Furthermore, do keep in mind that not all tangible assets are correlated. For example, real estate tends to do well when the overall economy is booming, whereas gold can be and frequently is used as a hedge or if you will, insurance policy. Therefore, just like diversification in general makes sense, the tangible asset dimension of your portfolio must be properly diversified as well.

However, from real estate to precious metals, all tangible assets have one characteristic in common, one which represents a selling point which cannot and should not be ignored in the context of 2020’s unprecedented stimulus on all fronts (both monetary and fiscal): the fact that they cannot simply be willed into existence.

Yes, it is true that for example mining-related technological advances could pop up which result in an above-average increase in supply (anything from asteroid mining to output improvements here on Earth). For example, discoveries on the American continent have resulted in such a supply surge in Spain in the distant past that the very monetary and economic system was shaken. As such, yes, problematic increases can occur as far as precious metals are concerned. The same principle is valid when it comes to other tangible assets as well, for example excessive construction that results in an increase in housing supply far beyond what demand dictates.

However, there is a world of difference between such scenarios and what is currently happening with pretty much all currencies. While supply shocks can exist, have existed and will most likely re-emerge at one point or another with tangible assets, the elephant in the room in terms of nuance and differences is represented by the fact that they cannot be created out of thin air. The same cannot be stated about unbacked fiat currencies.

Why should 2020’s developments worry investors to enough of a degree that they end up increasing their exposure to tangible assets?

Haven’t measures which were considered inflationary by many economists also been implemented in the aftermath of the Great Recession, with inflation nowhere to be seen?

While it is true that 2020 is hardly the only year during which central banks and governments have engaged in aggressive stimulus initiatives, this doesn’t mean inflation can never possibly become a threat again just because it hasn’t done so in the relatively recent past. As any investors worth his salt will tell you, it occasionally makes sense to zoom out.

Furthermore, it is important to pay attention to the structure of 2020’s stimulus measures when compared to the Great Recession or even Dot-Com Bubble days. As explained on other occasions as well here at ChinaFund.com, the likelihood of newly-created currency finding its way to the “real” economy more so at this point than in the past is quite high.

Why?

For reasons such as:

1. The increase in aggressiveness by all central banks and governments compared to the Great Recession days, with pretty much no political actors questioning the viability of these methods and on the contrary, right-wing and left-wing politicians out-bidding one another in terms of stimulus: more business-oriented stimulus on the right compared to more individual-oriented stimulus on the left, of course, but out-bidding is still out-bidding
2. The ubiquity of it all, with even countries which were considered extremely conservative such as Germany jumping on board and throwing hundreds of billions of EUR at the problem right from the beginning
3. On a similar note, yes, the “speed” element deserves to represent a stand-alone reason, with the fact that central banks and governments from all around the world quickly resorted to unprecedentedly aggressive methods speaking for itself
4. The fact that this time around, far more attention is being paid to the fiscal stimulus dimension than in the aftermath of the Great Recession. Therefore, unlike the post-GR currency creation initiatives which led to money finding its way more so to the banking system reserve dimension than to Main Street, it is far more likely that the real economy will also be on the receiving end this time around, which dramatically increases the likelihood of us also seeing consumer price inflation rather than merely asset price inflation at best
5. The political landscape being remarkably different, in light of the fact that in the aftermath of the Great Recession, populist leaders were exceptions. Nowadays, populism is seeing worrying “critical mass” numbers and from Brazil to the United States, a populist status quo is no longer a figment of the imagination of those writing scripts for B-rated movies but actually firmly in reality territory

These five reasons represent the most obvious choices but the list is by no means definitive. The bottom line is this: there have been few junctures throughout history which painted a more compelling picture in favor of embracing tangible assets than the 2020 developments. Does this mean impressive returns are guaranteed? Most definitely not, as it can oftentimes take the market remarkably long to make up its mind. This much is pretty much certain, however: the probability of tangible assets ultimately doing very well is so high at this stage in the game that Chinese asset investors and pretty much everyone else would be doing themselves a great disservice by not tweaking their portfolios accordingly. This doesn’t, of course, mean going all-in by proverbially betting the farm on tangible assets, it simply means treating them far more seriously than in the past. Fair enough?

Additionally, knowing who will be making the policies for a country can give you a good idea of where that country is heading over the next few years. You’ll want to know if this person is more liberal or conservative, as this will probably influence the legislator that they push. This is particularly valuable when that country has the potential to become the world’s #1 economy in the foreseeable future.

This is our brief biography of Xi Jinping and his relationship with the United States.

Political Career

Understanding who is at the helm of the country can help you articulate an educated guess as to how that person is going to attempt to steer the country over the next couple of years.

For example, when Donald Trump was elected in the United States, it was widely known that he was a former businessman who was going to do his best to boost the stock market and cut taxes for corporations. Over his first term, he has largely done this. If you are a foreign investor who understood this 4 years ago, then you most likely have made a nice profit for yourself.

One of the reasons why understanding leadership in China is becoming more important is that China just abolished term limits. This means that Xi Jinping has the potential to stay in charge until he decides to step down.

➢ The United States – Presidential terms last for 4 years and a president can serve a maximum of 2 terms (8 years total)
➢ China – No term limits. This development is fairly recent. Since the 1990s, China has implemented a term limit of 2 terms on their presidents. However, Xi Jinping revised this so that he can stay in power indefinitely

Next, let’s take a look at Xi Jinping’s career in politics.

History of Xi Jinping’s Political Career:

➢ 1999: Governor of the Fujian province
➢ 2007: Elected as one of the 9 members of the Politburo
➢ 2008-2013: Vice president of the Socialist Republic of China
➢ 2010: Vice Chairman of the CMC (Central Military Commission)
➢ 2012-Present: General secretary of the Chinese Communist Party
➢ 2013-Present: President of China

Once he took office, one of Xi’s first initiatives was to launch a nationwide anti-corruption campaign that led to the removal of thousands of high and low-class officials. During this time, Xi also started to emphasize the “rule of law”. Through this campaign, he was quite successful at consolidating power. He continued this anti-corruption campaign throughout his first term and ended up punishing more than 1 million officials by 2017.

