Shaun Rein

The End of Copycat China

Air Date: October 25, 2014

Shaun Rein discusses his new book, "The End of Copycat China."

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I’m Alexander Heffner, your host on The Open Mind. Today’s guest has globe-trotted from the Far East to visit with us. I first found his insights and must-read portrait of modern China when reviewing for USA TODAY his 2012 book The End of Cheap China.

Founder of the China Market Research Group, a strategic consultancy that targets Chinese consumers and whose U.S. clients include Apple and duPont, Rein arrived in China two decades ago when job opportunities were scarce. That all changed. As he chronicled with extraordinary clarity, China’s economic might and her middle class — 350 million strong —exploded.

Shaun Rein’s new book The End of Copycat China similarly combines lucid prose, professional reflection and intimate access to the Chinese business community, whose billionaires now rival and outnumber those in the United States.

Its thesis claims a rise of creativity in China. Shaun Rein once again gives us an incisive survey of the social dynamics at play in China’s pursuit of a more savvy economic orientation — including a comment on the vast environmental degradation.

I want to test his assertion today that “An End of Copycat China” is possible in the continued climate of crackdowns on dissent. Shaun Rein, we’ve never met, but it’s a pleasure to have you here in our studio in New York. So thank you for being here.

REIN: Well, thank you for having me, Alexander, it’s a pleasure … I just came in from ShagHai just for your show, so thanks for having me.

HEFFNER: So how about this question, in contemporary China are those new found values of creativity and that aspiration for creativity and, of course, individualism, you highlight. Are they compatible with the mantra, as we understand or a majority of people in the States understand … of economic orientation first …

REIN: MmmmHmm.

HEFFNER: … human values second.

REIN: I think that’s a great question. Let, let me start off with looking back 20 years ago, when I first arrived into China. When I first came there people were dirt poor … the vast majority of Chinese were still struggling to eat, and you know, were at … below the poverty line.

Let’s jump now … okay …in 2011 … 21 of China’s 31 provinces increased their minimal wage on average by 21.7%.

In January of this year 18 provinces increased minimum wage on average by another 18%. So what you’ve seen in a two decade period is people moving from not being able to eat towards being fat. There’s an obesity rate of about 12% in China that’s almost as high as the United States.

And so what’s happening is as people get wealthier, they’re starting to think more about just the raw basic needs of human life … eating, shelter. And they’re starting to look at what’s important. And so they’re starting to say, you know what … I want to be able to express my individuality … whether that be through art or through clothes … could be going off and using “We Chat”, which is an online phone system, kind of like a Twitter, but more supercharged, where they can show pictures of them traveling around the world.
What’s happened is now Chinese are starting to question what is important in life? You know. What, what does it mean to be Chinese right now. There’s really a … been a real big shift, Alexander, in the last two years with the new President …. Xi Jinping saying, “Let’s define the Chinese dream. Let’s look back at the Chinese roots, not with embarrassment, not … let’s not look at, say, Chinese culture was bad, as many had begun to think, which is why there was this aspiration for everything foreign and let’s create this new modern, strong China … let’s create a new definition of the modern Chinese dream. And that’s why you’re starting to see people think about individualism, creativity, and expressing themselves within the confines of the Party, in a different way than we’ve seen in the last three decades in China.

HEFFNER: But that’s the point … “within the confines” … elaborate on that.

REIN: Yeah. Hmmm, I think there’s …

HEFFNER: In what party?

REIN: Yeah, so the Communist Party … so China’s government remains a one-party state. And I think what you’ve seen with the new President, Xi Jinping, is he’s probably the most powerful leader since Mao Tse Tung 40 years ago. There is a lot more leadership by consensus under President Hu Jintao and President Jiang Zemin … President Xi is really consolidating power. You can see he’s putting in a lot of allies in the military, in the foreign service as well as in the Ministry of Finance.

Now what that means is … people can say whatever they want to say on the economic side, but the government is still really concerned about social instability and so there still is a limit on dissent, there’s a limit on pure freedom of speech.

It’s definitely much better than it was 20 years ago, but it’s still not good enough. But again, I think we need to look at it through the context of Chinese history.

