What does it mean to be China Literate?

Speech by Dr Geoff Raby, Australian Ambassador to China, to the Australian Institute of Company Directors Conference, Beijing, 18 May 2011

It’s a great pleasure to be here today to speak with you again in China.

As my term as Ambassador draws to a close, I’m reminded that one of the first public events I attended as Ambassador was the AIDC’s Shanghai conference four years ago.

I recall at the time being delighted and encouraged to see such a big group of Australian corporate leaders come to China to see for themselves the massive change that was occurring in China and to gain first-hand familiarity with what this meant for their companies and corporate bottom lines.

Since that time, I can report to you with a degree of satisfaction, that bilateral trade has increased by 40% to over $A100 billion, the number of Chinese students enrolled at secondary and post-secondary educational institutions in Australia has more than doubled to around 138,000, and over 220 Chinese investment projects have been approved worth over $A60 billion. This latter figure compares with a total stock of Chinese FDI in Australia of just $A8 billion at the start of my term.

Over the past four years, China has gone from Australia’s 2nd biggest trading partner and 2nd biggest export market to number one for both total trade and exports.

In terms of trade in goods, China now accounts for a quarter of all Australia’s exports. This is more than Japan took at the height of our trading relationship in the late 1980s.

Exports to China alone are worth roughly the same as our exports to our 3rd, 4th and 5th markets – namely, India (19.8bn), South Korea (18.4bn), and the US (14.8bn) – combined.

From another perspective, China now matters more to Australia in terms of trade than it matters to any other major country. Whereas China takes a quarter of our exports, it takes 23.9% of South Korea’s, 19.4% of Japan’s, 5% of US’s, 3% of Canada’s and 3% of the UK’s. So when we talk about acting with like-minded countries, in respect of our trading relationship we are today very much alone when dealing with China.

Last year, China for the first time also became Australia’s biggest services export market, based mainly on students and tourism. China is our main source of foreign students and our most valuable source country for tourists.

The past four years, then, represent a moment of great transformation in Australia’s economic history.

I am obviously proud to have been here during this period and to have contributed in some way to Australia’s prosperity during these years.

It is inevitable that with two countries becoming so closely integrated economically pressures and strains will emerge from time to time in the bilateral relationship.

This is even more so in the case of two countries like Australia and China that have such different systems of political and social organization. I have said in speeches elsewhere that there hasn’t been a time in recent world history where a major economic power, like China is today, has stood so far apart from the international mainstream of political and social organization.

To say China is very different from Australia and many other countries in the world today is simply stating an obvious fact. It is not special pleading for Chinese particularism, rather it is to be clear about the challenges we face in managing the relationship.

This is no less true for governments as it is for corporations.

Whether we like it or not, we have to come to know China in its own terms and deal with it as we find it. China is not on a path of convergence to something which we can easily recognize and deal with. It is a cliché to say – but many truths are clichés because they are so commonplace – that China has long historical and cultural traditions that are very much of its own. These are also shaping China’s future development.

The fact that China is so different presents endless professional and intellectual challenges, which is one of the attractions of working on and in China. It can also be a source of frustration and misunderstandings – on both sides of the relationship.

As Ambassador these past four years, one of the biggest challenges has been managing my own team. Not my first-class professional colleagues in the Embassy here, but politicians and officials in Canberra as well as Australian media and public commentators.

It is largely about attitudes and understanding. It is important to know why things in China are done at times the way they are, said they way they’re said in specific circumstances, and how each side at times perceives and mis-perceives each others’ intentions and motives.

If China were small, closed and backward, as it was when I lived here for almost five years in the 1980s, it wouldn’t matter so much. When I left China in 1991 at the end of my first extended term here, bilateral trade was just $A2 billion. Obviously, this is not the case today. China is big and matters a lot.

And so whether in government or business it is essential if dealing with China to be “China literate”.

On being “China literate”

When this subject is raised the first thing people think of is that it is essential to speak Chinese. This itself becomes a mental barrier to entry into the China space. Busy business and professional people who have made in the past different choices for study can scarcely be expected as their careers develop to take on the difficult and demanding intellectual task of learning the language to a level that would enable them to work in the language in China.

The good news, for those of us who struggle with the language, is that speaking Chinese is neither a necessary nor a sufficient condition for being “China literate”. To be sure, it is an immensely valuable asset when dealing with the Chinese. But to say that to work effectively with China and the Chinese one needs to speak the language is to set the bar too high. It runs the risk of deterring serious engagement.

To speak Chinese is not to know China. Many examples can be found of people who speak Mandarin to a high level but who do not understand how China works. They may have learned their Chinese shut up in their study reading the Analects.

The converse is also true, people can and do develop a deep and sophisticated understanding of contemporary China by being here on the ground, meeting people and building relationships.

