is interesting because it does give us a pause maybe for a year or a year-and-a-half. We’re in this ironic situation where if China follows through with this commitment to buy $200 billion incremental goods by 2021, even though there’s some decoupling going on, this means there actually would be a certain amount of goods recoupling.  And, you know, there’s this discussion about can the U.S. economy provide $200 billion goods to China and, of course, the answer to that I think is we can if the businesses that provide those goods have confidence that the market is stable so that they are willing to reallocate resources in a way that supports that supply.  But then when we say that, we realize, no, of course they don’t have that kind of confidence.

Prime:  Given all of the sensitive issues and the changes that have happened, what advice would you give young scholars who are thinking about doing China studies and research on China?

Great question.  I’d say dive into it.  It’s more fascinating than ever.  Although we’ve got some really serious problems and you can’t even rule out overt conflict between the countries, but the interaction between the incredible dynamism of Chinese society and the Chinese economy and just the dynamism of this gigantic generation of people especially in their 20s and 30s who are going to be on some level the main drivers of world history.  Chinese people in their 20s and 30s will determine everything.  If we can understand them, if we can influence them, if we can cooperate with them, it’s the most interesting, the most exciting thing in the world.  So, I hope we get more young scholars to study this process.

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Here is the May 9 email exchange between Dr. Prime and Dr. Naughton:

Prime: Since we met in January, the coronavirus has struck. What are your views now on the steps that China’s leaders took in response and the evolving U.S.-China relationship?

The initial instincts and responses of the Chinese government in the face of the coronavirus were damaging and increased the threat to the world, there’s no question about that.  They suppressed information about the virus and still haven’t provided the opportunity for a thorough and transparent examination of the source of the virus.

But it also produced heroic responses among Chinese doctors, scientists and frontline health care providers, and an individual hero, the late Li Wenliang.  Li’s simple statement “a healthy society should have more than one voice (健康的社会，应该有多个声音)” is something that won’t ever be forgotten.  We should also remember that Chinese scientists posted the genome sequence of the virus on January 11, 2020.  We in the U.S. had two months to mobilize a response, and, generally speaking, we wasted it.  The Chinese response, on the other hand, has been crude but effective.  Since their nationwide lockdown went into effect on January 23, they have gradually throttled the virus and appear to have stopped its spread.

The U.S.-China relationship, in the course of all this, has gone from bad to worse.  Mutual recrimination has become the main content of the relationship.  In both countries, the top leaders are desperate to avoid being blamed by their own people, and eager to put the blame on foreign countries.  It’s hard to be optimistic in this context.

The post Discussion with Barry Naughton, January 24, 2020 appeared first on China Research Center.

Penelope B. Prime, Georgia State University

U.S. President Donald Trump signed a trade deal with China on Jan. 15 intended as a first phase toward a more comprehensive agreement between the two countries.

In exchange for some tariff relief, China promised to buy an additional US$200 billion in American goods and services over the next two years and make structural reforms that would provide more protection for U.S. intellectual property. It still leaves about $360 billion in punitive tariffs on Chinese imports in place – and more sanctions would be triggered if China fails to meet the terms of the deal.

Good news, right? The end of the trade war is nigh? Don’t get your hopes up.

While business leaders in both countries will be temporarily relieved, the underlying tensions between them will not end easily.

As an economist who closely studies the U.S. relationship with China, I believe there are fundamental issues that won’t be resolved anytime soon.

Doing it in phases

Tariffs and other trade issues have received most of the attention during the trade war, but the more fundamental – and difficult – challenges are with lax intellectual property protection and China’s industrial policy.

The U.S. is unhappy with China’s use of these tools to develop its economy and to help its companies compete – unfairly, from the U.S. perspective. And many of the Trump administration’s demands challenge China’s normal business and policy practices.

China’s leaders can’t be seen by Chinese citizens as giving into the U.S., while Trump wants to show that he is tough on China as part his campaign for reelection. This makes the negotiations very sensitive on both sides.

That’s why American and Chinese negotiators, who have been engaged in talks for almost two years, decided to try to get to an agreement in phases.

Phase one has focused on the trade balance and tariffs, with some provisions relating to technology transfer, intellectual property and opening China’s economy to foreign business. Phase two is expected to then deal more deeply with intellectual property enforcement and economic reform in China.