A lot of people don’t realize that the people who … a lot of Americans don’t realize that the people who suffered the most during the Cultural Revolution … you know the time between 1966 and 1976, when most universities were closed in China … ahmm, the people who suffered the most were the ones who are now in charge. If you look, President Xi Jinping, his father was sent off to the country side in pseudo jail-ship for 18 years.

You know, and the rumors that when he came out from the countryside, he didn’t even recognize his sons. And so the under … the overarching goal of today’s leadership is to ensure you don’t go back to social instability.

Now I think sometimes they overreact and they do too much on the limits of freedom of speech. But you just have to sort of understand it’s not quite as black and while as a lot of Americans make it out to be.

HEFFNER: And that explains the absence of Twitter, other multi-faceted international forms of expression that do exist in most contemporary democracies. I …

REIN: It goes almost everywhere … it’s kind of embarrassing that China doesn’t allow Twiter or Fracebook.

HEFFNER: So what is the argument from the Chinese position of how they are not embracing some of these innovations that are shared by the globe and are isolating themselves in their individualism.

REIN: Let me answer that in two parts. The first is the Internet … okay? So Twitter, Facebook, Google all have accessibility problems in China. Twitter and Facebook are completely blocked.

HEFFNER: It’s censorship.

REIN: They were actually accessible for a number of years. But it stopped when you started to see some of the rioting in Iran and the government started to get very concerned abouit having social and civility spread throughout the entire country and people going out and starting to riot.

They blocked Twitter, but very soon afterwards they created another system called “Sina Weibo” … Sina Weibo is the exact same thing as Twitter, except you can … has even more functionality … the Chinese innovated to create things for the China market.

So, while we say there’s no Twitter, most Chinese actually don’t feel like they’re missing anything, because they have something … (a clone essentially) …

HEFFNER: Right.

REIN: … of Twitter where they’re allowed to discuss. Now what does the Chinese do … they force a lot of the Internet players to have in-house sensors, to take down questionable posts. You also have … the government will come in and say to them, “You need to shut these things down”. But for most Chinese they don’t feel that this …

HEFFNER: They don’t feel the restriction because they are innovating at home …

REIN: Yes.

HEFFNER: But, but they’re closing off their innovation in the sense that it can’t be an international experience yet and, and Twittter can’t be born out of China because …

REIN: Well, that’s where I disagree with you. Okay? And, and here’s why … the actual protectionism actually has helped proliferate innovation in China. So, in, in the Internet mobile space … especially mobile space, which is sort of the theme of my new book … The End of Copycat China … because the Chinese players didn’t have to compete against well-funded Twitter/Facebook, they were able to make mistakes.

Initially they had inferior products, so you had companies like, you know, Sina, like Ren-Ren come up with virtual clones. Because they were protected, Chinese consumers had no choice, they had to use them.

But over the last five years some of these firms have gotten really great at research and development and they’re actually more powerful than when you … then, then the American companies right now.

Because they’ve been, you know, competing in a non-competitive environment. And they’ve now started to go abroad. So “WeChat” which is ten cents company, actually has replaced Facebook as the biggest social media population in Indonesia in less than ten months.

I was in Indonesia in Q1 of 2013 … and Facebook was all the rage. Indonesians had never hear of “WeChat”. By the end of the year when I went back, everybody was using “WeChat”.

I was in South Africa earlier this year, people everywhere in South Africa were using “WeChat”. So what we’re now …

HEFFNER: Let me just ask you … are there any censors built into “WeChat” for the experiences of the Indonesians or of the South Africans?

REIN: So, we’re not sure. And that’s one of the questions. I think there’s definitely things built in in China. The question is “What happens if there’s an American user communicating with a Chinese user?”

HEFFNER: And who maintains ownership of the entities in these respective countries …

REIN: That’s in a gray area. And I, I think one of the big problems and what’s hurting Chinese companies from becoming truly global brands is the censorship. Right. Because if you’re an American and say you’re communicating with another American on “WeChat” in California or … do you want to have the Chinese government eavesdropping over your conversations?

