The Rise of a New China

European Straits #169

Hi, it’s Nicolas from The Family. Today, I’m pursuing my series focusing on specific countries, how they’ve been faring so far in the Entrepreneurial Age, and what the COVID-19 crisis reveals. Here’s China 🇨🇳

⚠️ If you’re not a paying subscriber, here’s what you’ve missed lately 😉

In the next Friday Reads, I will focus on how the COVID-19 crisis is accelerating the shift in the healthcare industry.

As for today, I’d like to come back to one of my favorite topics: China in the Entrepreneurial Age 🇨🇳👇

1/ I’ve traveled quite a lot in Mainland China (and Hong Kong) over the past few years. I was first invited to Shanghai to teach at Fudan University in 2017. Then last year I visited several other large cities: Beijing, Shenzhen, Guangzhou, and the most important Chinese city you had never heard of until very recently—Wuhan! I’m glad I had the opportunity, as it could be a very long time before we can hop on a plane again and explore China in the future.

Travelling in China is not the same as reading about China. I know it’s a cliché, but you need to be there to fully realize its scale and speed. And you need to talk to locals to better understand why China has been so successful in developing its economy over the past 40 years. Have a look at the anecdotes shared by my colleague Emilie Maret when we came back from our trip last year.

2/ I’m especially interested in China because it offers us a playbook that’s very different from that of Silicon Valley when it comes to moving into the Entrepreneurial Age. Here’s what I wrote a few months ago in a previous issue, Europe Is a Developing Economy:

The most interesting trend in global tech these past few years isn’t anything that’s been happening in the US. Rather, it’s the rise of tech companies in China. Like many Westerners, I had long been uninterested in what was happening in Mainland China. I thought it was too far away, too different, and all happening in the impenetrable language that is Mandarin.

But I changed my mind following Alibaba’s IPO in 2014. That moment triggered my interest, leading me to watch The Crocodile in the Yangtze, a movie that tells the story of Alibaba beating eBay on the Chinese market. I then read many books and articles, met many experts, and even had the opportunity to travel there twice…

Today, I’d say that the idea of China as a tech superpower has become widely acknowledged. But that doesn’t make the country any less interesting.

And it’s true that we French people tend to have a thing for China:

  • There are historical reasons. We’ve been taught for decades (by scholars, business people, politicians) that China, despite the differences evident in its regime, is a friend, a country we can do business with. It’s a tradition that dates back to De Gaulle recognizing the People’s Republic against Washington’s advice in 1964 and really even further, to when Zhou Enlai, Deng Xiaoping and their comrades were students in France in the early decades of the twentieth century.

  • And there are cultural reasons, especially when it comes to the views on the government. As pointed out by Martin Jacques in When China Rules the World, China is a country where people respect the government and fully expect it to take charge. And that has historically been exactly the mindset here in France—although we’ve been shamed for decades by the Anglo-Saxons and have thus learned to rely on the government less. (Plus, at the same time the government has become less effective, which suggests that a vicious circle is at work here.)

3/ But you’ve likely noticed that a backlash is happening, with more and more people in the West growing wary of China. Here’s why:

  • China’s joining the World Trade Organization triggered the relocation of many jobs overseas and the collapse of entire industries in the West. Until 2001, France still had a textile industry. It disappeared overnight. We all asked why, whether it was all a question of poor preparation and incompetence on the part of industry executives. And there was that; but mostly it was just because it was impossible to compete with businesses based in China.

  • More recently, there’s been a reassessment of China’s economic development over the past 40 years. We got used to praising Deng Xiaoping’s reforms and China’s escape from the middle income trap. Western corporations all went running to form joint ventures with Chinese companies to do business locally. But more recently there’s been evidence regarding how intellectual property theft has been a cornerstone of China’s development. (We’ll leave aside the fact that it’s the preferred tool of any developing nation, including the US in the 19th century.)

  • I’ve been struck lately that discussing surveillance, censorship and authoritarianism in China are no longer taboo. There was a time when we all knew (or at least guessed) the political nature of the CCP’s regime, seeing that it was very different from, and indeed radically incompatible with, our values in the West. But nobody went too far into the details, especially in the mainstream media. It’s only been very recently that readers of US newspapers such as The New York Times have seen stories like this one. Clearly something has changed.

