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Pride and Prejudice

February 24, 2009

This op-ed of mine appeared in the Asia Times on February 24, 2009.  The direct link is here.

Pride and Prejudice
by Patrick Chovanec

If Chinese President Hu Jintao and US Secretary of State Hillary Clinton had had any spare moments during their time together in Beijing this past weekend, they might have done worse than view a DVD (unpirated, of course) of Jane Austen’s Pride and Prejudice. They might have recognized in Miss Austen’s drawing room romance some rather striking resemblances to that other great love-hate saga, the US-China relationship.

For those who have somehow avoided the countless movies and mini-series, much less the book itself, Pride and Prejudice is the tale of two headstrong individuals whose own shortcomings blind them to the fact that they are made for one other. Mr Darcy’s puffed up pride prevents him from recognizing Miss Bennett’s obvious virtues, while her own terrible first impressions of Mr Darcy prejudice Miss Bennett against discovering his true, more generous nature.

The Darcy of our story is China. To be fair, the Chinese have much to be proud of. Since market reforms began 30 years ago, the country’s economy has expanded 14-fold in real terms, and living standards (measured by real per capital gross domestic product) have risen 10-fold. China’s exports are now 90 times greater than in 1979, transforming a US$2 billion annual trade deficit into a $290 billion surplus. China now holds by far the largest hard currency reserves of any country in the world, nearly $2 trillion.

By any measure, China has had a spectacular run, and the Chinese know it. China’s runaway gold-medal lead at the Beijing Olympics, its successful manned space flights, and the relative insulation of its state-owned banks from the global financial crisis have all reinforced this newfound sense of pride. In fact, many Chinese see the crisis as proof that the time for the US has passed, and as an opportunity for China to take its rightful place as the world’s new economic superpower.

In the mid-1980s, when I first came to China, what impressed me most was the modesty of its people. China, they would tell visitors, has so much to learn from the rest of the world, so much to improve. Sure, it was flattering to hear, but it also struck me as pragmatic and smart. That humble but hopeful attitude, by inspiring Chinese students to learn English and study abroad, by welcoming foreign investment and expertise, was a vital ingredient in making China’s transformation possible.

Today, pride threatens to erode this advantage. All too many managers I’ve encountered in Chinese companies have come to believe, based on the phenomenal growth of businesses within China, that the world has nothing more to teach them and is only holding them back out of jealousy. What they fail to realize is that, for years, China has enjoyed a home court advantage, as foreign companies flocked there and adapted, often with great difficulty, to doing business by Chinese rules. Successful Chinese companies may have mastered that game, but now they face a whole new challenge: building global brands and managing operations in places where someone else’s rules apply. Several have stumbled, badly, because they assumed they knew it all.

Pride also threatens to obscure China’s real interests as a global stakeholder. The increasingly popular idea that a strong China can “go it alone” is a dangerous illusion. Any country whose exports account for 40% of GDP will quickly find that its customers’ problems are its own. China’s outstanding economic accomplishments make it more, not less, reliant on the wellbeing of its trade partners, particularly the United States. As Clinton herself observed: “We rise or fall together.”

Americans may come to find Chinese pride as aggravating as Elizabeth Bennett found Mr Darcy’s, but they suffer from a good dose of Miss Bennett’s own flaw, prejudice. I do not mean racial prejudice, but preconceptions that prevent Americans from appreciating the real China and engaging it as a full partner.

Again, to be fair, China—like the much misunderstood Mr Darcy—rarely misses an opportunity to make a bad impression. The Chinese government’s harsh treatment of dissidents, its obsessive secrecy on military matters, and its hyper-sensitivity to criticism seem tailor-made to fuel American anxiety and suspicion. So when Americans hear that a Chinese company plans to invest or make an acquisition in the US, they start having flashbacks to the 1962 movie on what was seen as the danger from the east, The Manchurian Candidate.

China may not be all Americans wish it to be, but it is no longer the totalitarian nightmare they imagine. The truth is that China has become a much more open society than anyone could have possibly imagined 30 years ago. Economic reform has given birth to a vibrant middle class, who enjoy (and demand) greater privacy and legal rights than ever before. Americans like to lecture China on its faults, which are many and real, but they should keep in mind just how far China has come.

Besides, America needs China. In a world starved for capital, the Chinese are sitting on an immense pool of funds—the $2 trillion reserves—that could provide a far more effective stimulus to kick-start the US economy than anything from Washington. Right now, for lack of a better alternative, those funds are parked mainly in US Treasury bonds, the least productive use of capital from both the Chinese and American point of view.

If just a fraction could be unlocked and used, say, to let Chinese companies acquire bankrupt American businesses, or let individual Chinese investors buy NYSE stocks or summer homes in the States, the boost could be enormous. Rather than viewing Chinese investment as a threat, Americans should see it as a potential godsend.

Of course, not every initiative should be welcomed with open arms. Sometimes Chinese firms do act as agents of the state, and Huawei’s involvement in Bain Capital’s proposed buyout of 3Com last year, for instance, did raise genuine US concerns over national cyber-security. But Americans cannot afford to display an unthinking aversion based on an outmoded and inaccurate impression of China.

The ending of Pride and Prejudice is familiar and comforting: after much squabbling, our two protagonists fall in love and live happily ever after. It may be too much to expect such a fairy tale conclusion in international affairs. But perhaps we may hope that, with a little less pride and a little less prejudice, both sides might demonstrate a bit more sense and sensibility—and realize just how interdependent they really are.

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