One way to interpret this campaign “to eliminate corruption” is that it was effectively a way to remove his political rivals and help him consolidate power when it came time for his reelection. He was obviously quite successful at this because he is now in a position to stay in power indefinitely.

Aside from purging government offices of his rivals, Xi has also led China to become increasingly assertive in international affairs. To the point where other countries are finally starting to push back against China’s “bullying tactics”.

Xi Jinping’s Accolades:

➢ Xi Jinping has been given the title of “core leader” by the CCP. This is a special title that has only been bestowed 3 times in the past (Mao Zedong, Deng Xiaoping, and Jiang Zemin)
➢ Xi’s name and thought were enshrined in the Chinese Constitution (this has only ever been done with Mao Zedong)
➢ Under Xi, the National People’s Congress unanimously voted to abolish term limits and unanimously voted for him to remain in power past 2023 (when he was due to step down)

Xi Jinping is obviously very highly regarded by other members of Chinese leadership as well as the country as a whole. The fact that they willingly abolished term limits for him means that (as an investor) you can expect Xi to be in power for the foreseeable future. Xi is China’s man who they will be backing.

Policies

Xi Jinping recently revealed his 5-year plan for the direction that he wants to take China. Here are some of the main takeaways.

➢ “Socialism with Chinese characteristics” – This is the new slogan for Xi’s China moving forward. They have a dream for national rejuvenation and want to make it clear that the Communist Party will be at the forefront of that movement. Although they have been opening markets over the past few years, they want to leave no doubt that the Party still runs the country

➢ 2050 – Xi wants to be a world-leading nation with a global influencer status by this year. He has ambitious plans for growth and for launching China to the world’s global stage

➢ Level playing field – When it comes to foreign business, Xi wants to give equal access to everyone. In good news to U.S. investors, he mentioned that “the China that opened up will not close but will open wider and wider”

These are just a few of the ways that Xi has exclaimed he wants to direct China. As an investor, it’s apparent that Xi has ambitious plans and wants to see China at the top of the global food chain (although what leaders wouldn’t want that for their country?). It’s reassuring to see that Xi is open to foreign investment and has plans to keep Chinese markets open for foreign investors.

Now let’s take a look at China’s current relationship with the United States.

Relationship with the U.S.

The first aspect to note is that the United States has an upcoming election in November. This will determine whether Donald Trump remains in office or is replaced by Joe Biden. Either way, the China-U.S. relationship has definitely been tested this past year. First, there was the very public trade war between the U.S. and China. Next, there was the coronavirus outbreak that occurred in Wuhan, China.

Donald Trump, in particular, has flip-flopped on his sentiment as it relates to these two issues and China in general. He takes great pride in being “tough on China” and this is often a focal point of his speeches or tweets.

For most of the trade war, Trump was the antagonizer to China and seemed to initiate much of the back and forth tariffs. However, since coming to an agreement on phase one of the trade deal, Trump has been vocally more favorable of China. NOTE: Phase One of the trade deal should still be happening, despite the coronavirus.

When it comes to the coronavirus, Trump has sought to attack China by deliberately calling it the “Chinese Virus” and seeking reparations from China for the damage that the virus has done to the United States. However, at other times, Trump has applauded Xi Jinping for his handling of the virus (over 15 times between January and march of 2020).

If the United States stays with Donald Trump for the next four years then we can expect these back and forth relations to continue. However, if Joe Biden gets elected then there is no telling what the new relationship will look like (although it will most likely be more steady). China has also been vocal that they don’t have a preference for who the United States elects as their leader.

Xi Jinping’s Focus for the Future

China has had growing self-confidence for years now when it comes to how they view themselves on the global stage. Their view is that the United States (and Western dominance in general) is in relative decline and China is poised to be the next country to rise. After their meeting on the “Central Conference on Work Relating to Foreign Affairs” it was concluded that “Xi is determined to defy the trend-ling of Western history, to see off Francis Fukuyama’s “end of history” culminating in the general trump of liberal democratic capitalism, and preserve a Leninist state for the long term.”

A few of the manners in which China is taking more aggressive steps when it comes to solidifying their power on a global stage are:

➢ Expanding their military position in the South China Sea
➢ Participating in the 2015 Iran Nuclear Deal
➢ Developed naval bases in Sri Lanka, Pakistan, and other countries as far away as the Mediterranean and Baltic seas
➢ Establishing their own International Development Agency

To quote Xi’s own words, “China has been in the best period of development since modern times, while the world is undergoing the most profound and unprecedented changes in a century.”

We hope that you’ve found this article valuable when it comes to understanding a little bit about the man in charge of running China, Xi Jinping. If you’re interested in reading more articles related to business and China, please follow our blog and don’t forget to also visit the “New Here?” section of ChinaFund.com.

In this article, we’ll take a look at:

● Dealing with the Chinese government
● Chinese business practices
● Cultural expectations

Here is our list of important things to know before doing business in China:

Government Intervention

In the United States, the government and private enterprises are kept pretty separate from each other (and that’s the way that people like it). Obviously, there are still regulatory bodies (the Internal Revenue Service, the Securities and Exchange Commission and the Federal Trade Commission to name a few) as well as different licenses or permits you’ll need to acquire as a business owner.

In this sense, businesses operate independently from the government but still need to play by the rules that the government sets.

On the other hand, in China, the government and the private business sector are essentially one and the same. There is quite a bit of overlap between the two and the government has a lot more power over what private businesses can or can’t do. This means that if you plan on doing business in China, you can expect to be doing business with the government as well.