Given the negotiations went on for so long, it’s fair to ask, why are these issues so difficult to resolve? I believe there are basically three factors that have made finding much common ground difficult – and phase one won’t change that.

Government subsidies

First, China’s successful growth has combined market competition with government-led industrial policy. For example, when China’s leaders decided the economy needed more innovation, it created incentives and targets for companies and research institutes to create patents. The number of patents filed has soared as a result.

A wide range of government subsidies is used to direct and assist private as well as state investment in similar ways.

The U.S. does this as well but not on the same scale, and therefore views it as unfair.

From China’s perspective, however, it is not reasonable for the U.S. to require China to change its development model in exchange for removing tariffs.

Protecting intellectual property

Getting China to do more to protect the intellectual property of advanced technologies is another especially thorny issue.

Both countries are facing economic challenges that can be aided by improved technology. But since in many areas Chinese capabilities have caught up with those of the U.S., or are being rapidly developed, there is much more pressure from the U.S. for China to accept global norms on intellectual property rights.

Even while China’s own IP protections have improved at home, there is ample evidence that Chinese companies have copied foreign technology without permission or payment, despite China’s acceptance of IP protection as part of World Trade Organization membership.

Foreign companies also report being compelled to share advanced technology in order to do business in China. While, technically, the companies can decide to pull out of China’s market, the U.S. argues that this hurts the competitiveness of U.S. businesses. It either means they must lose their technological advantage or not have access to the business opportunities that China’s large market offers. There is no reciprocal requirement of Chinese companies doing business in the U.S.

The phase one agreement begins to deal with the IP issues and includes a complaint process, which is a step in the right direction. It remains to be seen, however, how extensive it will be and how quickly it’ll be implemented given that Chinese companies will still face intense pressure from the government to advance China’s domestic capabilities.

Military concerns

Finally, technology capabilities are related to growing military concerns.

Many of the advanced technologies that China is racing to obtain have military as well as civilian uses. U.S. policy under the current administration has indicated a wariness about China’s military intentions and is considering options.

This wariness has been bolstered by China’s military buildup, especially naval capabilities in Asia. Some advisers to the Trump administration argue that China’s ultimate long-term goal is to replace the U.S. as the dominant global power.

China’s rise

Conflicting differences in the U.S. and China’s economic systems were less of a problem so long as Chinese companies lagged far behind their American counterparts in terms of technology and competitiveness.

As China has grown more technologically advanced, its relationship with the U.S. has become increasingly strained. This will only get worse as China’s economy develops and its companies compete more with the U.S. and others.

The phase one agreement represents an important step in re-setting the dialogue between the two countries in a positive direction. Whether we see a phase two will depend on open discussion and trust.

Good relations with the U.S. have been one of the foundations of China’s successful development and entry into global markets. Chinese leaders are now weighing how much these good relations with the U.S. matter to their future.

This is an updated version of an article originally published on Dec. 13, 2019.

Penelope B. Prime, Clinical Professor of International Business, Georgia State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The post US-China Trade Pact President Trump Just Signed Fails to Resolve 3 Fundamental Issues appeared first on China Research Center.

This interview is based on a discussion in person and by email between Dr. Penelope Prime, the managing editor of China Currents, and Dr. Davis. The text has been edited for length and clarity.

Dr. Davis, welcome to Atlanta.  We are delighted to have you here and to learn from your expertise. We want to know how a sociologist sees what is going on in China today. The topic of urbanization runs throughout your work. What drew you to this topic and what have been the big takeaways?

I like cities, and I like living in cities. Perhaps if I had grown up on a farm, I would have the same emotional attachment to rural as to urban living; but in my case, cities draw me in. My first job after I graduated from Wellesley was at the Chinese University of Hong Kong and after two years, I became even more attached to high-density living and the cultural variety of urban, public life.  Subsequently at Harvard’s East Asian master’s program, I organized a reading group led by Alex Woodside to explore varieties of city life in East and Southeast Asia. In the mid-1970s when Americans couldn’t live in China, I interviewed PRC migrants in Hong Kong for my doctoral thesis. As a family of three we lived in a tiny 100 square meter apartment overlooking a busy street, and we thrived on the energy and diversity of the city. When I finally could do fieldwork in China in 1979, the Chinese government so severely restricted our geographic movements that we couldn’t even exit the final stop on the Beijing subway. One result was to turn my attention to analyzing the spaces and everyday life in the urban core.

