BOOK REVIEW
The myth of 1.3 billion cans of Coke
The Misunderstood China: Uncovering the Truth Behind the Bamboo Curtain, by Chi Lo

Reviewed by Macabe Keliher

Not since the Opium Wars of the 1800s has so much confusion and conflict penetrated public debate about the role of China and its economic future. If the illusion of "1.3 billion cans of Coke", the size of China's consumer market, is not seducing today's investors, then the coming collapse of the country's financial system is tantalizing pundits. Just as a century and a half ago, when British merchants drooled over a market for which "all the mills in Lancaster could not make stocking stuff sufficient for one of [China's] provinces", and its diplomats countered that further pressures would implode the country into a fiery chaos, so too does rampant misunderstanding of China grip the world today in ways that threaten to drive imprudent policy.

According to Chi Lo in his new book, The Misunderstood China: Uncovering the Truth Behind the Bamboo Curtain, great ignorance of China's economic issues runs unchecked in current world discourse, the implicit danger of which is that, should our misconceptions of China today be enacted in the form of, say, "raising anti-dumping and safeguard measures against Chinese imports and labeling China as a rogue trader", as Lo writes, it would be "unfair and dangerous to the global trading system".

Let the lessons be learned: during the second Opium War in 1860, British diplomats chose to march on Beijing, burn the Summer Palace and subsequently rule China indirectly for the next 40 years, a rule that stretched the Crown, and, due to the failure of the said China market to materialize, contributed to the wane of the British Empire.

It is true that the People's Republic of China is not the Qing dynasty, which was beset by devastating natural disasters, and faced an armed invasion by foreign capitalists during the Opium Wars. Also, the world economy did work a bit differently in the 19th century.

Notwithstanding, China today has not proven to be a gold mine for all who peddle their products throughout the land, nor has it imploded under the weight of rising unemployment and overdue bank loans as the naysayers continue to prophesize. Yet business decisions continue to be made on the illusion that China is "the last great untapped market on earth", while books and op-eds are written about "the coming collapse of China", and more detrimentally, government policies are crafted on the myth that China is a manufacturing threat.

Most analyses in the China debate do not yield insights because what seems obvious is often wrong. There appears to be much confusion and misunderstanding about the Chinese economy, which takes two forms: positive misinterpretation and negative misconception. The former camp has trumpeted China's economic integration within the global economy, while the latter opines that Chinese progress was an illusion, doomed to failure, with the potential to destabilize the global economy. By probing conventional wisdom, Misunderstood China seeks to uncover the truth behind China's economic and financial myths.

In the course of debunking such myths, Chi Lo offers many counter-intuitive insights to the opening up and growth of China's economy. Unlike other China discussions, which focus on one side of the China story and often lack underpinning research, Misunderstood China uses macroeconomic concepts to combine a balanced analysis with rigorous economic logic and facts. Thus, this book differs significantly from the current China discussions, which tend to stress either the positive or the negative side of the China story.

For so long we have been treated to sensational opinions about either the wonders of the China market (with its 1.3 billion consumers), or the death of the social order (read: financial collapse), that a cool-headed and clear analysis of what it all means comes as a welcome surprise. In his book, Chi Lo systematically defuses and re-analyzes the false notions surrounding China's markets and economy: the one billion-plus consumer market, forthcoming financial collapse as well as theories that China is stealing investment from the region, undermining Asian markets and causing deflation in the United States. In fact, one would be hard pressed to find a mainstream debate or myth that Chi Lo does not address and explain - in detail and with figures - revealing the truth of the matter.

While some of these issues have been dealt with competently elsewhere - in Joe Studwell's The China Dream: The Elusive Quest for the Greatest Untapped Market on Earth, and even by Chi Lo in his first book, When Asia Meets China in the New Millennium: China's Role in Shaping Asia's Post-Crisis Economic Transformation - other debates continue to rage, such as the US Federal Reserve this month again calling on China to revalue its currency in order to save US manufacturers. What we have in Misunderstood China is a type of guidebook, a manual of sorts, presenting clear, concise explanations and arguments on topics such as why "China is not the source of deflation", or "how cooked are the books"?