  • Then there are doubts about the data. Is China really doing as well as it claims? And if it’s not, what does that tell us about past data? The conversation about the reality of China’s economic growth is literally never ending—I have dozens of articles clipped in my Evernote covering it! Have a look at this interesting conference by Gavekal’s Louis-Vincent Gave, or if you want the very bearish view of the Chinese economy, see Everything We Think We Know About Chinese Finances is Wrong by Christopher Balding. And don’t miss this article for an overview of how geopolitical strategist Peter Zeihan sees China in the future.

4/ Whatever China’s strengths and weaknesses, I’m convinced that there’s something at work that is favorably disposed to Chinese success in the Entrepreneurial Age. Here’s the quote by Henry Kissinger that led me to that conclusion:

Americans think a stable world is normal. And so, when the world isn’t stable, then it’s a problem. And if there’s a problem, you solve it, and then you go on to something else.

Chinese leaders think that resolution of a problem is an admission ticket to another problem. So almost every Chinese leader that I’ve ever met has wanted to think, in a conceptual way, of policy as a process rather than as a program.

I later found echoes of Kissinger’s powerful idea of “a process rather than a program” in my never-ending quest to understand more about China, its history, and its culture:

  • Chinese venture capitalist Kai-Fu Lee beautifully explains in his masterful AI Superpowers how approaching entrepreneurship as a process (in this case, a process made of ruthless competition) lifts up Chinese startups. Specifically, it brings them from the early stage of imitating others (with copycats) to the later stage of discovering new products and models that uniquely fit their local context, with radical innovation happening in the process. 

  • Edward Slingerland, a scholar specialized in ancient Chinese philosophy, offers a beautiful account of China's fundamental concepts of wu-wei (a “state of perfect knowledge of the reality of the situation, perfect efficaciousness and the realization of a perfect economy of energy”, according to Jean-François Billeter) and de (per Slingerland, “one of the signals that a person is in wu-wei is that the person has de, translated as ‘virtue’, ‘power’, or ‘charismatic power.’”).

Let’s rephrase all that in startup terms. China in the Entrepreneurial Age is so ruthlessly competitive that the only way to come out on top is to approach building your startup as an endless series of problems (Kissinger’s “process rather than a program”). You can only survive this if you’re in wu-wei (“the realization of a perfect economy of energy”, which obviously starts with imitating others). In turn, being in wu-wei provides you with what makes the greatest entrepreneurs: de (“charismatic power”). De enables you to discover new things, turning the corner from imitation to innovation. And this is (almost) all you need to know to understand why China is doing so well in the realm of tech entrepreneurship.

5/ Now, what about China and the world? It’s kind of a mixed bag:

  • On the one hand, China seems to be fundamentally uninterested in what’s happening in the rest of the world. This is the result of having been inward-looking for so long. As a result, the Chinese don’t care about what others, especially in the West, think about them (check out this thread about their fighting H1N1 during the Olympics in Beijing). Indeed, having travelled in China, there were things I noticed that were different from other places. First, it feels like a privilege to be granted access to their country. Second, again, they don’t really care about what you think, and they certainly don’t expect you to comply with their way of life. Ultimately, they just want you to recognize that they have their own way and to pay tribute to how well it fits their (long) history and (rich) culture—regardless of where you come from or how you view the world.

  • On the other hand, China has been investing quite a lot in getting to know the world better. There was the admirable “Go out policy” promoted by Chinese paramount leader Jiang Zemin at the end of the 1990s. The goal was both investing Chinese money abroad and encouraging young people to go study in foreign countries so as to bring back new ideas and techniques to benefit the Mainland (I wish more Western governments, starting with the US and France, would take the same approach to learning from the rest of the world). More recently, there’s been the Belt and Road Initiative, a controversial series of investments sponsored by the Chinese government (you can read more in Bruno Maçães’s excellent work).

6/ I fully understand why the US would drift apart from China. Trump is an extreme manifestation of that, and really he’s just been recycling the prejudices he once had about Japan. Yet as several others have pointed out, there’s something more at work:

  • The end of the Cold War means there’s no need to play Communist China against Communist Russia. Only history wonks remember, but before 1971 China inspired even more defiance in the West than the Soviet Union. Then, advised by Kissinger, US President Richard Nixon decided to open up to China so as to flatter Mao Zedong and Zhou Enlai, divide the Communist world, and further isolate the Soviet Union. When Deng Xiaoping took over later in the 1970s, that earlier political shift led to the two countries doing a lot of business together.

