Chinese companies worldwide

Philippe Gugler from VoxEU:

"Some of the recent, high profile acquisitions of Chinese companies have become widely known. The acquisitions of IBM’s personal computer business by the Chinese Lenovo or MG Rover by Nanjing Automobile Group Corporation are famous examples. After all, we will soon see the first Chinese car company actually producing vehicles in Europe! Other outward investments of Chinese companies, such as investments in the natural resources industry in Africa, are known to the wider public as a phenomenon, but with few insights into the Chinese companies executing these investments. Finally, who would have guessed that already in 2004 there were 360 Chinese companies invested in the German city Hamburg alone?
Looking at the motivations of Chinese multinational enterprises (MNEs) to go international, most scholars agree that classical motivations play the key role for Chinese companies to invest abroad: Chinese MNEs are to various extents market-seeking, resource-seeking, and strategic asset-seeking. Market-seeking motivations are the logical consequence of China’s export-oriented policy over the last years. Investments abroad mean an avoidance of trade barriers and the facilitation of exports of domestic products. Famous examples for market-seeking investments include home appliance and consumer electronics manufacturers such as Haier, TCL, and Huawei Technologies. China’s tremendous need for natural resources is in sharp contrast to the poor availability of resources in the country. Chinese companies have thus developed great activities in resource-seeking FDI and execute them basically independently from the target country or region. Destinations for Chinese outward FDI in natural resources include African as well as Central Asian countries, along with Australia, Russia and Canada. Due to the strategic importance of the sector, most active Chinese multinational enterprises are state-owned – the top three Chinese outward investors are SINOPEC, CNPC, and CNOOC. Finally, strategic asset-seeking motivations play a key role for Chinese investors abroad. Investments to purchase assets are often aimed at the acquisition of business information and concrete intangible assets such as advanced proprietary technology, as well as immobile strategic assets. The acquisition of foreign technologies and brands is often regarded as a short cut to establishing a company as an internationally known, quality producer with a portfolio of the latest technologies and services and an efficient distribution channel. Industry knowledge reports a large number of famous examples of Chinese strategic asset-seeking FDI, including SAIC, the largest Chinese car producer acquiring the Korean SsangYong, the Holley Group acquiring Philips CDMA chip design departments, and the D’long Group investing in the German Fairchild Dornier.
To this extent, Chinese outward FDI may well be explained with the established theory of multinational enterprises. Do outward FDI activities of Chinese MNEs thus also constitute a classical example of this theory? It does not seem so. The theory, originally developed in a Western context and for Western companies, may not be able to completely explain the phenomenon and reveal all motivations and characteristics of Chinese multinational enterprises. A number of aspects seem to be particularly unique to Chinese companies.

They may be categorised as 1)expertise and technology-based features, 2)access to home country resources, and 3)features of cultural proximity.

1)Chinese firms may have a particular expertise in managing large, complex markets, such as infrastructure projects in telecommunication. Moreover, multinational enterprises with a Western background tend to be experienced in operating in stable markets with transparent regulation and weak government influence. Contrary to that, Chinese firms are likely more capable of dealing with troublesome regulation and navigating around opaque political constraints, given their greater experience with such institutional features. Such experiences may put Chinese firms arguable in a better position than many other non-Chinese firms.

2)Home market characteristics also play a very important role for Chinese companies. In a broader perspective, all extensive government interference with the activities of firms may be seen as an element of home country activities. In China, for example, companies that have been designated as “national champions” will receive the government support necessary to overcome their late-coming disadvantage internationally. This can include financial aid and political interference.

3)Finally, cultural proximity in a wider sense constitutes an explanation for investments in various culturally proximate regions, be it real, physical proximity or perceived proximity due to a similar culture. These factors may take the function of a door opener and catalyser for business development.
The main motivations of Chinese multinational enterprises to invest internationally are thus motives derived from their operation in an international capitalist market economy.

Chinese MNEs have mostly market-seeking, resource-seeking, strategic asset-seeking, and efficiency-seeking motivations. Chinese MNEs are to this extent part of global business undertakings. The traditional theory on multinational enterprises offers valuable tools to analyse their activities.