The answer’s obviously “no”. So I think the government needs to do a re-think. You know, they need to understand it’s okay to be concerned about social instability, but they need a more elegant solution and they also need to be able to ensure that the rules aren’t hampering the ability for Chinese firms to grow abroad, which they clearly are.

HEFFNER: Well, that’s, that’s very interesting because I wonder if American best practices, which have been anything other than “best practices” in the arena of surveillance and the fact that many Americans now realize that they are sacrificing their own personal identity and information when they use Twitter or Facebook or some of these new social media arms.

How have the Chinese reacted to American surveillance through these vehicles and the big data that’s emerged and do they want to differentiate themselves and actually be the bigger man, as it were.

REIN: I, I don’t think they want to be the “bigger” man … (laugh) … I think that most Chinese are … they look at America’s government with skeptical eyes. Okay? They feel that America’s trying to contain China’s rise.

So, like President Obama sent several thousand Marines to be based in Darwin, Australia. There’s that pivot towards Asia where America is pushing to have closer relations and maybe even open up more military bases again in the Philippines, where America is supportive of Japan to move from self defense forces to having a military force.

This is very disconcerting for most mainland Chinese. So they love Americans and that’s why you see so many Chinese are coming here to shop. If you look on Fifth Avenue where we are …

HEFFNER: Or Columbia University …

REIN: … everybody’s like a Chinese. You know, they go to Gucci, they go to all the top shops. But there is … I think … people think that the American government is actively trying to contain China.

They’re concerned that as China’s rise … that there is going to be more increased tension. And I’m quite concerned about it, too. I’m not a political scientist by training, but just by looking at an every day basis, the distrust of America is rising and I think President Obama probably needs to change his foreign policy, if he wants to insure that there’s a lack of tension in the coming five, ten years.

HEFFNER: MmmHmm. Well, I mean would an economic summit of some kind further that?

REIN: Yeah, I think, you know, and economic summit is always good. But I think that in the back of the mind … the Chinese, the Russians, everywhere in the world, they’re thinking: “Well what about the Snowden affair? What does that mean?” If the Americans were actually looking at Merck in Germany what are they doing in China?

I think what’s key is to continue to have regular economic summits, it’s key to have cultural exchanges and to continue to have more Chinese come to the United States and vice versa. And try to have more military transparency.

It’s not an easy thing. I mean if you look historically, there’s always a tension between a super power and a rising super power, but I’m hopeful and optimistic that tension will decrease between the two nations. I think it, you know, the business, at the end of the day is what most Chinese want and they want to have strong economic ties.

HEFFNER: Well, that’s why I asked about an economic summit because that really is the decisive imperative. Is the 800 pound gorilla, if you will, in the room … in that economic summit the, the debt? I mean is, is that weighing n the Chinese, the debt that they’ve taken and we still have and are growing … this very large and unsustainable deficit and we owe the Chinese a lot of money.

REIN: Yeah, well, I think the Chinese are looking more at their economy. So when you look at it, China’s been growing about 10% a year for the last three decades. And that’s really slowed, they grow about 7.2% in Q1 of this year.

And it’s clear that China’s growth model of the last three decades is broken. Okay, the country can no longer rely on low cost, cheap labor … can no longer on manufacturing for export. It needs to shift more towards a services and consumption-oriented economy.

Right now the average GDP per capita is about $6,000 US dollars. That’s what we like to call the middle income trap. When you hit that GDP growth, typically you see a country’s economy stagnates. You also see the rich get richer and the poor get poorer. Very few countries have been able to overcome the middle income trap in the post World War II period. And so right now what you see is China’s leaders are trying to increase the wages like I mentioned before and push more services. And that’s going to have more sustainable economic growth in China.

It’s not an easy thing and the world needs to watch and … can China make that economic transformation?

HEFFNER: Well, I think you’re bullish in the book about China’s potential to overcome a sluggish recession.

But I, I asked you about the debt because … are they in a position to point to America and say “I want our … we want our money now.”

I mean is there, is there a concern that the Chinese have, in some respects outsourced their economic capital and their future to America which is holding it hostage.

REIN: I think the Chinese are very concerned about the Democratic, Republican fighting and turmoil that’s going on in the United States.