Here are a few manners in which the government encroaches on private enterprise in China, a situation that is remarkably different compared to the United States:

➢ Putting government officials on the board at companies – This initiative was recently announced and was “sold” as an effort to transform the country’s economy to catch up to rivals in high-value industries such as robotics and aerospace. Government officials will be placed on the boards of Alibaba, Greely Holdings and Wahaha but a full list was not disclosed. Although the primary claim was that this move was purely for economic innovation, it does raise security concerns. That’s because Chinese companies are required by law to hand over data that the government requests

➢ Accessing proprietary files – The Chinese government is legally allowed to request data from companies (and companies are obligated to provide it). This is one of the main reasons why there is such a backlash against microchip company Huawei and the 5G network. Other countries are concerned that if Huawei gets access to a global 5G network, it will hand over personal data of other countries’ citizens to the Chinese government

➢ Requesting that private companies do favors for the government – Although you are starting to see more of this in the United States (with Donald Trump’s attacks at Twitter and Facebook), it is much more commonplace in China. Companies in China are required by law to follow government orders. The same expectations exist for American companies doing business in China and it’s one of the reasons why so few companies have entered the market (especially in the technology industry). For example, a company such as Netflix would be in a bind if the Chinese government suddenly demanded that they hand over information on their viewers, because their customers in the United States wouldn’t like this very much

The main takeaway from this is that if you’re planning on doing business in China, expect the government to be holding your hand along every step. If you were to refuse to comply with a governmental order, it would have widespread consequences and wouldn’t be easily resolved in a court setting.

This is especially true if you’re a businessperson from the United States.

Common Business Practices

For the most part, every different country is going to have slightly different business practices. Even different states within the United States have slightly different business practices and expectations. That being mentioned, you’ll want to make sure that you have a good idea of what the expectations will be from you before walking into a meeting with Chinese businessmen. Let’s take a look at what some of the most common business practices are in China:

➢ Business mentality – When you show up for a meeting, the Chinese will expect you to be fully prepared. When it’s time for business, it’s time for business. This means having an adequate number of copies of your report ready to hand out. It’s generally safer to have the report in black and white, as opposed to color. On the other hand, when meetings are broken and you’re at dinner, it’s considered rude to keep discussing business. Another thing to note is that China places a big emphasis on hierarchical order. This means that the first person of a group to enter a room is considered the most important. They will expect that the same is true of your group

➢ Relationships – Relationships play a critical part in Chinese business and are a major part of building trust (more on that in a moment). The Chinese prefer to do business with people whom they have a favorable relationship with and more often than not, this can represent the difference between winning business or falling short. Because of the need to build a strong relationship, deals and negotiations can take longer to materialize and close

➢ Trust – Trust is one of the building blocks of a successful business relationship. Trust is acquired in many ways. Doing the proper research beforehand, always being polite, and showing that you’ve made an effort to adapt to their culture are all ways to earn trust. Surprisingly, another good way to earn trust is to engage with drinks over dinner (while also avoiding talking business). Drinking is a big part of Chinese culture and it’s considered rude to deny a drink

➢ Indifference towards deadlines – When doing business with the Chinese, expect deadlines to come and go with little fanfare. In the United States, there is a strict emphasis on deadlines and people scramble to get projects or deals closed by a predetermined time. This attitude is not reflected by the Chinese. In fact, it can be considered pushy and rude to force deadlines in China. This is mainly due to the need to build a trusting relationship before putting pen to paper. Don’t put too much weight on specific deadlines and factor this into your own personal plans

➢ Business attire – When in doubt, it’s better to dress conservatively. Wearing neutral colors and a traditional suit is always a safer option over something flashy. Wearing flashy attire can be seen as an attempt to belittle or brag

These are just a few of the more common business practices in China. If you’re interested in reading a more complete list, click here. Don’t worry about memorizing every little detail, sometimes just making an effort is all that matters. You just want to make sure you’re not insulting the other party without realizing it.

Now let’s take a look at what some of the cultural expectations are in China as a whole:

Cultural Expectations

Cultural expectations are a little bit different from common business practices. For example, knowing to show up prepared to business meetings so as to not waste time is a business practice. Knowing that small talk is an important part of doing business is a cultural expectation.

Having a firm grasp on the cultural expectations of doing business in China will not only help make you a successful businessperson, but it will also help make you popular in China in general! It’s important to be aware that what is acceptable and commonplace in the United States might be considered rude in China.

Let’s a take a look at some of the more pressing cultural expectations:

➢ Small talk – Small talk is considered an important part of the relationship-building process (see section #2). Launching right into a business conversation can be considered hasty and rude. It would also be a good idea to learn a few Chinese phrases for the small talk (this type of gesture is always appreciated)

➢ Handshakes – Handshakes are common in China but it’s always smart to let the other party initiate the shake

➢ Negative answers – A firm, negative answer (even a simple “no”) can be considered rude. It’s always better to try and frame answers as positively as possible, even when the answer is a simple no. For example, instead of “no” you might say “I’ll think about it”, “maybe”, or “we’ll see”

➢ Body language – It’s always best to appear calm and professional. Using too much emotion during the meeting can negatively impact your business relationship

➢ Do not bring gifts – Although this seems like a polite and innocent gesture in general when doing business, it can seem as though you’re trying to offer them a bribe (which is illegal). Offering a gift can make them uncomfortable and question your morals

Again, these are just a few of the cultural expectations that should be expected when doing business in China. Depending on the scope of your business, we’d recommend doing a little more research before the meeting. Additionally, just like most things, practice will make perfect. The more meetings you take part in, the easier it will be for you to remember certain things.

We hope that you’ve found this article valuable when it comes to understanding what to know before doing business in China. If you’re interested in reading more, please visit our New Here section and for more personalized tips, our team of consultants is at your disposal.

We’re sure you know that the United States is a democracy and China is communist*. However, this article will dive deeper into what that really means and how the differences can impact you.

These are a few ways manners in which the US and Chinese governments differ.

The United States – Democracy

If you grew up going through the United States public education system, we’re sure you’ve learned about the three branches of government. However, if you need a refresher, those branches are the legislative, judicial, and executive. Each of these branches exercises different powers of each other to ensure that no one branch/individual can ever gain too much control over the country:

⦁ Legislative branch – This branch is in charge of making laws and is broken down into two bodies: the Senate and the House of Representatives. The Senate is comprised of 100 members (two senators from each state). The House of Representatives is currently made up of 435 members with each state getting a different number of representatives depending on its size. Each of these two bodies has exclusive powers that allow them to check each other’s power over each other as well as the executive branch. Legislation must go through many different approvals and voting processes to get passed

⦁ Judicial branch – The Judicial branch is in charge of upholding the rule of law. They decide the meaning of laws and whether or not a law breaks the constitution (the highest law in the nation). In total, there are over 1,700 judges across 209 courts in the federal court system

⦁ Executive branch – The Executive branch is in charge of carrying out laws that are created by the Legislative branch. This branch is comprised of the president, vice president, and members of their cabinets. The president acts as the ruler of the country but his power is checked by the other branches

This separation of powers is meant to ensure that no person or entity can dominate when it comes to controlling the country.

