Big China and Little China go for an International Ride.

“Going Out” and “Capital Flight” both involve money leaving China – but they are very different things.

Let’s start the week by clarifying two of the big trends involving China and its interaction with the international community.  The

One China – Two Overseas Negotiations

The Chinese government/party policy of Going Out is a form of “soft power diplomacy” designed to transform China’s strategic industries and exert influence overseas.  Capital flight is when individuals move money out of China in order to hedge risk, increase returns or avoid authorities.   While they both may involve moving money from China to Western institutions, they are not the same thing.

There are 2 Chinas right now – Big China and Little China.

Big China is the official SOE  economy.  This is the China you read about on front pages.  China Mobile, CNOOC, and the Big Banks.  Big China is the characterized by opaque decision-making, huge sums of money and party/government guanxi.   Unfortunately, Big China may have already squandered its international opportunities with corruption, cronyism and mistreatment of MNCs.    Big China has big money – but also has lots of baggage.

Fragile Bridge - Managing Chinese Business Conflict
Fragile Bridge – Negotiate to Win in China

Little China is made up of the new middle class professional, successful entrepreneurs, business owners and private investors. They all claim to have great connections in the government, but they are really on the periphery.  These are the real estate speculators cashing out and the manufacturers & distributors trading up.  They created their own networks when times were good – and are now eyeing the exits.  Nimble, smart, and nervous.  In a perfect world they would stay in China – but the world isn’t perfect so now they are looking to get out while the getting is good.  In China they were rich – in the US they’ll be upper middle class.  Still – upper middle in Flushing beats being investigated in Fujian.

Chinese Business Style – Big vs. Little

Big China doesn’t give a foreign sucker an even break.  If you aren’t an MNC, Wall St giant or government entity then it probably doesn’t pay to deal with Big China in any way other than through an arm’s length transaction.  Even then, you are probably better off dealing with a partner.  That means getting paid by the partner.  In cash.  In dollars.  In HK, Singapore or the US.  Up front.  Don’t be dazzled by the top-line figure or the raw number of potential customers.  There aren’t 1.3 billion people in China – there’s the guy across the table and his two colleagues who don’t seem to talk much.  There’s no Chinese Dream for you.

Little China still offers opportunity – if you play it right.  In many cases, Little China is coming to you.  Many of these guys were successful real estate flippers or entrepreneurs who made it big riding the churn & burn pre-crash boom.  The low cost model is dead in China, and now the quick & nimble are being squeezed in all directions – from workers demanding living wages to rising variable costs to savvy customers insisting on higher quality.  They may rise to the call of commercial opportunity again someday, but for now they just want to protect what they have – which means emigrating with the kid and the cash.

Different reasons to Go International

There are two reasons for China to internationalize.  Big China needs to keep the Party going – and that means finding new markets and new technology.  Little China wants to keep what it has – and that usually means leaving town.  Little China will talk about their connections in China and tell you that they are setting up a subsidiary or marketing arm in the US – but the truth is that these guys are on the run.  They had a factory in China – they’ll be real estate brokers or franchise owners in the US.  That’s not to say that they won’t do great here, but their relationship with their Mainland connections is questionable.  The people they know are the wrong people for you – and they probably owe more favors than are owed to them.

Big China sends the kid over to be educated and buys an apartment building in Boston or LA for him to live in.  They’ll talk about retiring to the US, but the ones who do will never be able to go home again.  You don’t buy investment properties in Vegas and Florida on a bureaucrat’s salary.

Little China brings their aging parents with them and moves to Flushing.  They’ll talk about returning to the Mainland, but later in the same conversation they’ll tell you they are never going back.  Unless things change drastically, they won’t go home for many, many years.  They are the latest diaspora.  The China they eventually go back to will not be the same China they left.

Two Chinas:  A dynamic relationship – but not a good one.

Big China needs Little China more and more – mostly because “going out” and “soft power” aren’t working.  As China’s economic growth decelerates, local markets are going to be increasingly important.  So is a local tax base because Big China pays small taxes – or no taxes.  Big China also needs the innovation and dynamism that Little China brings to the table.

Little China used to need Big China, but now it is feeling stifled, bullied and frightened.  In the past there was no way to leave, no place to go – and nothing to lose, so for generations Little China had to endure and make the best of it.  In the future that may be true again.  Right now, for those with the money and the ambition, it is possible to get out.   Little China will gamble on leaving Big China behind.


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