However, the particular Chinese characteristics in this process are eye-catching and make the emergence of Chinese MNEs a special phenomenon. It is becoming increasingly obvious that the most important differences between Chinese and Western MNEs going international are not found in their motivations but in the special characteristics of their home country in terms of resources and the Chinese institutional and cultural context. In coming years, we will see whether these differences constitute a temporary facet of Chinese firms until they can fully compete internationally or whether the theory of multinational enterprises must adapt to consider these characteristics as ongoing elements of multinational enterprises’ motivations and strategies".

Social engineering

Esther Duflo's on one-child policy, from VoxEU:

China’s one-child policy led to an explosion of the boy-girl ratio in the ‘80s and ‘90s. As this “only child” generation reaches adulthood, problems – including rising crime rates – are starting to appear. China is gradually getting rid of the vestiges of its communist past. But the demographic policy of the 1980s and 1990s planted a time bomb, and its effects are just starting to be felt. Its best-known aspect is the one-child policy, first put in place in 1978 and still in practice, though in a more relaxed form. Today, a couple made up of two only-children are allowed to have two children. In rural regions, a couple whose first child is a girl is normally authorised to have a second. But in the ‘80s and ‘90s, the one-child policy was strictly applied, albeit not uniformly across regions. Parents were penalised for births “outside quota”. They were fined and were financially responsible for the education and health-care of “extra” children. Envisioned by Deng Xiaoping, this aggressive fertility control strategy marked a rupture with the Mao period, which had launched the slogan “more people, more power”. Xiaoping considered fertility control essential to getting a handle on the economy, the foundation of China’s success. The one-child policy was a great success in terms of controlling fertility. But in a country where there was already a strong cultural preference for boys, it resulted in a serious imbalance between the number of girls and boys; the widespread use of techniques for determining a foetus’s sex opened the door to sex-selective abortion. The preference for boys, sex-selective abortion, and excessive mortality of young girls isn’t an exclusively Chinese phenomenon and isn’t therefore entirely due to the one-child policy. This phenomenon is seen in India, Taiwan, Pakistan, and even in the United States in communities made up of immigrants from these countries. But the one-child policy accentuated this imbalance, by “forcing” parents who wanted at least one boy to eliminate girls from the first children born to them. For example, in Taiwan, where fertility wasn’t controlled, the liberalisation of abortion in 1986 led to significant sex-selection of children, but only starting with a couple’s third child. In the People's Republic, governors in each province had some latitude in implementing the policy, and in certain regions, since the ‘80s, parents have been allowed to have a second child if their first-born was a girl. In these areas, the boy-girl ratio is more or less normal for first-births and catastrophic for second births. All of these factors combined, including the one-child policy, led to an explosion of the boy-girl ratio in the ‘80s and ‘90s: there were about 102 boys for 100 girls among children born in 1978, and more than 112 boys for 100 girls among those born in 1998. Today, there are 37 million more men then women, and there are as much as 120 boys born for 100 girls. This “only child” generation is now reaching adulthood. A child born in 1980 is now 28 years old, and China is beginning to realise the consequences of this demographic imbalance. Among 16-25 year olds today, there are nearly 110 boys for every 100 girls. Boys are having trouble getting married. And young men, particularly single ones, have more behavioural problems and commit more crimes than young women. It has been argued that the “frontier town” mentality of the United States is responsible for its high propensity to violence. Since 1998, the number of crimes has risen 13% per year on average. Seventy percent of criminals arrested are between 16 and 25 years old, and 90% are male. To what extent is the rise in the number of young men responsible for the increase in crime? A recent study by Chinese and American researchers: “Sex ratio and crime: Evidence from China’s one-Child Policy” (by Edlund, Li, Yi, and Zhang) answers this question by comparing the increase in the number of crimes between 1998 and 2004 in regions where the one-child policy was strictly enforced with the same increase in regions where parents were allowed a second child if the first were a girl (where the boy-girl ratio is much closer to normal). They conclude that the one-child policy explains one-seventh of the increase in crime. Besides the mechanical effect of the increase in the proportion of boys (and therefore potential criminals) in the population, the difficulty that young men have getting married is probably one source of this phenomenon. A long-term study of Vietnam veterans in 1998, cited in a recent New Republic article, provides some clue as to why. The subjects' testosterone levels, which are linked to aggression and violence, dropped when they married and increased when they divorced. Men who remain single maintain high levels of testosterone, which may make them particularly aggressive. Another factor is that of being raised as an only child. One study shows that girls born in regions where a second child was permitted have stayed in school longer than those in regions where they were the only child. It seems that far from creating competition, siblings benefit each other. The only-child generation is perhaps a generation of lonely children. Whatever the case may be, and even though the one-child policy is on the decline, it will continue to haunt China for decades to come.