China – Communist

The People’s Republic of China is under the exclusive leadership of the Communist Party of China, which has been in control since 1942. Their power has generally gone unmatched and they rely on three different bodies to enforce their rule. These three bodies are control of personnel, control of propaganda and control over the People’s Liberation Army. The senior decision-making group of the country is known as the Politburo and these members do not face competitive elections.

In China, personal relations generally matter much more than job titles. This is a cultural difference that carries over into the business world as well. Trust is given very sparingly, is very interpersonal and is critical to succeeding in business.

The Chinese Communist Party convenes every 5 years at its National People’s Congress (NPC) to agree on major policies moving forward as well as choose the Central Committee. The Central Committee consists of about 370 members and acts similarly to a board of directors. The Central Committee then selects the Politburo, comprised of 25 members.

Comparing this method of government to the U.S., it is worth noting that over in the United States, there is a significant emphasis on separation of powers. No one person or party has total control over the other and Democrats/Republicans are constantly playing tug of war. The president could be a republican but the House of Representatives and Congress might both be dominated by democrats.

However, in China, there is really only one party (the Chinese Communist Party). This party is then responsible for setting all major policies and choosing all senior leadership such as the Central Committee and Politburo. These elections are generally backdoor elections carried out by high ranking officials.

It should be noted that despite the fact that the Communist Party of China has complete control from a national perspective, individual provinces in China enjoy a good amount of autonomy. Provincial leaders (who are appointed by the central government) have almost complete control over their immediate province.

Each Country’s Approach to Business

The United States – Capitalist

On the business side of things, free-market capitalism is a huge part of American culture and the economy is dictated by a free-market enterprise. You could make a strong argument that this is what fueled America to become the world’s number one economy. According to Forbes, 8 out of the 15 largest companies in the world are American (however, China is gaining fast and has 5 of the top 10 on that list).

A free market is defined as one where voluntary exchange and the laws of supply and demand are responsible for driving the economic system. In this sense, the market is exempt from any government intervention (price controls, production controls, etc.) That being stated, no market is ever purely free from government intervention.

In the U.S., the government will step in if there is an industry that is viewed as anti-competitive (more on this shortly). Additionally, the government sets mandates that must be met to ensure workers are treated fairly.

Free market systems run off of competition. Companies are constantly competing with one another to win over customers. This competition drives companies to offer the best product at the lowest price, which ultimately ends up as a win for the consumer. If an industry is seen as anti-competitive, then that means that only a few companies dominate the industry.

U.S. Government Intervention

The U.S. has a strong history rooted in entrepreneurship, capitalism, and the American Dream. The American Dream is a strong cultural idea that anyone, regardless of their circumstances, can achieve success. Upward mobility is possible for everyone as long as they’re willing to make sacrifices and work hard. For the most part, this mentality carries over into the government and allows private enterprises to operate independently from the government. However, it would be naive to believe that this is 100% true.

First, private enterprises in the U.S. are known to lobby government officials into passing favorable legislation. Additionally, occasionally the U.S. government will pass legislation that impacts businesses directly. A few of the most recent examples of this are the talks surrounding breaking up “big tech” or Donald Trump’s trade war, which had direct impacts on American companies.

Although breaking up big tech hasn’t happened yet, some government officials are expressing concern that tech companies wield too much power and stifle competition. The government wants to break up these companies. Similar stories have happened in the past with companies such as Standard Oil, AT&T, and JP Morgan.

Let’s take a look at how all of this compares to China.

China – Mix of State-Run and Free Market

Despite the central government’s dominance, China is still technically a combination between both capitalism and socialism when it comes to their private enterprise. After deregulations in 1979, they began to allow for private enterprise to take over independently of the government. It was this decision that has allowed the Chinese economy to grow at the rate that it has. In this sense, it has been about 4 decades since China was a purely state-owned economy.

To quote the Chinese economist, “China’s reform started with an all-powerful government under the planned economy. The reason China could have sustained economic growth during the process of reform was that the government managed less and the proportion of state-owned enterprises decreased, not the other way around. It was precisely the relaxation of government control that brought about market prices, sole proprietorships, town and village enterprises, private enterprises, foreign enterprises, and other non-state-owned entities.”

If you’re thinking about setting up shop in China, it’s important to remember that certain regions operate under their own autonomy. Obviously, the central government will get the last word but you will still have to be ready to deal with the local government as well, as they will call the shots in their region.

In summary

To sum things up, the United States is primarily a free-market country with a little bit of government intervention. China, on the other hand, is primarily a state-run country with a little bit of free-market capitalism. There are definitely opportunities for businesses to make a name for themselves, however, you can fully expect the Chinese government to be looking over your shoulder.

We hope that you found this article valuable when it comes to understanding the difference between each country’s government. To read more, we would strongly recommend visiting our “New Here?” section or for a “tailor-made” experience, the ChinaFund.com team of consultants is at your disposal.

Today, let us move on to a granular level and try to analyze disaster preparedness from the perspective of the average individual. Colloquially, the term “prepping” is also oftentimes used and believe it or not, prepping has represented a niche for a very long time, a niche which revolves around catering to the needs of ultra-prudent individuals who are worried about a wide range of scenarios: some “prep” because they are afraid of scenarios involving a financial system collapse, others do it because they are worried about local and/or global natural disasters and the list of concerns could continue indefinitely… geopolitical issues including hot wars, solar flares, epidemics (especially in light of 2020’s events) and so on.

