Sidney Rittenberg on China’s New Leadership and Future Trends

April 10, 2013 Posted by China Briefing Reading Time: 7 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

Apr. 10 – I had the pleasure of meeting Sidney Rittenberg at the annual Asia-Pacific Business Outlook conference in Los Angeles yesterday, which is pretty much the premium U.S.-based event of the year for anyone involved in business between Asia and the United States. While the two-day program itself covers not just China, but India and the rest of Asia, one of the highlights was Rittenberg’s talk, entitled “What to Expect from China’s New Leading Team.”

For those of you not familiar with the man, Rittenberg is an American journalist, scholar, and Chinese linguist who lived in China from 1944 to 1979. He worked closely with PRC founder Mao Zedong, military leader Zhu De, statesman Zhou Enlai, and other leaders of the Chinese Communist Party during World War II, and was with these central Communist leaders at Yan’an. He witnessed first-hand much of what occurred at upper levels of the CCP and knew many of its leaders personally. Later, he was imprisoned in solitary confinement, twice, for a total of 16 years. He was the first American citizen to join the Chinese Communist Party.

Rittenberg’s connections and experience have subsequently enabled him to run a successful consultancy business representing some of the world’s biggest brands, such as Intel, Levi Strauss, Microsoft, Hughes Aircraft and Teledesic. So when he talks about China’s leadership, people listen. This is what he had to say, in my own words gathered from notes I took and questions asked not just by myself, but others at the conference:

The essential takeaway message from Rittenberg’s talk is that the new leadership under Xi Jinping has no option other than to instigate economic reforms, but that political reform will be unlikely. In terms of the economic picture, China’s banks must now break away from the tyranny of having to constantly support loss-making SOEs and lend more to private enterprise, as SMEs now constitute about 50 percent of China’s economy, and the banks are being let down by recent performances from many SOEs in the country. Rittenberg believes China will go through a transition from an economy financed by state banks to one financed by capital markets (Rittenberg’s dry humor: “Some communists they turned out to be!”). If so, he suggests, this will be positive news for foreign investors looking at China, and in the financial industry in particular. However, China’s SOEs are likely to put up resistance as they will not want to have to compete with private enterprise for business, and many of China’s senior leaders have stakes in those same SOEs. Rittenberg explained that this is a battle the government has no choice but to win and that Xi’s position and strength – unlike that of Hu Jintao – will prevail.

In discussing the strength of Chinese companies overall, Rittenberg said that most are poorly managed and hampered by a lack of corporate governance within China that inhibits them from properly operating or developing as true multinationals. Chinese companies, he indicated, have been largely incapable of growing into global forces, singling out just one Chinese business – Haier – as China’s sole true MNC.

Rittenberg also voiced caution about long-term structural defects in China’s economic system. The Chinese government, he said, seems to believe that they can grow their economy by increasing purchasing power, whereby modern economics dictates that economies grow by putting in place austerity measures. At some point in the future, he indicated, China will come back down to earth with a large crash. The problem, he explained, is an internal conflict between the desire to maintain social stability and the desire to continue growing the economy.

He then went on to discuss the overall social goals of Chinese society, with the government wanting to “put a chicken in every pot” and develop a “moderately wealthy” society on a national basis by 2020. The CCP will continue to try and narrow the current income gap across China by increasing spending on welfare, education and salary levels. He believes that will also continue to increase the rise of nationalism in China, which itself is a double-edged sword. Projecting nationalism typically begins as a foreign policy, but needs to be reined in when it “gets too noisy.” His opinion is that China has not yet mastered this balancing act and that, as a consequence, serious long-lasting damage is now being inflicted upon the future Chinese economy overall as a result of too much aggression, and especially towards that of its close neighbors. It has bred not a fear of China, but a large degree of distrust towards the country, and of the CCP’s actual regional intentions towards Asia as a whole.

Taking Japan as an example, Rittenberg said that China’s constant conflicts with the Japanese has now resulted in a situation whereby the Japanese will not actually pull out of China, but are now instead actively looking beyond China as a preferred destination for their own FDI. This means that the Japanese priority now is to develop its business interests elsewhere in Asia, with India, Indonesia and Vietnam topping these lists (Authors note: I concur with these views and we already see this happening in India and Vietnam, where Japanese investment has picked up significantly over the past two years). In short, Rittenberg indicated, the Japanese have had enough of China’s continuous bellicosity towards them and this pattern is in danger of being duplicated elsewhere between China and other nations.

In line with this, Rittenberg said that the Chinese are somewhat insecure in their foreign policy, and remain diplomatically awkward. Having overtaken Japan as the world’s second-largest economy, China seems to feel that Japan should treat them with more respect, and the CCP wants to be seen as a “Great Power” – and especially so by the Japanese. He suggested that the Japanese do not need to show any deferment to China and, as a result, China will continue to “stand up” to Japan – demanding subservience in a way. Treating the world’s third-largest economic power, and China’s fifth-largest trading partner in such a manner was “uncivilized” and “needless.”