Then after these early restrictions were lifted and Chinese and American scholars developed ongoing partnerships, professional and personal networks reinforced my initial focus on densely settled cities, and in particular on Shanghai. I first went to Shanghai in 1981 and then returned almost every summer between 1984 and 1995, following 125 households whom I first interviewed in 1986 and 1988. Over these 10 years, China took the first steps toward a rapid expansion of the urban population that by 2010 had created 160 cities with more than one million residents.

You have also studied marriage. Is that urban marriage or just marriage generally?

In my first book “Long Lives,” the core question was how the Communist revolution had impacted the elderly and their relations to their families in both rural and urban China. Previously many had assumed that collectivization of the economy and political campaigns against ancestor veneration had destroyed family solidarity.  Drawing on documents and household interviews, I argued that the economic, legal, and health initiatives of the CCP between 1950 and 1976 had actually strengthened family connections because they promoted higher levels of marriage among all social classes, and more sustained interdependence between elders and their surviving sons and daughters than had been the norm during the three decades of war and dislocation before 1949.

What are the big takeaways that you have found over these decades of studying marriage and cities and family relations?

First, I would stress that as a fieldworker focused as often on dynamics of daily life as on broad demographic and structural trends, I rarely can muster big takeaways. That is not to say I never generalize, but the level of generalization tends to be modest and contingent. For example, over the past decade I have focused on how the one-child policy, commodification of property relations, and enforcement of a new marriage law that reduced barriers to divorce have “privatized” the institution of marriage. But simultaneously, I have used focus groups and extended family interviews to probe the refined moral logics by which siblings and divorcing spouses divide domestic property as the party-state has granted individuals more privacy in how they conduct their intimate relationships. By listening to individual voices and placing these conversations within larger institutional spaces, sociologists work to understand both social process and personal agency.

Do you have any observation of youth in China these days?

As you know, currently I’m a visiting professor at Fudan University, and this year I will return for my third faculty appointment at Schwarzman College at Tsinghua University in Beijing.  In these two university settings, as well as in interactions with newly arrived PRC students in the U.S., I get a glimpse into the ambitions and fears of those in their late teens and early 20s. Fifteen years ago, acceptance to university guaranteed a good job upon graduation.  Now after rapid expansion of the tertiary sector, 30 percent of 18- year-old men and women continue their education beyond senior high school. Consequently, the value of a bachelor’s degree has fallen and competition to enter specific majors in elite colleges has greatly intensified. China not only has the largest number of college and university students in the world, but it also has one of the highest percentages of secondary school graduates continuing to tertiary education.  Higher education has become highly stratified, and the pressure on teens and their families is far more intense than for those only 15 years their senior. Therefore, the first thing I would say about “youth” in China today is that most teens in urban centers live in a pressure cooker, and the sorting process begins in the last years of primary school. Those who succeed in these academic competitions and whom I have taught at Fudan, Tsinghua, and Yale are extremely accomplished and ambitious; but even they worry intensely about their future. However, I would also stress that talent stretches across the whole country, and it is not concentrated in one or two megacities. China has no single metropole.

But that is a good thing.

Yes, overall such drive and ambition are good for this cohort and good for China and there is not a single province where one cannot find talent and drive.

You have done a lot of research on the ground over these years.  How have those opportunities and methodologies changed, or not?

Indeed.  When I first went to China in 1979 Chinese officials had no experience with foreign social scientists. Working with the U.N., the government had committed to making the 1982 census meet global standards, but virtually no officials who supervised foreign visitors championed random samples. As a result, until well into the 1980s, sociologists did a kind of “piecework” or what we more formally term “triangulation.” We gathered every shard of evidence from as many sources and angles as possible, operationalized variables in multiple ways, and when the results aligned into a coherent pattern, confirmed or rejected our hypotheses. Today, we still need to “triangulate,” but the methodologies in the study of Chinese society closely resemble those in the study of American society.

