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Charles Hugh Smith

Charles Hugh Smith

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global…

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Google's Decision Highlights the Dangers of Doing Business in China

The ramifications of Google's decision to leave China are deep: China's leadership, be careful what you wish for.

I have been a student of China for 40 years. Alas, no, I did not learn Mandarin. When I started reading about China in 1969, and taking university courses on its culture and history in 1972, the Cultural Revolution was in full swing. The People's Republic was locked down; other than a trickle of black-market trading with Hong Kong, nobody was allowed in or out. No young person today, Chinese or American, can even imagine conditions in that distant, bleak time.

In essence, China's leadership sacrificed two generations in the Cultural Revolution. It imprisoned, tortured, killed, banished, placed under house arrest, etc., the most experienced leaders of its society below the secretive high reaches of the CCP (Chinese Communist Party) and Mao's inner circle.

Due to our large number of Chinese friends, we know several utterly harmless, apolitical men who were imprisoned during the Cultural Revolution. One was actually an officer in the People's Liberation Army. Yes, even the military was purged.

By destroying its educational system, China also sacrificed the upcoming generation. Though few ever voice it, there remains a deep bitterness amongst those who were denied an education and thus a foothold in a better life. After the madness of the Cultural Revolution finally ended with the death of Mao and the coup deposing The Gang of Four (circa 1976-77), then the generation of youth who came of age in Deng's era of reform starting in 1978 were awarded opportunities lost to their older peers.

I preface my entry with this brief history to show how far China has come in the past 30 years. The young people we know (teens and 20-somethings) show little to no awareness (or interest) in the Cultural Revolution. This is understandable; that era might as well be ancient history to youth concerned with getting their place at the exciting banquet of opportunities now available.

China remains a velvet-gloved dictatorship. If you work within the boundaries set for acceptable behavior and thinking, you will be left alone or perhaps followed /tracked but not openly harrassed. But if you step over that boundary by embarrassing the Central State, by questioning its authority or its prosecution of policy and laws, then you will disappear or be driven into exile.

Chinese Dissident Lawyer Convicted of Subversion The whereabouts of Gao Zhisheng, who had carved out an international reputation for taking on controversial legal cases, such as government land seizures, has been the subject of intense speculation since he disappeared last year.

In essence, Google questioned the status quo too directly, and so it has been silenced by being driven into exile. To do anything other than exile Google would have caused the Central Government to lose face, which is a humiliation which must not be allowed.

There are two keys to understanding the nuances and apparent contradictions in Chinese policy and actions. One is the absolute importance of "face." Face must be saved; any perceived slight or humiliation will be countered forcefully lest face be lost. This is a pan-Asian cultural trait which Westerners often fail to understand in full measure. If you don't understand "face" then you will fail to understand Asia.

General Douglas MacArthur's nuanced arrangements for the unconditional surrender of Japan in World War II provide a good example. Many felt that Japan's Emperor should be hung as a war criminal, and indeed it seems Emperor Hirohito expected this himself. But MacArthur felt that might unleash an unwelcome turmoil in Japan, right when the U.S. was fending off Soviet demands for the northern half of Japan (due to their extraordinary efforts in the the last week of the war, when they formally declared war on Japan).

So instead he had the Emperor address the Japanese people in a radio broadcast. The citizenry had never heard their Emperor's voice before, and so this simple act was a revelation of vast consequence. Next, MacArthur released one photo of himself standing next to the diminutive, formally attired Emperor. MacArthur was a tall man, and he wore his U.S. Army uniform (not dress uniform) and a grave expression.

The message was clear to the Japanese people: MacArthur was in charge but had avoided humiliating their Emperor. The occupation of Japan, a fantical enemy which had fully embraced mass-suicide attacks on U.S. ships and troops, went smoothly.

The point is that being challenged by an American tech company raised the issue of face for the Chinese Central Government. To "lose" a confrontation with Google was simply not possible for the leadership; to do anything but "win" by forcing Google to "obey the law" (which is a relative term in China) would be to lose face.