Feet on the ground

One of the things that has so surprised me in my time here, has been the number of senior figures in business or public life who were making their very first visit to China only after they had already achieved high office in Australia.

It would be invidious to give specific examples, but I could name numerous corporate leaders, CEOs and chairs of boards, not to mention ordinary board members, whom I met and briefed on their first visits to China. I know public commentators in Australia who write about international affairs who have not visited China for fifteen or more years, if at all.

While I would be the first to agree that, in many ways, the more China changes the more it stays the same with respect to social and political organization, nothing can replace the first-hand experience of seeing the tremendous changes in people’s lives of the past decade of super-charged economic growth.

Similarly, while once it would have been enough to visit Beijing or Shanghai, today rapid economic growth has spread across the country. It is almost irresponsible these days to zip-in and zip-out of these cities, ignoring what is occurring in places that most people in Australia have not heard of but which are major economic entities in their own right.

Boards of directors should be impressed more by the fact their CEOs and senior corporate executives can speak knowledgably of places such as Chongqing, or Jinan, or Ordos in Inner Mongolia, with the highest per capita income in China, than how brief was their last visit to China.

During my time as Ambassador, I have made it one of my priorities on behalf of Australia to visit all of China’s 31 provinces in an official capacity. Of course, I’ve visited many frequently, both officially and privately as a tourist.

If a province like Guangdong were a standalone country, it would be Australia’s 5th largest trading partner in the world. About a year ago, I had a meeting and dinner with the Governor of Shandong Province which has a population of some 92 million. Our discussions went well and so did the drinking of the mandatory white spirits during the course of the dinner. In the end we spent over three and half hours together. On our way back to the hotel afterwards I said to my staff this was better than spending this time with a leader of a major European country and – in view of our extensive commercial interests – probably worth more to Australia.

Or take some of the other next tier of provinces going through their period of rapid economic expansion. For example, the central inland provinces of Henan, Hubei and Hunan, of which most people in Australia have not heard, have a combined population of 229 million and a combined GDP of around $A925 billion – roughly the same as Australia’s GDP in 2009. Each of these provinces posted double digit growth rates in 2010 and are set to do the same again this year.

I could fill the rest of this presentation with examples like this, but the point is clear. If you don’t know these things, you don’t know China today.

Relationships

More so than most other societies, in China business and influence depends heavily on personal networks and relationships. This is very well known by most people doing business with China. It is usually at the top of every consultants “How To” list for doing business in China. After “ni hao” the next word in Chinese most foreigners pick up is “guan xi” – a reference to mutually dependent relationships of obligations.

The concept is straight forward, even if we as foreigners tend not always to appreciate fully the central role it plays in business, politics and the wider society.

Doing it is more difficult. It requires senior corporate officers, as well as boards and directors, to come to China; to spend time and money here building relationships; and it also requires inviting and spending time with Chinese associates in Australia.

The extent to which someone is China literate can be measured and evaluated by the extent of their networks of contacts and trusted relationships and, of course, their seniority - not only in the business world but the political world as well.

I have been surprised to hear a senior corporate leader in Australia tell me that he doesn’t need to know the names of the grandchildren of the head of his biggest customer to make a lot of money in China. Maybe he does, maybe he doesn’t, but it doesn’t seem a particularly high price to pay to ensure that you can continue to make money.

In response to questions I put to one major importer in China concerning why his company preferred products from a competitor country, even in the absence of a clear price advantage, we were told it was because they never saw the heads of the Australian companies.

In another case, a very senior political figure made inquiries via informal back channels – which is another common way for sensitive issues to be raised by China – as to why heads of certain Australian corporations were seldom if ever seen in China.

I would suggest that if your company has commercial interests in China it is both prudent and good corporate governance for you to ensure that your key executives are visiting regularly and building these relationships.

Some Australian companies, boards and executives, do get this and are highly effective. I know of many cases, where corporate leaders visit regularly and quietly and patiently build important relationships and networks of influence. Many of these are well and truly below the radar, but are perhaps even more effective for that reason.
Other Australian companies have their senior executives visiting regularly. Some take time out of their extremely busy schedules to take positions as advisors on the international boards of cities; to come to the high-level private think tank meetings that bring political and business elites together; or to sponsor publicly important conferences or meetings which also bring key decisions makers together.

When viewed from the perspective across a board room table in Sydney or Melbourne such activities may seem marginal. But in China they are core business activities that will repay the investment of time and money.
My unscientific observation over my time here is that the US in particular, but also European, business leaders do understand this and are increasingly prepared to put the time and effort into building these relationships.

Their governments have also been prepared to spend big to put in place various bilateral frameworks to give structure and continuity to relationship building. The Australian and Chinese Governments have started to do this as well. During the Prime Minister’s recent visit, the second meeting of the high-level Business CEO Roundtable was held.