I drew my first random sample in 1986, when the Shanghai City Union sponsored me to write about the family life of newly retired textile workers. This project was negotiated at the local level. They had never heard of a random sample, but they wanted scientific methods. Over the next 18 years I went back eight times to that research site. Many of the original respondents had died or moved away. Yet in 2004 I was able to contact family members in 70% of the original 125 households.

The years between 1996 and 2016 represented a golden age. Excellent census data was publicly available, digitized statistical materials were accessible via the internet, and most importantly, many PRC born sociologists were leading research teams. The Chinese census is one of the best in the world and almost every Chinese academic journal can be searched online.  In one day, scholars working from the United States can gather trend data and run regressions that 20 years ago would have taken months to complete.  For example, in 2005 when I wanted to discuss how the government had understood and used the role of consumers after 1949, I spent a few hours with keyword searches of People’s Daily to create the numerical trend and then a week to read all the articles in which the word “consumer” had been linked to discussion of “waste” between 1949 and 2003. To complete such an analysis 10 years earlier, I would have needed to travel to the rare library with a complete run of People’s Daily, lifted every bound set, and spent hours to identify every article which discussed both consumption and waste. It would have taken months and would not have produced results that were as accurate.

What advice would you give to young scholars these days who are interested in studying China?

I am not one to easily give advice, but I would note that the support and recognition for scholarship of contemporary China varies by discipline. Not so very long ago, donors to Yale had raised money to hire an economist who worked on the Chinese economy. Nevertheless, the economics department did not launch a search because most faculty believed that there was no suitable data on China to support frontier research in economics. Clearly, we no longer face the same data restrictions today, but some disciplines still provide more opportunities than others.

So what is your next project?

Currently my primary research focus is a multi-year study of how rapid growth of megacities and the inclusion of 400 million rural residents into urban settlements have impacted family life. I also will extend a 2015-2016 project that studied wedding ritual to understand changing urban kinship ties.

Congratulations! So from your vantage point, just to wrap up our discussion of this wonderful career that you’ve had, what is your sense of U.S.-China relations today?

We are challenged. Short statement.  We are challenged.  But we’ve been challenged before, and I think that the talent and the diverse players on both sides of the Pacific who are committed to the long term give me confidence that the future will be brighter.

So you are overall optimistic?

You have to be. What’s the alternative?  There are many reasons to be pessimistic but there is too much at stake, too many shared interests, to see only the dark side.

The post Interview with China Scholar Dr. Deborah Davis, Yale University appeared first on China Research Center.

As a partner and founder of Jin & Fang LLP, Dr. Lei Fang practices U.S. IP law and counsels clients on IP protection and enforcement strategies in domestic and global markets. She represents multinational clients ranging from start-up companies to large corporations, universities, and research institutes in various technology fields, particularly in pharmaceutical biotechnology, medical device, and life sciences. She helps clients seeking patent, trademark, and copyright protections; IP due diligence; technology transfer; and licensing on various transactional IP matters. She also assists in the Hatch-Waxman ANDA (Paragraph IV) patent litigation involving generic pharmaceuticals, and managing International Trade Commission Section 337 investigations and related district and appellate court cases involving Chinese companies. She is currently an adjunct professor at the Emory University School of Law, where she teaches a contract-drafting course.

Penelope Prime: Dr. Fang, thank you for sharing your expertise in IPR protection with the China Research Center. We know that many companies investing in China have faced serious challenges with IPR issues because of weak enforcement. As an attorney who has worked a long time on IPR issues, how do you assess the situation in China today, and going forward?  What kind of changes are you seeing?

Lei Fang: In general, both IPR protection and enforcement in China have been improved dramatically. Intellectual property refers mainly to patent, trademark, and copyright. China has fully developed laws governing these three types of intellectual properties, and Chinese patent laws, trademark laws, and copyright laws have all been amended several times since they were enacted. The latest amendment for the Chinese trademark laws was in 2014. I believe between 2014 and 2015, the Chinese copyright laws were amended, too.  Since last year, China is preparing to amend its patent laws for the fourth time. The latest draft was prepared by the State Intellectual Property Office (SIPO) and was submitted to the State Council Legislative Affairs Office for review. A new draft of the fourth amendment may be available for public comments by early 2017.  So we can see that Chinese policymakers are continuously trying to change their laws and make them more compliant with international standards.

