Negotiating in China: The Mystique of Madness

China-as-negotiator has been enshrouded in a Mystique of Madness – the notion that it will behave irrationally if refused or denied a bargaining point. Observers tend to regard China as a hair-triggered, unpredictable powder-keg that is not bound by the principles of self-interest or civilized behavior. The latest spats over Google, censorship, RMB exchange rates and international trade are all case studies of a China that cultivates an air of volatility to control expectations and wring concessions from counterparties. In fact, China has deftly set up dual channels of communication – using state-controlled information networks like Xinhua and the People’s Daily to issue thinly veiled threats and accusations while sending seasoned diplomats to quietly, patiently work out compromise – or at least stake out its position.

China, unfettered by democratic pressure, is actually hyper-pragmatic. The entire 30 year post Deng Xiaoping opening process is a repudiation of the party’s founding core values. Levis (the jeans company), Japan, Britain, Russia (then Soviets), the Kadoorie family (of the Peninsula Hotel and opium trade) were all, at one time or another, sworn enemies of the CCP. Either the Chinese have very short memories (they don’t) or the Party’s tendency to seek vengeance over gain is grossly exaggerated. Control of the media allows Orwellian freedom to rewrite history. Of late, China has been accused of capriciousness for adopting a position that, “The world needs China more than China needs the world”. This maxim may be obnoxious, it may be inaccurate and it may be short-sighted, but it is not on the face of it irrational. Europe, OPEC, Japan the old Soviet Union and, of course, the US have all been accused of taking the same approach. This may be wrong-headed, but that does not make it crazy.

Mystique of Madness is a tactic, and an effective one. It becomes even more successful when third parties carry the torch – competitors, commentators, consultants and media pundits spread dire warnings of vendettas and revenge only to have Beijing step in as the soft-spoken, harmony-seeking good guy. When it serves their interests, the Beijing party leadership is extremely flexible.

There are a number of advantages to this kind of negotiating behavior.

    1. It allows others to ‘force’ it to do things it needs to do anyway. Entry to the WTO is the prime example of this, but the tactic was also used to justify SOE reform, instituting market mechanisms, anti-corruptions drives and many of the other benefits of the post Deng Xiaoping Chinese economy. China routinely gets international concessions for bowing to its own self-interest.

    2. The Mystique of Madness allows Beijing to control expectations & timing and to reorder priorities. In other international business centers, ‘hurting the other side’s feelings’ is not a paramount concern, yet China has won many concessions to repair its bruised ego. In most countries an opaque, Byzantine bureaucracy is something that has to be justified. In China, counter-parties often find themselves composing written apologies for attempting to skip a step or cut through red tape.

    3. The Mystique allows China to drag out pre-negotiation posturing and talk issues to death so that by the time they are implemented it is already old news – and the impact on the market is extremely limited. Watch the exchange rate debate as an example.

Finally, the Mystique allows China to claim victory no matter what the outcome. This has earned China somewhat misplaced commendation for ‘always thinking two steps ahead’. When I suggested to another Westerner in Shanghai that the real cause of the Google-China falling out was the discovery of sophisticated industrial hacking, my colleague speculated that China intentionally allowed itself to be caught to force Google out of the country and thus shore up the fortunes of domestic players like Baidu. Possible, but highly unlikely. A better explanation is that by controlling the media and silencing conflicting opinions, China can put its own spin on events. Afraid of incurring the ire of an irrational giant, others prefer to go along.

China is an extremely rational actor, though the Mystique of Madness has one fatal flaw. If the bluff is called once, it loses its effectiveness and forces the negotiator to take real action. Unfortunately, that’s precisely how trade wars and international tensions escalate.

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