That being said, Rittenberg also said that he feels Xi will get China out of what he described as “stupid” conflicts. Noting Xi’s recent comments that “no Asian country should upset or provoke instability in the region,” he suggested that this is not purely a reference to North Korea, as Xi will also not want his own words to come back to him over disputes with the Japanese or other Asian countries. It is, he inferred, a toning down of Chinese rhetoric towards the various regional disputes that have seriously affected ties with Japan, Vietnam and the Philippines over the past year. Rittenberg’s expressed opinion is that these regional disputes will now start to calm down. While China will continue to defend its interests, it will deal with regional territorial disputes by “not arriving at any settlements, but continuing to leave room for negotiations.”

Concerning North Korea, he said that while the Chinese may publically object to an American presence so close, and may ask the United States not to provoke the North Koreans, the Chinese government are “furious” with Pyongyang and actually prefer a U.S. military presence nearby, although this will never be mentioned publically. He said that the same goes for American military involvement in Pakistan and Afghanistan, both countries that also have borders with China and impacted upon the stability of Xinjiang. China does not want to get involved in any conflicts on foreign soil other than the small obligations it fulfills with the United Nations, and Rittenberg said he believes China is “happy” the U.S. military is keeping a lid on the situation in Pakistan, Afghanistan and North Korea – mainly because this means China doesn’t have to.

Rittenberg went on to discuss China’s internal social issues, commenting on the many riots, protests and complaints over the past few years, but noted none of these were actually directed at the central government, and were instead largely aimed at corrupt local officials. Such events could be better seen, Rittenberg suggested, as an outlet for such communities to complain to Beijing about their local “bad guys,” and that Beijing does in fact sort the situations out, coming down to local areas and getting such conflicts resolved and punishing the officials responsible. In terms of issues concerning Tibet and Xinjiang, Rittenberg noted that “the suppression of indigenous peoples is not a policy,” as it doesn’t have the support of the local population. In terms of solving the conflicts between Han and other minorities, he said, China doesn’t really have a working policy and hasn’t been able to develop one. He suggested that there would eventually have to be solutions to these issues, but he sees no short or medium-term changes to these conflicts. However, he was more upbeat about religious freedoms, noting that increasing numbers of young Chinese are now being introduced to Buddhism and that China now “probably” has about 100 million Christians, albeit many of them practicing underground. Rittenberg said that the Chinese government is actually noticing that Buddhists and Christians in China (he didn’t refer to any other religions) are well behaved and aiding social stability, and he feels that religious freedoms will continue to develop in the country as a result.

Moving onto Xi’s corruption drive, Rittenberg expressed that this will be largely cosmetic in nature, because the entire system is systematically corrupt, and the only way to change this would be to change the entire political model, and that is not going to happen. There are likely to be purges and decrees, and high profile cases, Rittenberg said, of which Bo Xilai was just an example, but otherwise the system will not change much to combat corruption in China because it is incapable of doing so.

Rittenberg believes that China is now looking to promote its own “China Dream,” just as the United States had its “American Dream,” and this is affecting not just China as a country, but the entire “Chinese Nation,” including the Chinese Diaspora. All are considered politically to be part of the Motherland, regardless of actual nationality. Part of this dream is to double GDP by 2020, and that China is feeding into the “World Dream” as a result, especially in other emerging areas of the world. In terms of democracy, Rittenberg noted that the Chinese have stated that their longer term goals were “to build a harmonious, democratic society” by 2049 – being the 100th anniversary of the founding of the CCP.

In summary, Rittenberg’s opinions are worth listening to as he is, after all, the eldest of all the old China hands (he will be 92 this August), and certainly the most adept at deciphering meaning from statements issued by China’s leaders. It is notable that he views Xi Jinping and the new leadership – trimmed down to seven individuals instead of the previous nine – as having more power than their predecessors. A political consensus has already been reached, he suggests, about the path that China needs to take in its reforms, and Xi will not find his way blocked as Hu and Wen often did. That said, reform will not prove easy as was noted – so many SOEs remain tied to senior Chinese leaders who will resist. Yet Rittenberg feels this will be overcome, however future problems lay in the actual makeup of the entire Chinese belief that growth will come from increasing domestic consumption. That, he feels, flies in the face of already proven economic wisdom and at some point China will have a heavy price to pay.

In short, Rittenberg feels Xi is a man who can deliver. But longer term, and quite possibly within the next decade, serious economic structural weaknesses in the current Chinese economic model will begin to emerge. It seems Rittenbergs’ position on China is that the glass is half full. But only just, and it needs careful handling not to spill part of the surplus.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates. The conference he and Mr. Rittenberg attended was co-sponsored by the U.S. Commercial Service. To download the complimentary 2013 U.S. Commercial Service’s “China Business Handbook” please click here.