With respect to the protection side, China continuously increases its patent application filings both inside China and in other countries through international PCT or Paris Convention filings. In 2015, Chinese innovators filed over a million patent applications for the first time ever within a single year.

With respect to the enforcement side, I actually just discussed this issue with a few Chinese IP attorneys in China the other day. I was informed that China has set up special IP courts to deal with patent and complicated trademark infringement cases in three major cities: Beijing, Shanghai, and Guangzhou. These IP special courts are equivalent to the appellate court level in the U.S., but any patent infringement cases or complicated trademark infringement cases can be filed in these IP courts directly. There are about 20 highly experienced judges in these IP special courts. Each of them must have more than 10 years working experiences in dealing with IP issues. Therefore, the decisions rendered by these judges in the IP special courts should be reasonable and fair, I hope.

Furthermore, the statutory damage for IP infringement cases has been increased, and punitive damages for willful infringement are acceptable, too. For instance, for the trademark infringement cases, the statutory damage increased from 500,000 to three million RMB; For the patent infringement cases, the current statutory damage is about one million RMB, but the draft fourth amendment proposes to increase statutory damages for patent infringement, as well.

With respect to the national/local protectionism, the recent survey indicates “foreign plaintiffs notched a 100 percent win rate in civil cases heard by the Beijing IP court last year.”¹ This is very encouraging and good news for U.S. and foreign companies that are doing and/or will do business in China.

PP: Are those IP courts for foreign companies or both Chinese and foreign companies?

LF: These IP special courts handle all the patent infringement and complicated trademark infringement cases in China, regardless of the nationality of the companies or individuals. Basically, all the patent infringement cases can be filed directly before the IP special courts, but for the simple trademark and copyright cases, they would start with the local court first, and then can appeal to the IP special court, if needed. Although right now, there are only three such IP special courts in the three cities, eventually more IP special courts will be set up in other jurisdictions.

PP: So, if you have a problem in Sichuan you can’t go to one of the three courts?

LF: You can, if you (or the company) can show you are doing business in any of those three cities. It’s the same concept as in the U.S.: one must show a “personal jurisdiction” in the selected court.

PP: Do you see these rule and enforcement changes creating less infringement because people who might infringe see that they will get in trouble or more likely get in trouble so there’s more respect for IP today?

LF: Absolutely. Increasing damage awards and acknowledging punitive damages would certainly send more serious messages and imposing more serious punishment to the infringer, as well as more respect for the value of owners’ IPR.

PP: It is making a big difference, then?

LF: Yes. China is really trying to switch from “made in China” to “created in China”. The Central government is strongly emphasizing innovations and creative inventions.  Many new policies have been implemented to encourage innovations and technology transfer and licensing.

For a foreign company that is entering the Chinese market as part of its global business, actively seeking IP protections and diligently enforcing its IPRs in China are very critical. Remember, all IPs are territory, meaning you must have IPR protections in each and every nation/country in which you are doing business. Having only a U.S. patent does not prevent an infringer from copying or infringing your products or technologies in China. You’ve got to have a corresponding Chinese patent that covers your products and/or technologies, and can be asserted in a patent infringement suit, if an infringement arises. Further, you’ve got to think about all types of IPR protections in China. For instance, a Chinese invention patent to protect your products and technologies, a Chinese design patent to protect your products’ designs, a Chinese trademark to protect your brand names, a Chinese copyright to protect your source code, etc.

Many U.S. companies now realize the importance and necessity of obtaining Chinese IPs, and have started to seek Chinese IPR protections, as well as enforcing these IPRs in China diligently. That’s good news. Moreover, for any U.S. foreign companies, before entering the Chinese market, conducting due diligence and product clearance are equally important.  One should know potential competitors, their products and technologies, and whether you have  “freedom-to-operate” (FTO) in China.

PP: Do you mean compliance issues?