Here IbnBattuta: what I would really like to check is the boy-girl ratio among college degree educated.

Shared Capitalism

Alex Bryson and Richard B. Freeman from VoxEU:

Shared capitalism schemes, in which workers are given larger financial stakes in their employers, are growing in popularity. This column summarises recent evidence that may explain the growth – shared capitalism seems to boost productivity.

Shared capitalism, by which we mean firms that pay all or almost all employees in part on the basis of performance of their enterprise or workplace, has traditionally been viewed as a niche part of an economy; John Lewis in the United Kingdom, Mondragon in Spain, and at one point United Airlines in the United States. In its 1991 PEPPER (Promotion of Employee Participation in Profits and Enterprise Results) Report and in ensuing reports, the European Union endorsed ownership and profit sharing.

Our analysis shows that in the United Kingdom and United States, and to a growing extent in other advanced countries, shared capitalist modes of pay and work arrangements have increased way beyond niche economic status.
Today, more employees have a bigger financial stake in their firms than ever before. Forty-four percent of US workers have part of their pay linked to company performance, either through ownership, stock options, profit sharing, or gain sharing. In Britain, one-fifth of private sector workplaces have share ownership schemes covering one-third of employees (Bryson and Freeman, 2008).

Some of the growth in share ownership in Britain over the last quarter century (and in Employee Stock Ownership Plans in the United States) is attributable to government tax privileges given to firms that pay workers with ownership stakes. But some of the growth is also part of a movement towards incentivising workers through collective forms of pay (Bryson, Pendleton and Whitfield, 2008). Despite the United Airlines bankruptcy, overall employee ownership in the US has not fallen. In the United Kingdom, an increasing number of firms, some with very different ownership models, have joined the Employee Ownership Association, which represents the growing co-owned sector.

Is this any good for the economy?
The narrowest theory of worker behaviour says it can’t be any good. Workers will free ride on the back of others instead of trying harder because of the financial incentive. Under UK tax law, employees have to hold onto shares for three years before they benefit from the tax breaks. Shares can go down as well as up. And worker effort and activity is only one factor influencing the company’s performance. Aside from CEO and top executives, few employees have sizeable holdings that give them both a large financial stake and influence on decisions.

But share ownership and other forms of shared capitalism are large and growing. Shared capitalist enterprises are meeting the market test. So do they really lead to better performance?

Isolating the effects of share ownership on performance through econometrics is tricky. Estimating production functions or profit functions from administrative or survey data is subject to all sorts of problems. Firms do not choose the schemes randomly. Nor do they choose other inputs randomly. Share capitalist companies may be those that have identified benefits in sharing the rewards of company performance with their employees, but other firms have chosen to be “lean and mean” because that pays off for them. Many believe that the firms adopting share schemes have more sophisticated managements than firms that do not, and that it is that management leadership that really matters, not the scheme.

Evidence from the United Kingdom
Two new studies for Britain find, as best as one can with this type of data, that yes, indeed, shared capitalism works for UK firms beyond the fabled John Lewis. They also find substantial differences in the effectiveness of various schemes and that effectiveness differs in combination with other practices.

The first study, commissioned by HM Treasury, is the largest study of share ownership ever to have been undertaken in Britain. Linking administrative data taken from HM Revenue and Customs records to company performance data, the authors find “on average, across the whole sample, the effect of tax-advantaged share schemes is significant and increases productivity by 2.5% in the long run”. They also find that “there are further benefits to be gained from operating several types of schemes” (Oxera, 2007a, 2007b). And they found that schemes chosen by firms without tax advantages tended to pay off more than those with tax breaks.

Our work based on nationally representative workplace data from the 2004 Workplace Employment Relations Survey, finds positive effects of share ownership on workplace productivity variously defined, with the effects being much more pronounced when shared capitalism schemes are deployed in combination. Among the single schemes, share ownership has the clearest positive association with productivity, but its impact is largest when firms combine it with other forms of shared capitalist pay. This may explain why British firms are increasingly choosing multiple collective pay systems (Bryson, Pendleton and Whitfield, 2008).