Just like when it comes to country-level preparedness, strategies vary wildly across countries as well as individuals. For example, over in the United States, prepping has a very heavy gun-oriented component in light of the 2nd Amendment, whereas in countries where private gun ownership is not allowed, the component in question is marginal at best. For example, let’s just say that the average Chinese individuals does not exactly intend on purchasing a dozen shotguns so as to protect himself.

The same way, there is a historical dimension that needs to be kept in mind. A German citizen who was educated by grandparents who went through hyperinflation to the tune of one dollar going from being worth $4.2 marks to being worth $4.2 trillion marks is most likely more concerned about potential (hyper)inflationary scenarios, compared to a US citizen who was perhaps educated by grandparents who went through the ultra-deflationary Great Depression. In China, of course, parents and grandparents who went through the many difficulties associated with the Mao Zedong regime ended up transferring at least some of their fears to their children and the list could go on and on.

Let us not forget the political dimension either. For example, in socialist and strongly unionized nations such as France, CEOs of various companies were essentially kidnapped by disgruntled employees in the aftermath of the Great Recession. In the US, despair brought about (short-lived) political movements such as the Occupy Wall Street one and the list could go on and on. As such, the prepping strategy of the average citizen also takes into account political ramifications and potential volatility, with the many consequences that can result (for example, a tidal wave of populism which followed the sovereign debt implications of the Great Recession in the so-called PIIGS nations: Portugal, Italy, Ireland, Greece and Spain).

Finally, it is paramount to also bring the culture dimension to the attention of our readers, especially the civic culture sub-category. One need only compare case studies involving natural calamities in Japan as opposed to let’s say the United States and it will become clear that the reaction of the average citizen was remarkably different. Over in Japan, “discipline” was the operative word and even when panic levels are high, Japanese citizens for the most part bought supplies in an orderly manner rather than resorting to hoarding, a topic covered through a dedicated article which can be accessed by clicking HERE.

In the United States, on the other hand, the prevailing attitude tends to be a considerably more selfish one, with approaches ranging from examples such as hoarding by law-abiding citizens to downright looting in other cases. Again, the cultural dimension should not be underestimated. For the most part, the status quo tends to revolve around civil obedience in China at this point in time (even if it was achieved via fear in China as opposed to education in Japan, but that is a topic for another article) and as such, the reaction of the average citizen is closer to what we can expect in Japan rather than in the United States.

As can be seen, individual preparedness strategies can vary wildly.

Why are they important?

Simply because everything tends to be so interconnected these days that the prepping strategies of let’s say Chinese citizens risk affecting people in the United States. As an example, in the aftermath of the Covid-19 crisis in China, countries such as the United States found themselves facing an amazingly strong demand for masks, masks which were largely imported from China. Even if the US would have managed to ramp up domestic production, guess where most of the materials required come from? As such, it should come as no surprise that, for example, mass hoarding of masks by Chinese citizens risks affecting people on other continents as well, in this case US citizens.

The main message we are trying to get across through this article is that when analyzing calamities in general, employing an analytical framework which revolves around a meaningful understanding of the ultra-complex economic system we currently have is essential. A superficial understanding of the various mechanisms involved will yield mediocre results at best and possibly even disastrous ones. As such, being thorough is not just recommended but downright vital. If you are in need of assistance with respect to putting together a robust risk assessment and mitigation strategy for your own needs or for the needs of your organization, the ChinaFund.com team of experts is at your disposal and only a message away. While we specialize in China as a jurisdiction, feel free to pick our brains with respect to pretty much any topic you believe we can be of assistance with.

Human nature 101, at the end of the day.

From an evolutionary perspective, being quick to panic seems perfectly logical in light of the fact that for the most part, specimens that are quick to panic are more likely to survive and spread their genes. For more of a financial industry comparison, think of it as an “ergodicity vs. non-ergodicity” issue or a “risk of ruin” one. As a quick example, let us assume that in 99 out of 100 cases which involved an individual panicking, his reaction was greatly exaggerated. However, in one case, panicking led to survival, survival that wouldn’t have been possible in the absence of said panic. As such, our individual ends up surviving, ready to fight another battle in terms of spreading genes, whereas more “laid back” individuals… well, don’t.

Therefore, let us not be too quick to judge panic-driven behavior because it is remarkably well-engraved in our genes and again, for all the right reasons from an evolutionary perspective. The same way, other behavior types are just as deeply ingrained, for example the fact that stereotypes and quick pattern recognition (tiger -> bad, apple -> good) were also essential to our survival. Unfortunately, fast-forward to the present and when it comes to our remarkably interconnected and complex world, many of these behaviors which make sense from the perspective of individual survival lead to… well, collective disaster.

From stereotyping that leads to racism to the topic that is being put under the microscope today: hoarding. As far as the average individual is concerned, the equation makes perfect sense on a granular level: he wants to ensure his own survival and that of his family more so than anything else, it is his most basic need in times of panic and only once that need is met will he move on to worrying about collective well-being. A variation of Maslow’s Hierarchy of Needs, if you will.

But when everyone does it, disaster is all but guaranteed because a wide range of bottlenecks will appear that put immense pressure on anything from supply chains (when people hoard food and essentials) to the financial system (when people hoard cash or generally speaking, abstain from risk-taking and facilitate a collapse in the velocity of money).

On the one hand, we need to understand that those who hoard are only humans who entered survival mode… for more or less rational reasons. On the other hand, measures need to be taken because widespread hoarding risks crippling even the most robust of system if the matter isn’t somehow kept under control.

From the perspective of food and bare essentials, it does not take a lot for the many vulnerabilities of supply chains to become obvious. This would even be a problem in an autarky/self-sufficiency scenario, whereas in today’s international trade-driven landscape where raw materials are imported from one jurisdiction, the manufacturing process takes place in another and the end product is sold all over the world… let’s just say it isn’t the least bit difficult to envision scenarios where cracks become obvious.

The same way, hoarding in terms of investment behavior leads to nothing short of disaster. From money to our financial system and ultimately business sector, we need reasonable money velocity for things to run smoothly because as mentioned when it comes to the worldwide economy… “interconnectedness” is the operative world. When getting let’s say a haircut, my spending is the barber’s income, who then spends his income on a wide range of products, perhaps even one I myself sell. If the chain is broken via hoarding, then as ironic as it may seem, we are all ultimately worse off.