LF: No, not just compliance issues. It is the same for a Chinese company thinking about investing or operating in the U.S.  Due diligence and FTO assessment of the market are very important. It is very common and good practice for a U.S. company to conduct due diligence and FTO assessment when they develop a new product or technology. Due diligence and FTO assessment would help the company learn whether its product or technology is patentable: whether there are any blocking patents that the company’s product or technology may fall into, and if so, how to design around such blocking patent, if possible. In other words, whether the company has a freedom-to-operate its product or technology in the U.S. market.

In the recent years, due to global collaborations, more and more Chinese companies realize the importance of due diligence and FTO assessment, and have started to consider and conduct such assessments, too.

PP: A lot of Chinese companies are starting to invest in the U.S. Many of them are interested in developing their own technology, buying new technology, and learning so that they can conduct R&D themselves.  What trends do you see in that regard?

LF: As I said before, China now really focuses on innovations and advanced technologies. Although many Chinese companies are still very interested in merger with, or acquiring, U.S. companies, due to the lack of management and U.S. operating skills in running the company, Chinese companies are more interesting in investing in the U.S. company’s technologies, rather than the whole company.  Both the central Chinese government and local province level governments are encouraging and providing many incentives for Chinese companies to invest overseas.

For instance, lately there are many China-U.S. innovation and entrepreneurship competitions and forums in the U.S. These competitions are organized and initiated by Chinese investors and government agencies, and the main purpose is to foster communication and facilitate China-U.S. technology innovation and investment.

I just participated the first 2016 U.S.-Southeast China U.S. Innovation and Entrepreneurship competition in August. Surprisingly, more than 400 people attended this competition. The technologies presented related to biomedical, IT electronic, and other advanced technologies. Several Chinese investment groups attended and evaluated these technologies. The selected technologies will go to China to compete there. Even though this is the first of this kind of technology competition in the Southeast, I was told that Silicon Valley hosts such technology competitions almost every month.

PP: And these are Chinese companies in the competition?

LF: No, most of the technologies presented in the competition are from U.S. companies, research institutes, or universities. The Chinese local government on the province or city level sponsors the competition, and could possibly participate in developing the selected “winning” technology.

PP: In China?

LF: Either one, in China or in the U.S.; it doesn’t matter. In China, almost every province has, on the government level, set up innovation technology incubation and development centers for companies, particularly start-up companies.

Same here, too. For example, in the U.S. Silicon Valley, there are several incubation centers providing incentive packages for start-up companies to grow up and develop. Same here in Georgia. In Peachtree Corners, for example, there is a new technology park particularly set up for start-up companies and small business owners, including Chinese-owned companies.

China is also working on facilitating university technology transfer and licensing. Anyhow, China is really focusing on developing and acquiring innovations and advanced technologies in the next five to 10 years.

PP: What kind of areas are priorities?

LF: Technologies related to life sciences are certainly a big interest. China’s pharmaceutical and advanced medical development are behind – not like the IT field.  Others, such as artificial intelligence (AI) technologies, and material sciences – e.g., biomaterials, energy control materials, etc. – are also a focus of China’s interest.

PP: Do you have an example of a Chinese company investing in technology here that you could share with us?  Or is that client privilege that you can’t really share?

LF: I am aware of several Chinese investment companies constantly investing in U.S. companies, and Chinese pharmaceutical companies that are very active in merging with and acquiring U.S. companies.  WuXi AppTec is a good example.

PP: So the company is acquiring that technology here and taking it back to China?

LF: Not necessary, and it depends on many factors dealing with business and market strategies. The focus is licensing the technology for further development and commercialization.

Of course, we have been talking about investing in technologies, but there are many Chinese companies interested in investing in real estate and services like AMC.²

PP: Entertainment.

LF: Yes, entertainment and more.  I just saw the news this morning that a Chinese company is thinking about buying GNC, which sells vitamins and supplements.  They are talking about buying a branch of GNC for $100 million.

PP: Because a company develops a technology or buys a technology or licenses a technology doesn’t mean that they can be successful using that technology or selling the products and service—

LF: No, it’s still a long way to go.

PP: What is it about firms that tend to be more successful in that regard, especially Chinese firms, or is it too early to say?