  • Now the US is turning inward itself, a trend that I discussed at length two weeks ago in the issue Adieu to Old America. As a friend wrote to me a few days ago after reading my piece, “I think the US wants to be a “normal” country. I think it wants to take the world down off its shoulders, and move on. The question of what the world will look like without the US as global policeman is the most important for our moment. COVID-19 is only the latest blow against the post-World War II institutions. These were tottering before.”

  • China’s economic development has been so steady and impressive that it has now become more of a rival than a partner to the US. This is what Harvard’s Graham Allison calls the “Thucydides Trap”: the high probability that the rising power of the day (China) eventually goes to war against the dominant one (the US). As written by Evan Osnos in an in-depth piece for The New Yorker, “China has never seen such a moment, when its pursuit of a larger role in the world coincides with America’s pursuit of a smaller one”. And COVID-19 only reinforces this.

7/ Where does that leave Europe? Do we have to emulate the US when it comes to handling our relationship with China? Whatever China’s clumsy behavior on the international stage (and the aftermath of the COVID-19 epidemic in Wuhan has certainly provided many opportunities for such behavior), it’s still very difficult for anyone in Europe to consider China as a foe. Two reasons:

  • From a geographic point of view, we’re just not the US. We Europeans are effectively part of the same continent as China, Eurasia, which means that we have to learn to coexist in one way or another. Here’s Bruno Maçães summing up his idea of Eurasia: “[T]he distinction between Europe and Asia rested on nothing more solid than the fact that for a number of centuries Europe was modern, while Asia remained traditional. The distinction was not really about Europe and Asia but about two kinds of society or, better yet, two concepts of time. With the fast embrace of modernity outside Europe, the distinction was destined to disappear.”

  • As a result, we Europeans simply aren’t experiencing a shift comparable to that in the US. Again, France still considers itself very much a friend of China, with many traditions in common—that of a respected government, that of selecting and training its Mandarin elite, that of culinary pride 😋. As for the UK, they have several reasons not to align with Trump’s position on China: the British have a special connection with China because of Hong Kong and Chinese money is an important part of what makes the City tick; as recently as last year, former Prime Minister David Cameron was busy raising a £1B fund to deploy capital along the Chinese Belt and Road

8/ All this being said, I have been reading a lot recently about the history of the Cold War, and for me it’s now clear that from a Western perspective China is today’s equivalent of the Soviet Union:

  • China has effectively become expansionist. Imperialism is not a Chinese tradition, but looking outward has become a cornerstone of their development model. China needs the rest of the world to ensure prosperity and stability at home! And it seems ready to shape its foreign policy accordingly. As I wrote in Hedge, “China isn’t interested in conquering land and submitting entire peoples to its power. Rather their goal is to pursue a trade-, investment- and connectivity-driven exploration strategy designed to confirm China’s superior approach to innovation, expand their economic reach, and support the growth of their businesses in the process.”

  • Yet while China is looking more and more outward, it remains close to impossible for us to understand it. The language is impenetrable and extremely difficult for us Westerners to learn. Their society and ways of doing business are ruled by complex customs and social institutions such as gaining and losing face and cultivating personal relationships over the very long term (Guanxi). Mastering those cultural codes is the only way to overcome the complete lack of trust that marks China’s relationships with other countries (and Chinese society in general).

My recent readings on the Cold War, notably with this book, The Wise Men, indicate that understanding the Soviet Union in 1945 was as difficult as understanding China today. The cultural and political gaps were just impossible to bridge, making it difficult to interact, let alone get along. Thus it’s not absurd for Niall Ferguson to talk of the US-China relationship as the Second Cold War.

(Notice that just like during the Cold War, most Western European countries will want to cultivate tiny differences with the US in their relationship with the other superpower, China. And unlike during the Cold War, there’s no strong sense of alignment between the US and Western Europe anyway.)