About the grandstanding against China, the anti-China rhetoric and so what you’re having is the Chinese government is saying “We own all of this American debt, we’re basically America’s bankers, but our client doesn’t listen to us.”

And so what you’re starting to see is China’s trying to diversify its foreign currency holdings. So it’s been looking more into the Euro, even the Australian dollar.

The issue is that none of these currencies have liquidity of the US dollar, none of them have the strength and trust in the investment community.

So what the Chinese government is trying to do is make the R&B, the Chinese currency a reserve currency and so you’re seeing a lot of swaps. The Chinese will do a swap with South Korea, with Russia in order to try to diversity away from the American dollar. But it, it is a very difficult thing where China basically in the 1980’s and 1990’s decided let’s outsource our economic decision making to the Americans. Now, they’ve got a problem and they don’t know what to do.

HEFFNER: I mean do you think and you’re really the best person to ask here, that there was more admiration of the United States across China, especially in terms of its political coalitions … when Richard Nixon was President? I mean you arrived in China a younger man … but …

REIN: Not all that young …

HEFFNER: (Laugh) … but you’ve seen an evolution and you talk about it in the end of Cheap China of the, the economic status and the rise of the middle class.

But one of the things I’m interested about in this whole dichotomy and conversation about “copycat” and China versus American interests and values, is are they … are the Chinese still looking to Americans for their moral or economic conviction? And I would really stress the, the moral piece of that there? Or do they seek that kind of moral inspiration from another country, another state, another philosopher?

REIN: When I first arrived in China most Chinese looked to America as a beacon of light. Okay? I think … and I’ve lived all around the world … okay, I’m American, I love the United States, I’m as great a patriot as you can be, I, I travelled in Eastern Europe and I spent time in Romania and Hungary after the fall of the Berlin Wall.

Wherever I lived people looked to the United States as the moral arbiter of the world. It wasn’t just a policeman with a stick … it was “America would always do the right thing.” And would shed light into dark areas. I think in the last few years, starting with the Bush Administration, but continuing to the Obama Administration, Chinese feel let down. They feel that the United States is not doing the right thing from a moral standpoint.

Chinese are saying, “Look our government has done a great job at lifting hundreds of millions of people out of poverty. The Chinese have never attacked another nation in recent years. And so Obama should give us more respect.” But the President doesn’t seem to be allowing China to become an equal partner …

HEFFNER: What would that respect consist of, Sean?

REIN: Well, I think … there, there’s the issue of not sending military to South Korea or to Japan or the Philippines. A lot of Americans … we say, “Why are Chinese increasing their battleships or their air force?”

But that’s what great powers do. As you get more money, it’s pretty natural to arm, not necessarily for offensive purposes, but for defense.

And they say that this means that China’s becoming aggressive. But when you take a step back and you think that Americans are all over the world, there’s 30,000 troops … you know an hour and a half flight from China … that makes a lot of Chinese disconcerting.

But, again, I’m hopeful that America-China tension will go forward. I think at the end of the day, most leaders on both sides of the country understand it’s better to maintain the status quo.

I’m not so concerned about American/China relations. I am very concerned about China/Japan relations and I’m also concerned about China/Hong Kong, which the Chinese consider an internal issue.

But I’m worried about how that might play out and some of the pro-democracy movements in Hong Kong and some of the anti-mainland Chinese sentiment down there … that’s really been rising over the last, you know, 12 to 18 months.

HEFFNER: Well, talk about this more. What, what are your worries, I mean especially in terms of your role … you run a business that caters to the Chinese and their interests and that advances their lifestyles. So what are these important issues to take hold of?

REIN: So I think, you know, Hong Kong obviously was a colony from the UK and so a lot of people in Hong Kong before the, the city … or I don’t know what you would call it …reverted back to China in 1997 … they wanted to maintain a closeness with the British.

And now that they’re pushing for more voting on their CEO, in a couple of years universal suffrage and the mainland Chinese government is saying, you can have it, but it might be our chosen candidates.

So there’s an element within Hong Kong that wants pure democracy. There’s an element that harkened back to the British Colonial days and they like that. And they feel different. Okay? The Hong Kong people … they feel very separate from most mainland Chinese. They speak a different language, Cantonese versus Mandarin … they were raised under a different economic, political system.