LF: I think when a company decides to license a technology, they must conduct due diligence on the technology and the market.  Technology development and commercialization, particularly in the life sciences and biopharmaceutical fields, is a very complicated, long process and involves many players in various stages. Of course, the earlier stage, less investment, but higher risk; the later stage, higher investment, but less risk.  Even after the development stage, there are animal studies, clinical trials for FDA regulatory approvals, because whatever you make in the lab is different from what can be used in the market.

So, it’s very hard to predict, and it depends on many factors. Nothing is guaranteed during the technology development process, particularly in the life sciences. However, if the technology is good and has potential market value, and the company engages the right people to work on it in different stages, then there’s a high probability of success.

PP: In terms of the Chinese companies investing in technology here, what is the breakdown, just a rough estimate, of how many of those companies would be state-owned companies versus private companies?

LF: I think most of them are private companies.  Even if the company is state-owned, it’s probably semi-state-owned.

PP: Is that in life sciences or in general?

LF: In general, I believe 80 to 90 percent are private companies, not state-owned companies.

PP: Thank you so much.

The post Intellectual Property Right Challenges and Opportunities in China and U.S.: An Interview with Dr. Lei Fang appeared first on China Research Center.

Chinese goods seem to be everywhere these days.

Consider this: At the Olympics in Rio this summer, Chinese companies supplied the mascot dolls, much of the sports equipment, the security surveillance system and the uniforms for the volunteers, technical personnel and even the torch-bearers.

Do you own a personal computer or air conditioner? Or a pair of shoes or set of plates from Wal-Mart? They all almost certainly bear a “Made in China” label.

Put another way, China has become an “export machine,” manufacturing an increasing share of the world’s products. Its initial success exporting in the 1990s – which surged after it joined the World Trade Organization in 2001 – surprised everyone, including Chinese policymakers. The result was rapid growth of over 9 percent for many years. In 2014, China surpassed the U.S. as the largest economy in the world in terms of purchasing power parity.

How did a country with a national income of just US$155 per capita in the 1970s turn into one of the most economically powerful countries in just 40 years? The answer not only shines light on China’s success story but also offers some important lessons for governments considering a turn inward, such as the incoming Trump administration.

I visited China for the first time in the spring of 1976 – just before China’s renewed entry into global markets. Research, teaching and taking students to China over the following decades have given me a window to observe the dynamic development that has occurred. And now, as a clinical professor at Georgia State University and director of the nonprofit China Research Center, I am involved with research and outreach that informs policy and business to strengthen U.S.-China relations.

The costs of isolation

Historically, China has nurtured strong connections to world commerce.

From the Han Dynasty (206 B.C. – A.D. 220) until the Ming (A.D. 1371-1433), goods, culture and religion flowed among Central Asia, the Middle East and China via the various overland routes of the Silk Road. Sea exploration began in the Ming Dynasty, when the famous Captain Zheng He took seven voyages to establish trading contacts with Africa, Arabia, India and Southeast Asia. In the early 1900s, Shanghai was nicknamed the “Paris of the Orient” based on its role as a center of trade and finance.

But after Mao Zedong led the communists to victory in 1949, China established a planned economic system, withdrawing from global markets, which the communists deemed capitalist and imperialist. Foreign assets were nationalized and companies left the country. Trade increased with the communist Soviet Union and Eastern Europe during the 1950s, but that was sharply curtailed with the Sino-Soviet split in the early 1960s. The U.S. did not even have official trade links with China between 1950 and the early 1970s.

From Mao’s point of view, China’s goal was to build a strong economy by being self-sufficient in production of all its needs. He believed that self-sufficiency should even extend to each province as well. His “plant grain everywhere” policy, regardless if the geography was ill-suited for it, is an example of how far he implemented this strategy. One consequence was the disastrous Great Leap Forward, in which an estimated 30 million or more died from famine.

This disaster resulted partly from pushing self-reliance in industry in the countryside, as well as setting impossible grain output goals. The idea of specialization of production based on relative efficiency of resources was seen as capitalist and dangerous to communist development. To benefit from specialization, China would need to depend on other countries and deal with competition. As a result of rejecting specialization and trade, China’s economy grew slowly, with poor living conditions based on backward technology and little exchange within the country, let alone between China and the world.