What can be done?

One word: discipline.

Imposing discipline, however, is easier said than done, especially in Western nations where the population has been conditioned in an “easy gratification” manner and is therefore… to be blunt, spoiled. A generation of individuals who lives paycheck to paycheck when times are good and depends on the well-functioning of the proverbial system for basic survival is remarkably hard to discipline because once you take away the training wheels, the individuals in question essentially freeze.

In countries such as China that are let’s say anything but human rights-friendly, discipline can be imposed by force, as the Wuhan response made clear. In countries such as Japan where civic discipline is the norm, as made clear by the manner in which the population has weathered calamities such as earthquakes/tsunamis time and time again, once again… no problem at all.

In countries such as the US and European Union nations, things are a bit trickier due to cultural aspects revolving around a form of, one might say, entitlement. When citizens believe they are entitled to this or that, civic cooperation for some kind of greater good is a remarkably tough sell and as such, as strange as it may seem, it is actually multiple orders of magnitude more difficult to tackle behavior types such as hoarding in wealthy (on not just a nominal but also per capita basis) jurisdictions such as the US/EU than countries like China, with implications that will be analyzed through future articles. For now, let’s just say that at this point in time as well as in the foreseeable future, hoarding represents a risk factor that warrants our attention.

Is that true? To put it differently, is socialism with Chinese characteristics perfectly in line with let’s say Marxist-Leninist values?

Not quite!

Before elaborating, let us start by making it clear that as the name suggests, Marxism-Leninism is a combination between the classical ideology of Karl Marx and Friedrich Engels (classical Marxism) and the ideology of Vladimir Lenin (Leninism). In a nutshell, it “sells” (intentional capitalist irony) the idea that in light of the many contradictions inherent to capitalism, the future of the world will inevitably involve socialism and ultimately communism. As such, Marxist-Leninists believe that the death of capitalism would bring about widespread socialism (with the state taking over means of production) and that in the end, society would be so prosperous that the state would no longer even be required, with communism representing that final stage. As one can tell, communism never actually existed based on this “definition” (especially the stateless society dimension) and as such, even the USSR would (still) be considered socialist by Marxist-Leninist standards.

Moving on, it is important to note that “things are different in China” was a concept one can consider valid right from the beginning of the People’s Republic of China and as such, Marxism-Leninism “evolved” into Mao Zedong Thought, with Mao and key CPC members putting together an ideological framework which revolved around Marxism Leninism with… you’ve guessed it, Chinese characteristics.

Fast-forward to the present with the “Chinese characteristics” dimension in mind and we cannot help but notice that socialism with Chinese characteristics seems strangely incongruent if we are to compare it to the spirit of Marxism-Leninism.

What happened?

To be more specific, was Marxism-Leninism abandoned as of the Deng Xiaoping days, with China deciding to embrace market economy elements and reforms with the goal of tapping into the global economy and eventually catching up with the West?

It depends on whom you ask:

1. Ask any rational outside observer and he will quickly point out that socialism with Chinese characteristics embraces far too many capitalism-oriented aspects for it to be considered let’s say a true descendant of Marxism-Leninism
2. Ask Chinese ideological purists (from the infamous Gang of Four to modern-day thinkers) and they will agree, stating that China has committed the mistake of diverging from its Marxist-Leninist values and aiming for economics growth at all costs… with, according to this group, the costs in question revolving around China essentially losing its ideological identity
3. Ask Communist Party of China officials and they will say the exact opposite, that socialism with Chinese characteristics represents an evolution of Marxism-Leninism or if you will, an adaptation of this ideological framework to modern-day Chinese realities. Officially speaking, these values have not been abandoned, with leaders such as Jiang Zemin pointing out that Mao Zedong Thought and Marxism-Leninism must never be eliminated from the equation

Who is right?

From a strictly formal perspective, CPC officials are indeed correct. The more one reads official documents/statements and analyzes the verbiage dimension, the more one tends to conclude that indeed, CPC officials still very much believe in Marxism-Leninism values. There has never been a formal inflexion point, a moment as of which the status quo in terms of official narrative changed in a fundamental manner.

Moving on to the real-world dimension, is would be a significant stretch of the imagination to state that today’s China is built in a manner which reflects Marxist-Leninist values for a wide range of reasons, for example:

1. The fact that in some instances, China can be considered more of a capitalist nation than some Western countries. When it comes to let’s say the official or unofficial barriers to entry dimension for Chinese citizens (much less so for Westerners who are interested in doing business in China, although things have been changing from that perspective as well), it is oftentimes easier to start a business in China than in let’s say excessively regulated European countries
2. The fact that the revolutionary approach to geopolitics has been all but abandoned, with China diligently establishing itself as a soft power and pragmatically stepping in whenever it makes sense rather than trying to bring about ideological revolutions in other countries. The exact opposite of the Cultural Revolution framework, if you will
3. The fact that the Chinese population became more and more willing to not just tolerate but downright look up to entrepreneurship, with figures such as Jack Ma becoming “economic rock stars” and asked to speak at important events rather than being considered exponents of corrupt imperialistic thinking or proverbial enemies of the revolution
4. The fact that China has been, once again since the Deng Xiaoping days, willing to not just cohabitate with the West but actually learn from it, something let’s say Mao Zedong would have considered unacceptable, especially in the earlier days of his rule

… the list could go on and on.

All in all, the Marxist-Leninist dimension represents perhaps a textbook example when it comes to the contradictory nature of how things sometimes work in China, a remarkable divergence between what officials state and what the reality of 2020’s China looks like.

As an entrepreneur who is interested in establishing a presence in China and/or an investor who would like to gain exposure to Chinese assets, these nuances represent the difference between meaningfully “getting” China and being taken to surprise time and time again. Should you be in need of assistance so as to avoid the latter scenario, the ChinaFund.com team would be more than happy to put its 13-year experience at your disposal and is only a message away.