Politics and Power

In China, little that matters happens without the involvement in some way of the Government and the Party. Even successful private entrepreneurs will have carefully cultivated close ties to both government and Party officials. Sometimes, but not always, they are the same people. Understanding and working with government in China is therefore central to being China literate.

In view of the close involvement on the Chinese side of government in the daily detail of commercial life, knowing when and how to use Australian government presence in China is also essential. We have a robust, entrepreneurial, can-do spirit in Australian business which often sees using the good offices of the Australian government in a place like China as somehow an admission of failure of business manlihood. To the contrary, involving government is what you do in China. Skills and experience in this area are particularly valuable assets.

Political power in China is also highly concentrated in Beijing. The capital is where all major decisions are made. Each province, municipality and lower levels of government have their own offices (usually commercial hotels these days) which are staffed to represent their interests at the centre of Chinese political power. Much wining and dining, relationship building and networking are conducted by provincial representatives who are like internal ambassadors.

Knowing this bears directly on the decision of where to locate your corporate head office in China. Many western business people are dazzled by the high-rise, glass and chrome of Shanghai with its air of being a modern sophisticated business centre. Accordingly, because they think that they do business and not government, western businesses often establish their head office in Shanghai.

It is interesting in this context to note that the Australian Institute of Company Directors first conference in China was in Shanghai, not Beijing.
I wonder if four years ago had the conference been held in Beijing it would have attracted as much interest as holding it in Shanghai.

Foreigners do prefer to live in Shanghai. It is a city full of fun, pleasure and promise. Foreigners prefer Shanghai because, well, it’s foreign. Viewed from Beijing, however, Shanghai is just another provincial centre. Power resides in Beijing. If you establish your head office in Shanghai, effectively you have tattooed on your forehead – “I don’t understand China”.

In certain cases there may be specific commercial reasons for doing so. Mostly, it is a misunderstanding of what Shanghai is and how it fits into the national picture. Not surprisingly then, the representatives of companies spend a lot of time travelling to Beijing and also a lot of time justifying to head office in Australia why they need to travel so frequently to Beijing.

So when a proposal is put to a board of directors in Australia to open a representative office in Shanghai. It is not immediately obvious that this is the right call. The board would do well to ask how China literate are those in management who are making the proposal. At the very least a good case needs to be made. The default setting for such decisions should always be Beijing.

Representation

Foreign businesses in their wish to appear “China literate” will frequently appoint as their chief representative in China someone of ethnic Chinese origin, with a strong preference for someone who speaks fluent Mandarin. This could be termed the “localization fallacy”.

Undoubtedly it is important to employ local staff and to place a heavy emphasis on staff that can speak Chinese, provided they can also do other things. As with all employment decisions, it is important to match people to a particular role based on a clear understanding of the job at hand.
In choosing your chief representative, localization may not always be the best policy. If your chief representative is to be the face of your company in China and will be the key contact with government and senior officials, then a westerner with grey hair may be a much better choice.

I can think of no mainland Chinese company operating overseas that would be headed up by a foreigner. In China an ethnic Chinese head of a western company would be viewed as lacking authority and weight with his or her head office.

However, it is important that your chief representative is seen to have the full backing and support of head office, including by having a prominent role and standing during the visits to China of the company’s most senior people. It is essential to give your people on the ground “face” or “mian zi”- another word the soon enters the vocabulary of even the most linguistically challenged foreigner.

In the unfamiliar and difficult business environment which exists here, as events in the recent past have shown, it is also essential for your chief representative not only fully to embody core corporate values, but to be able to convey them to all your staff with authority. In the murky world of relationships and the interplay between government and private interests, adhering to a firm’s core values becomes a cornerstone for sustainable operations.
So being “China literate” requires taking a more sophisticated, informed and hence nuanced approach to the question of localization.

Conclusion

While much of what I’ve just said is based on lengthy experience in China, it is really nothing more than structured commonsense.

As for China literacy, the Australian Government is correct to promote the study of Chinese language in schools in Australia. Australia as a country needs to have many more people who are fluent in the language. In the meantime, we can all be “China literate”.

China it is clear offers enormous potential but endless challenges at the same time. Whether it is worth your while can only be judged in terms of the commercial interests of an individual firm.

The holding of the second Company Directors Conference in China is to be warmly welcomed. It is doing the sorts of things I have been suggesting, coming to see for yourselves, informing yourselves and building relationships and networks. I wish the Conference every success.

The theme for the Conference “Riding the Dragon” is aptly chosen. In the West the image of the Dragon is threatening and to be feared. In China it is benign and friendly. Such is the importance of being “China literate”.

Thank you.