Because China had been closed to foreign investment since the early 1950s and exported primarily to pay for essential imports, the value of China’s exports in 1978 was less than $7 billion – a mere 0.3 percent of their value today. This isolation contributed to China’s low living standard. Its GDP per capita of $155 ranked 131st out of the 133 countries with reported data, just above Guinea-Bissau and Nepal.

When I visited in 1976, I saw men with belts wrapped a couple of times around their waists – because they were very thin, and perhaps because the planned economy did not produce many sizes of belts.

Renewed global connections

When Mao died in 1976, a group of leaders, including Deng Xiaoping, believed that market reforms would revive the economy through more efficient production and better technology. China’s so-called “opening up” officially began with the Third Plenum of the Chinese Communist Party Central Committee in December 1978.

As part of the reform strategy, China’s leaders established four special economic zones in southern China near Hong Kong with incentives for foreign companies to invest in production aimed at exporting. The most well-known zone is Shenzhen, located in Guangdong Province.

At the time, U.S., Japanese and European companies were looking for new locations to manufacture their goods cheaply after wages rose in East Asian countries like Hong Kong, South Korea and Taiwan. And few other countries were welcoming to foreign investment. India, for example, remained closed to foreign direct investment for another decade.

In other words, China’s policies changed at a fortuitous time.

Companies moved quickly to China, especially across the border from Hong Kong, giving birth to deep manufacturing capacity that became the center of the world’s supply chain. By 2006, foreign companies were generating nearly 60 percent of China’s exports and even today produce close to 43 percent of them.

The power of specialization

China’s export story is a lesson in the power of globalization for development. Specifically, China’s policies leveraged its comparative advantage.

It attracted foreign direct investment with incentives to export, which included an undervalued exchange rate and a large population willing to work for relatively low wages. The returns to this investment were used for infrastructure, education, R&D and institution-building. This focus on domestic capabilities supported growth and rising living standards, avoiding a “middle income trap” where a country is not able to move its production beyond the lower end of the value chain.

Over time, Chinese domestic businesses became increasingly competitive as they developed management skills and market knowledge. Even small domestic firms have grown their exports in recent years as a result of access to international e-commerce platforms such as Alibaba.

China’s embrace of global merchandise trade and capital markets has transformed it into a middle-income country with a GDP of almost $8,000 per capita in current U.S. dollars, and the largest producer of manufactured goods in the world.

Chinese families now have enough income to travel the world. Chinese tourists are expected to soon be the biggest spenders on travel. Meanwhile, labor-intensive, low-wage manufacturing is moving to new opportunities in Bangladesh, Vietnam, Cambodia and elsewhere, and the composition of China’s exports is changing from textiles, furniture and toys to sophisticated pumps, electronics and engines. China is successfully moving up the value chain.

The next stage and lessons for the U.S.

Going forward, however, exports are not likely to dominate China’s development process. Its outward investments will. Chinese companies are investing worldwide. The value of their investments outside of China reached $1 trillion in 2015, up from just $57 billion a decade ago. Some analysts expect it to double by 2020.

The impact of Chinese companies investing abroad looks likely to be as big, or bigger, than that of its exports. Chinese outward investment is growing very fast both because of industry conditions within China, loosening of constraints on outward investment by its leaders and growing capabilities on the part of business managers.

In just the U.S., already Chinese companies have invested an estimated $64 billion and employ 100,000 people. So while we will continue to buy goods “made in China,” we will increasingly work with, and for, these very same companies.

That is, if we are lucky. If the next administration carries out its campaign promises, then the U.S. may miss out on many of the benefits of foreign investment all together from China and elsewhere, such as revitalized towns with new jobs and tax-paying businesses.

In recent decades, the U.S. helped China join the global market system through corporate investment and government policy. Both countries benefited tremendously.

The irony is that China has learned its isolation lesson and is now promoting trade agreements that will substitute for the ones that the U.S. may leave on the table, such as NAFTA and the Trans-Pacific Partnership. And if the U.S. begins a trade war with China, then all bets are off. Not only will new jobs not materialize, but the low-cost goods we have enjoyed will be much more expensive, and our growing exports to China will no doubt be hurt by Chinese retaliation.

Penelope B. Prime, Clinical Professor of International Business, & Director, China Research Center, Georgia State University

This article was originally published on The Conversation. Read the original article.

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