Managing such situations is always a Herculean task, even when we are referring to ultra-responsible governments which do their best to maintain harmony, through a carefully orchestrated independence which doesn’t end up affecting the sovereignty of the nation. Again, even when the very best of “peaceful” intentions exist, it can be difficult to find the right balance between pleasing both groups.

When it comes to China, not only were the best of intentions not there, the exact opposite is true, with very aggressive measures such as a centrally-facilitated Han Chinese migration to Xinjiang from the fifties up until the seventies exacerbating already-problematic tensions. Add the persecution of minorities to the equation and we have a deadly cocktail, with on the one hand, a minority which resorts to extreme measures such as terrorist attacks (from the 1997 Urumqi bus bombings to the 2014 Kunming attack) and on the other hand, the state responding in a very aggressive manner.

Are China’s concerns baseless?

Of course not, with terrorists threat fears being legitimate indeed, especially in light of the fact that anti-state movements are supported by terrorist organizations such as Al-Qaeda.

Have China’s aggressive responses been wise?

No.

Simply put, whenever a nation is dealing with delicate issues involving minority-majority relations, the last thing it wants to do is antagonize the entire minority by applying “one size fits all” or “guilty until proven innocent” approaches, which is exactly what China did.

How?

By implementing arguably the most 1984-esque surveillance system known to man, a system which revolves around:

1. Mass surveillance, with millions upon millions of individuals being constantly monitored. While it is true that such a status quo does tend to act as a strong deterrent and aggressive action can be inhibited, it is just as true that it generates long-term resentment among the segment of the population that did nothing wrong: the majority of individuals, in other words
2. Mass arrests, with China hoping that this asymmetrical display of force will once again act as enough of a deterrent. Unfortunately, the exact same principle that has been mentioned previously is valid in this case as well, with certain measures being effective as deterrents but perhaps equally effective when it comes to frustration build-ups
3. Human rights being all but ignored when it comes to China’s “re-education camps” which hold over one million Muslim minority members due to being perceived by China as potential terrorists which need to be re-educated. Needless to say, transparency is pretty much non-existent, with these camps being quasi-unilaterally condemned by the West
4. Seeking support from other authoritarian regimes, with 50 nations (in)famously writing a joint letter to the UN Human Rights Council President as well as the United Nation’s High Commissioner for Human rights so as to defend China, in response to the July 2019 document signed by 22 Western nations which condemned China’s actions
5. Inhibiting domestic criticism (with us dedicating an entire article to the freedom of speech dimension of China or lack thereof) and even resorting to more or less sophisticated retaliation methods when it comes to external criticism. In both cases, a combination between deterrents (punishing to the point of squashing any and all form of dissent) and let’s call them incentives (rewarding individuals and/or organizations that proverbially play ball) is used by Beijing

At the end of the day, it is difficult to believe that the Xinjiang situation will become less complicated anytime soon, in light of the fact that there just doesn’t seem to be enough (geo)political energy to alter the status quo.

On the one hand, China perceives the measures it has taken to tackle the Xinjiang situation as a display of force, one which makes it clear that those who oppose the regime in any way, shape or form will be harshly punished. On the other hand, despite severe backlash from the West, Beijing seems to have managed to secure enough geopolitical allies for the scale to be balanced yet again, at least from China’s perspective.

Why?

Because it can, in light of the fact that while nations such as Canada exist, which choose to willfully engage in less trade with China for reasons pertaining to issues such as human rights (with recent poll data indicating that 7 of 10 Canadians believe human rights should trump trade) in an effort to make it clear that there is more to geopolitics than the monetary dimension, other nations seem to be willing to fill that void.

Once again, why?

Perhaps because they have human rights issues of their own to deal with. Maybe because appeasing China puts more than enough trade-related benefits on the table for them to be willing to not just look the other way around when it comes to China-related human rights problems but actually defend China, as the previously mentioned UN example makes clear. What matters is that for a wide range of reasons, China managed and manages to garner enough support to counteract Western indignation and until that changes (with there being a distinct possibility that no changes occur at all), it would be excessively optimistic to assume the Xinjiang status quo will be meaningfully altered.

Why?

Simply because “today’s China” or if you will, China as envisioned by the Communist Party of China would most likely not survive if the proverbial foot were taken off the pedal in terms of authoritarianism. To put it differently, the Communist Party of China in general and the Xi Jinping administration in particular see human rights as not just a nuisance but rather an existential threat, for a wide range of reasons such as:

1. The fact that in light of not being a democracy, the government does not have the “blessing” of the population or to put it differently, the average citizen does not feel like he or she is contributing to the rule of the country, even if only through a vote that matters. As such, blame cannot exactly be shared between voters and politicians like with a democracy for the simple reason that extreme centralization of power inevitably brings about just as extreme centralization of responsibility. For this reason, frustration is bound to become systemically risky once let’s say a sustained period of economic slowdown is experienced and the authorities believe that inhibiting human rights at least enables them to keep thins under control… a very risky supposition but the status quo one nonetheless
2. The fact that there are no let’s call them release valves for the proverbial negative social energy that accumulates, release valves which would at least enable public anger/outrage to be eliminated from the system in a somewhat orderly manner. In the absence of such release valves, the first meaningful social crisis experienced by an administration such as the Xi Jinping one risks… well, being the last
3. The authorities, at least since the Deng Xiaoping days, believe in unleashing the productive capacity of China’s 1.4 billion population but don’t believe in unleashing the freedom of expression of the citizens in question (a topic covered through another article) due to fears pertaining to the potential of things spiraling out of control
4. It being difficult for China to keep everything in check as it is, despite the authoritarian surveillance state that has been built. Simply put, a wide range of citizens have proven to be more than creative enough to (relatively) easily bypass roadblocks such as the Great Firewall of China

For these reasons and many others, not only is China not willing to tone it down a notch (or two, or three!) but the exact opposite is valid, with the Xi Jinping administration imposing measures which make it clear that the preservation of authoritarianism represents a top priority, for example:

1. Eliminating term limits and enabling Xi Jinping to remain the paramount leader indefinitely
2. Creating a textbook cult of personality around Xi Jinping and “Xi Jinping thought”
3. Shutting down domestic critics, while rewarding domestic media outlets as well as “influencers” who play by (Communist) Party (of China) rules
4. Going after foreign critics as well, while also working on creating a strong external network which facilitates propaganda
5. Minority oppression, for example the 1984-worthy system that has been implemented in Xinjiang, where approximately 13 million Muslims (primarily Uyghurs, Turkish minorities and Kasakhs) are persecuted through anything from constant monitoring to “re-education camps for extremists”

Once again, the list of examples can continue but the bottom line is this: not only is today’s China in no way able/willing to take its foot off the pedal with respect to human rights, the exact opposite is happening.