So Google predestined the outcome by going public.

Alternatively, if Google had gone privately, hat in hand, to "friendly" fixers in the top rungs of the CCP or Central Government, the outcome might have been different.

But perhaps not, because China's leadership is making it clear that it wants a Chinternet, not the Internet, within its borders. The Central Government has erected, at vast expense, a Great Firewall of thousands of technicians who monitor and selectively block or impede thousands of sites--even down to my architect-friend's Chinese-language version of his entirely harmless and apolitical architecture site.

China is blocking any coverage of Google's banishment except for official sources. Is there any clearer way to stress that all communication within China proceeds at the Central Government's pleasure?

I often note that if you don't have sources within local government, then you know nothing about China. In cases such as Google, the Great Firewall, exchange rates, or closing down the country to battle SARS, then the Central Government does wield extraordinary powers. Yet in the actual lived experience of doing business, all the action is local.

Thus the Central Government issues various environmental statutes, but how, when and where they are actually enforced is entirely a local matter. Ditto for food safety, development, lending, land stolen from peasants, etc. etc. etc.

Thus when Westerners go to China and end up in fancy restaurants drinking with locals, or being ushered into Central Government offices, their grasp of China on the ground is mostly illusory. Let me repeat: if you don't have sources within local government, then you know nothing about China.

I will illustrate with one example of dozens known to me personally (yes, from sources in local government). A multinational pharmaceutical company opened a large, costly plant in China to manufacture medications for the Chinese market in China. Within weeks, reports trickled in that the medications didn't work and Chinese consumers were angry. It turned out that local entrepreneurs had begun shipping sugar pills in the exact containers used by the pharmaceutical giant--worthless counterfeit pills, identical in shape, size, feel, and packaging, were being shipped all over China.

The pharmaceutical giant closed the plant. What choice did they have?


This was of course hushed up; only the local government and the managers knew the truth.

The pharmaceutical giant had learned a painful but important lesson: not only can you prosper without doing in business in China, your business in China will fail if your products can be counterfeited, pirated or copied. Your recourse is zero.

China is organized at the Central State and local government levels around building China, Inc. To the degree that Western and other Asian firms can help build China, Inc., then they are encouraged to set up shop and invest their billions. To the degree they challenge China, Inc. or the Central Government, they are unwelcome and will be cut off at the knees, either openly or via subversion.

What Google is announcing to the world is profound: you can stop doing business in China and prosper. The notion that "you have to be in China or you're doomed" has been upended. There are plenty of other markets, and Western firms are learning (if they haven't already learned from painful experience) that their capital and trade secrets are there to serve China, Inc. Once the knowledge is in Chinese firms' hands, then the Westerners are either junior partners or left in the dust of piracy.

Google is simply the highest-profile company to publicly say, Take This Dictatorship and Shove It. Yes, they still hope to sell their Android phones and advert services, and perhaps they will do well in these other ventures--if they establish strong local partners with access to the Powers That Be.

But in its push to construct a Chinternet free of troublesome Western-controlled information and ideas, China's leadership should be careful what they wish for. Establishing a simulacrum Internet is akin to establishing a simulacrum of free-market capitalism; the consequences of a system built on obfuscation, manipulated "news" and statistics, cronyism, and what amounts to fraud and corruption are not controllable.

As we in the U.S. are learning to our own sorrow, any system (financial or otherwise) built on obfuscation, manipulated "news" and statistics, cronyism, fraud and corruption cannot endure. Truth will out, eventually, and those who have maintained power via propaganda and lies will find manipulation has its limits.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.

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  • Anonymous on March 21 2010 said:
    You say that there are other markets besides China. What are you thinking about: Pago-Pago and Guadacanal? One way for a country to go backward economically is to ignore the Chinese market. Incidentally you seem quite impressed by General MacArthur. I respect what he did during the first world war, but he must have been the absolutely worst American general during the second, which was proved by his being relieved during the Korean War. And as President Truman said: "I'm sorry I waited so long".

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