Reading at times like a reference book, The Misunderstood China is flush with figures and even a few graphs. Chi Lo's aim, of course, is to diffuse misunderstandings about the country's economy and economic development, and he is able to stay on course by tying in "developments in other parts of the global system that are relevant to understanding China". So, for example, in discussing the ever-popular conspiracy that China is stealing foreign direct investment (FDI) from the rest of the region, Chi Lo shows foremost that China's FDI actually can be halved if one accounts for the domestic investment leaving the country in order to reenter as FDI and receive tax breaks. Furthermore, Chi Lo writes that China's FDI inflows are only about 4 percent of gross domestic product (GDP) - the same as Singapore's, and significantly lower than Hong Kong's 12 percent and Indonesia's 6 percent.

Chi Lo's analysis counters many China watchers' views, which "are based on a partial analysis of the global economic system", where "convention wisdom becomes convention thinking without much wisdom," he writes.

As an economic strategist in Hong Kong, and former research director at HSBC (Hong Kong and Shanghai Banking Corporation) and chief economist at Standard Chartered Bank in Hong Kong, Chi Lo is flush with global wisdom. And with more than 15 years of experience in international economics and markets, Chi Lo does not tergiversate the macro conclusions or effects of mismanaging or misunderstanding economic systems.

And it is here that Chi Lo is most provocative. "The detrimental effects of misunderstanding China are tainted business judgment, distorted investment and policy decisions and obstruction to global trade," he writes, arguing for example, that Japan's vocal complaint over China's surge in exports "underscores the embarrassing fact that, despite her more advanced economic structure and per capita GDP (30 times higher than China's) she still competes with China in products that she does not have any comparative advantage". Japan's foot dragging on reform and economic restructuring has created not only domestic stagnation in economic innovation, but also holds the potential for the leveling of a protectionist policy, which would obstruct global trade or even start a trade war. Chi Lo also sees this trend occurring in some of the large European economies.

At times Chi Lo seems on the cusp of putting forth a new rule for the world economy in which the economic power of China is completely integrated. "ASEAN [Association of Southeast Asian Nations] and Japan should take note that to survive in the new economic paradigm, where profit squeeze, pricing-power erosion and constrained demand are common, they have to break from commodity competition driven by cost - it is about innovation, creativity, packaging and marketing." For Chi Lo, "in a nutshell, opening up to understand China properly and embracing changes, instead of whining" is what must define the evolving world economy - a message that appears to have been lost on US politicians these days.

However, it is unfortunate that this message gets buried at the back of sections or chapters. An embracing vision of this "new economic paradigm" never shines through and is only hinted at in moderation throughout the book. One keeps searching for the chapter or section where Chi Lo will break down the current economic system and present a new model and direction for governments throughout the world. But it never comes. Instead, Chi Lo hides behind platitudes here: "economies need to revitalize themselves from time to time to survive".

Equally frustrating are the lack of any references to support the bulk of information Chi Lo puts forth. One does not doubt that one man can know so much in the prose, but there does come the occasional passage where one would like to look up the source to confirm, for example, who "the politicians in Tokyo and Washington" are who scapegoat China for causing deflation. Likewise, the anecdotes about companies or economies seem to fall out of thin air. And where do all these figures come from? It is true that his own number gathering and crunching make Chi Lo a source in himself, but when he quotes "a UBS figure" it would lend more credibility to be able to know exactly which report it came from.

These shortcomings aside, Chi Lo has done the China hand an immeasurable favor. In 1860, British diplomats went against their better judgment and, with merchants funding the offensive, opened the China market by gunboat. The consequences are best left to historians to assess, but economic policy is not so academic. Those considering China today would do well to read Misunderstood China before holding forth.

Macabe Keliher is an independent historian and journalist. His most recent book, Small Sea Travel Diaries: Yu Yonghe's Records of Taiwan, will be published next month. His website is www.macabe.net.

Misunderstood China: Uncovering the Truth behind the Bamboo Curtain by Chi Lo. Prentice Hall, January 2004. ISBN: 9812446060. Price: HK$122 (US$15), 150 pages. (Website)

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