Can this status quo persist indefinitely?

No, which is why we have chosen to hedge by using the term “today’s China” rather than limiting ourselves to broadly referring to China.

It is important to understand that no matter how powerful an authoritarian regime may be, change is oftentimes forced upon it by the population. In this respect, China’s increasingly educated population represents a force to be reckoned with and the authorities find themselves between a rock and a hard place: on the one hand, the already slowed-down economic growth of China would risk grinding to a halt in the absence of proper progress in the education department but on the other hand, an increasingly educated population becomes far less willing to tolerate an authoritarian status quo.

At the end of the day, nothing is set in stone.

Might the political system of China end up changing pretty much overnight, as a result of a (geo)political or economic black swan event?

Yes.

Might there be a “velvet revolution” or if you will, a peaceful transition to a more human rights-oriented system at one point or another in the future?

Yes.

The ChinaFund.com team strongly hopes reality will bring about a path closer to the latter, one that enables China to embrace a system more in line with Western values in a peaceful manner. As hard to believe as such scenarios may be, pragmatism might end up prevailing once or if the authorities decide that there is no other way. Unfortunately, this hasn’t exactly been the norm when it comes to authoritarian regimes of the past but in light of the fact that we are in a 21st century framework with all that it encompasses, we have more reasons to be cautiously optimistic about the future, even if the present is anything but stellar from a human rights perspective.

But is it really an “either-or” situation?

No.

Or, to be more precise, it might be if businesses are determined to play fair. However, we need to understand that businesses are not run by robots or angels but rather people. As such, the temptation to find let’s call them “grey area” solution is hard to resist.

Cartels represent a textbook example to that effect, an example which revolves around complex or at least relatively complex structures being built to facilitate sustained fixing of prices, production quota implementation and so on.

Comparatively, collusion represents something that doesn’t necessarily have to become permanent or quasi-permanent. Instead, entities may choose to simply collude temporarily for very specific and pragmatic purposes. For example, if a new and potentially promising competitor enters a certain industry, established market participants might decide to collaborate rather than compete so as to drive the newcomer out of business. How? Perhaps by setting very low prices (below reasonable profitability) temporarily and playing the waiting game, hoping that the new company will have no choice but to give up.

To put it differently, cartels as well as the concept of collusion revolve around entities that should be competing against one another doing the exact opposite, with one of the main difference being that cartels frequently represent long(er)-terms endeavors, whereas collusion (while it can end up becoming a long-term arrangement as well) is more frequently limited in scope, as per the previously mentioned example.

Is collusion tolerated in Western jurisdictions?

No, with powerful antitrust laws being enforced to ensure collusion-related scenarios are discouraged.

Is collusion tolerated in China?

As mentioned in our article about cartels, the “official” answer is no, in light of the fact that the (in)famous Chinese Anti-Monopoly Law (AML) has been approved in 2007 and started generating effects as of 2008. Furthermore, even prior to the Anti-Monopoly Law, other legislative initiatives that were meant to keep collusion at bay existed, from the Anti-Unfair Competition Law of 1993 to the more recent Law on Bid Invitation and Bidding (2000).

As such, from a strictly legislative perspective, it is difficult to the point of impossible to paint the picture of collusion somehow being tolerated.

Unfortunately, more so in jurisdictions such as China than let’s say the United States or European Union, the legislative dimension alone cannot make problems go away. In other words, the simple existence of laws is not nearly enough to be considered a foolproof deterrent, with it being equally important to actually… well, enforce the laws in question.

As such, we are back to the formulation found in the title of this post:

Is collusion TACITLY tolerated in China?

In other words, of course there will never be a large sign at the Chinese border which states something along the lines of “Welcome to China, where collusion is tolerated!” and of course laws along those lines will not be enacted. The informal dimension, however, is key, with the elephant in the room in terms of questions being whether or not there is some kind of an informal code of conduct which revolves around collusion being tolerated to a certain extent.

In our view, there are two broad perspectives:

1. Law enforcement effectiveness in China, a topic we have covered through a dedicated article. From this perspective, let’s just say law enforcement is nowhere near effective enough in China for us to be able to state that the AML represents as much of a deterrent as it should. This is especially true in rural regions of China as well as less developed ones, with there just not being enough of a law enforcement infrastructure in place for the AML to represent a believable enough deterrent. Furthermore, as explained in the article about cartels, the net results after over ten years of AML existence are not compelling enough to paint the picture of a “legislation + law enforcement” duo potent enough to be able to meaningfully put an end to collusion
2. The political initiative dimension, with significant efforts of the Xi Jinping administration making it clear that the current powers that be over in China are determined to actually tackle core issues which have been left unaddressed by previous administrations, including issues pertaining to cartels and collusion. While similar attitudes have been observed with previous administrations as well, breakthroughs when it comes to issues such as large-scale corruption have been significant enough to “sell” the idea that this time, we are looking at more than just rhetoric

At the end of the day, those who embrace perspective #1 or let’s say skepticism in general will be tempted to state that despite the AML in particular or let’s say legislation in general being prohibitive enough to be painted as a deterrent, law enforcement ineffectiveness acts as an anchor which prevents meaningfully noteworthy progress and as such, collusion is effectively tacitly tolerated in China. Those who embrace perspective #2 on the other hand, while admitting that nothing is perfect and that tackling tricky issues such as collusion represents a Herculean endeavor, will make it clear that the Xi Jinping administration has proven enough in terms of “real world” results for it to be given the benefit of credibility. Time will ultimately tell which side is right, how you as an investor position yourself is unfortunately a decision that cannot be outsourced.