9/ In any case, for many regions in the world China will become an example to watch—if not to follow. I understand the pessimistic view put forward by Peter Zeihan: as he argues in his book Disunited Nations, China is doing very badly in its geographic and demographic perspectives. But I think that China can still make the most of the current technological revolution, setting a precedent in terms of reconciling prosperity and stability through a social contract that fits the Entrepreneurial Age, even if that contract is radically incompatible with our Western democratic values.

For example, there’s how the regime makes the most of technology not only to implement massive surveillance and censor what individuals have to say, but also to be highly sensitive to what’s happening at every level of society. As written by Elenoire Laudieri di Biase, “The CCP knows that it needs to stay connected to the people in order to sustain its primary role in the government of the nation. The Chinese are not as quiescent as many Western people tend to believe. Every year there are an estimated 150,000 protests, rallies and demonstrations across the country and it's a high priority for the party that they remain manageable and localised. And where possible, the party tries to respond to public concerns.” We know that they didn’t really do that early in the COVID-19 crisis, but they caught up quickly.

Then there are the many other things that China is doing better than most countries in the West. Their financial and payment systems are now way ahead, with the pace of innovation increasing in financial services, consumer Internet, and other sectors. There’s the intriguing and sometimes frightening “social credit” system being experimented with in the Shandong province—and yet it’s much more nuanced than what the Western press would lead you to believe. There’s the fact that China knows how to build and manage dense, modern cities—with all the infrastructure that you need in transportation, housing, retail, healthcare, and others. (This is in sharp contrast to what can be observed in the US and Europe, and it makes a huge difference on the COVID-19 front!)

Because China is setting an example in so many respects, they’ve begun to export their model—starting with Central Asia and Africa, while also making inroads in Europe. Again, I think most of their model is incompatible with who we are in the West. But if we don’t come up with our own model, China will become the core of the Entrepreneurial Age in Eurasia, taking over from the US. And for lack of a better solution we in Europe will be forced to adopt a diluted version of the Chinese model that I call “the Chinese model, with Western characteristics” (I’ll write more about that in the future). 

10/ In conclusion, what should our relationship with China be?

  • There’s some business that can still happen, although it’s likely impossible for Europe to grow giant tech companies able to compete with ruthless Chinese entrepreneurs on their own market. What kind of business? There’s definitely interest from Chinese investors who want to deploy capital in European startups and then help them access the Chinese domestic market—especially up the technological stream, to compensate for the restrictions put in place by the US on Huawei and others, and in consumer goods.

  • At the very least, we can observe what they’re doing in the realm of entrepreneurship and venture capital and learn from them just as we’ve been learning from Silicon Valley over the past three decades. There are so many things we European can learn from the Chinese when it comes to tech: approaching entrepreneurship as “a process rather than a program”; besting the competition by way of cash efficiency rather than raising more capital from VC firms; a more obvious alignment between the government and tech entrepreneurs; and value propositions in line with a more urban life. It only requires one thing: we Europeans should embrace the mindset of a developing economy.

Despite the current setbacks, I sincerely hope to have more opportunities to travel to China and learn from its entrepreneurs, investors, and policymakers exploring the frontier in the Entrepreneurial Age.

⚠️ Yesterday my wife Laetitia Vitaud and I launched Nouveau Départ. It’s a French-speaking media hosted on Substack. Here are the details:

  • The focus of Nouveau Départ is on providing a business-minded audience with a broader perspective on the COVID-19 crisis and its aftermath. It’s in French and the content will be mostly video (notably interviews with interesting people).

  • You can have a look here, and then don’t hesitate to subscribe as publishing for paying subscribers has already started. Later today I’ll publish all the content related to my Nouveau Départ conference last week about the future of education.

  • Please send me a message if you’d like to learn more—but be assured that if French is your preferred language and you’re an entrepreneur, a business owner, a corporate executive or a member of the public interested in the current paradigm shift, this is tailor-made for you!

🦊 In the meantime, my cofounder Alice Zagury is continuing her daily show, Good Vibes, where she sits down with an entrepreneur to talk about their business and how they’re staying positive during the ongoing crisis. You can find the schedule on our website, and past episodes are available on our YouTube channel, Startupfood.

The comprehensive reading list attached to the European Straits weekly essay is part of the Friday Reads paid edition. Subscribe if you want to receive a list of articles to dig deeper into China!

From Normandy, France 🇫🇷

Nicolas