And they’re starting to get angry at mainland Chinese. The Chinese are coming in, they have more money than Hong Kong now, all of the big $20, $30 million dollar properties in Hong Kong have been bought up by mainlanders. You’re starting to see that Chinese tend to be a little bit more gregarious, to put it politely, when they’re tourists. They’re loud, there have been issues of mainland kids peeing on the streets and that’s gotten a lot of Hong Kong people angry.

So they’ve been putting in anti-mainland ad in newspapers. They’ve been actually putting in pictures of locusts, which stands in for mainland Chinese and say, “We don’t want locusts here.”

You’ve had a lot of mainlanders coming in to buy baby formula, so making it very hard for Hong Kong people to get baby formula now. A lot of mainlanders are coming into give birth because the Hong Kong passport might be the best in the world. And this, sort of influx of Chinese, these different people crowding out from the good homes, from the shopping, from the beds and hospitals, from baby formula is creating a backlash.

And my concern is how will the Chinese government react? Okay? If the Chinese government were to crack down in a city in mainland China, like a Chung Do, most, most people in the world would think of it as a internal issues.

But because Hong Kong was previously part of the British Empire, there are a lot of people in the West who hold Hong Kong closer and dearer to the heart. And they might react and protest in a different way. And frankly, you know, from my own standpoint, is I think the Chinese government has been very good to Hong Kong since 1997.

I think that without China, Hong Kong’s economy would have gone down and I think they’ve largely kept to the word and the spirit of the agreement between Deng Xiaoping and Margaret Thatcher to have Hong Kong revert back to China.

I think the Chinese government is in a very difficult position. No matter what they do, they’re going to be criticized by these people.

HEFFNER: Well, that also seems like an element of how these social constructs and, I mean, it’s not a civil war, but it could be an emerging conflict within, within China.

How, how that’s a reflection of China’s acceptance of other parties. And I mean and, and I wonder if that is going to lead them, even more than a popular uprising … towards democracy.

Having to confront Taiwan, having to confront Hong Kong, do you think it will lead China to copying a more democratic …

REIN: No. I think, I think a lot of … most of the China analysts and the American government seem to get China wrong on the political side. It, it always amazes me, some of the stuff they put out. They said that the new President Xi Jinping is a reformer. And by saying that they thought he would be liberal and move more towards democracy. I, I just don’t see that. He is a reformer. He’s one of the biggest reformers in China in the last 20 years, but he’s reforming towards a stronger party. And that’s why he’s cracking down on the corruption in the country.

He basically saw what happened in the Soviet Union. He doesn’t want to be a Gorbachev, he doesn’t want to have the Communist Party collapse on his watch. So he’s looking …

HEFFNER: But it, it’s almost like that inevitable ….

REIN: I don’t …

HEFFNER: … I mean the way that your speak … I mean … he doesn’t want to be the counter-factual, but may or may not …

REIN: He doesn’t want to be, so he looks at what caused the Soviet Union to stagnate … lack of supplies in retail stores. Endemic corruption and that’s why, since he became President, he’s been leading a far reaching political campaign to crack down on corruption. People are running scared. As they should be. Because too many every day government officials and higher ups, you know, got rich over the last 15 years by essentially stealing from the state and stealing from every day Chinese. So President Xi Jinping is doing a great job at arresting these people. And that’s why most Chinese actually support him.

You know if you looked … the Pew Center … they say there’s about a 90% approval rating for President Xi Jinping and the direction he’s taking the country. So I, I think that a lot of Americans think increased incomes, better access to education, more demand for individual rights means that they want democracy. I don’t see that.

I think that a lot of the Chinese are happy with the status quo as long as it keeps evolving and as long as it keeps improving. And that’s why, when you see the social instability it’s not so much about the government, it’s about other issues.

HEFFNER: Shaun Rein, it’s really interesting to hear your perspective and I hope you’ll come back to The Open Mind and update us soon.

REIN: Thank you so much for having me.

HEFFNER: Thank you, Shaun.

And thanks to you in the audience. I hope you join us again next time…for a thoughtful excursion into the world of ideas. Until then, keep an open mind.

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