The findings on shared capitalism in the United Kingdom mirror , to a considerable extent, results from the United States in the 2000s. Researchers at NBER went beyond the production function methodology to survey tens of thousands of workers in firms concerned about what makes shared capitalism work more or less effectively under a research project on ”Shared Capitalism” (Blasi, Freeman, Kruse, 2008). The research, to be published as an NBER volume in 2009, shows that shared capitalism improves outcomes for companies and their workers. For example, owning company stock strongly predicts both an innovation culture and willingness to engage in innovative activity. They also find that shared capitalism and high performance work policies have stronger effects in predicting an innovation culture when they are combined in a setting that encourages worker co-monitoring.

We have learned a lot about shared capitalism schemes as a result of this recent research but much still remains to be understood.
Firms often change the specific schemes they use. The schemes appear to have larger positive effects in some sectors and firms than in others (with almost no evidence of any negative effects). Absent experimental data, it is possible that the analyses have not identified true causal effects on performance. Neither the Treasury-sponsored study nor ours felt sufficiently confident in the magnitudes of the estimated effects to assess whether the tax privileges given shared capitalist arrangements are socially optimal. And neither we nor the NBER researchers feel sufficiently confident that we have identified the right mix of schemes and other policies that guarantees success with shared capitalism. But taken together, the growth of shared capitalist forms of pay and the econometric evidence that it pays off for firms and workers gives a picture that diverges greatly from the old view that this is just a small niche part of capitalism.

In UK OEA members include the John Lewis Partnership, Arup, Unipart, Mott MacDonald, Blackwell, Martin Currie, eaga and Baxi Partnership; long established co-owned companies like Scott Bader and Tullis Russell; and a diverse range of other successful enterprises.
The Employee Ownership Association represents a thriving sector worth around £25 billion annually and growing.
To have a proportion, in 2007 25 billion pound represented a 2.25% of total GDP!!

A fast deflating bond bubble?

From FT.com Alphaville:

Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction failed in a warning for governments seeking to raise record amounts of debt to stimulate their slowing economies. It is the first eurozone bond auction of the year and an ominous sign of potential trouble ahead for governments around the world, with an estimated $3,000bn expected to be issued in sovereign debt this year — three times more than in 2008.

The auction of 10-year bonds failed to attract enough bids to reach the €6bn the government wanted to raise. Although a number of German bond auctions failed last year, it was almost unheard of before the credit crisis.

Meyrick Chapman, a fixed-income strategist at UBS, said: “When a German bond auction fails, then that does suggest there is trouble ahead for governments wanting to raise money in the debt markets.
“There was certainly a supply/demand imbalance because of the large amount of issuance in the last quarter of 2008 and the large amount due in the coming months. Before the financial crisis, German bond auctions just did not fail.”

In fact, the timing of this failed bond auction is far from ideal. US Treasuries have been in under pressure in recent days partly because a glut of new issuance is about to hit the market. A total of $166bn in fact, this week.

Perhaps the bond bubble is starting to deflate.

Is Financial History Bunk?

From PaulKedrosky:

I ask myself that question a lot lately, almost every time I read something where the analysis compares the current “recession” to the average of something in a prior recessionary period.

For starters, there are precious few prior periods, with less than a dozen downturns worth the name in the last century. So we’re already working from a tiny sample size.

Second, there are oodles of reasons to expect that such situations are closer to unique than analogous. Is the previous example a recession? A depression? Was it in the U.S.? Where were rates going into it? Was it consumer led? What was inflation at the outset? Where was unemployment? What triggered the downturn? What was consumer debt load? I could go on and on, but you get the point I’m sure: History is awfully flawed as a guide for what is going to happen next when you’re dealing with small sample sizes and when inter-period situational variance is so high.

So, why do it? Why talk about which sectors lead in/out? Why mention that this is the best two-day week in modern market history? Why talk about the length of typical recession since WWII? Why go to any of those lengths? In part because it makes people feel better, which is nice; in part because it gives market analysis the patina of a science, which is wrong but also nice. And, yes, there is also that sometimes there is even some validity to it -- that, all else being equal (which it rarely is), we might things to unspool in a similar way this time as they did the last time something like this happened.

The risks of financial history are higher than ever though. We have more data, better analytical tools, and more people crunching the data, so we can expect to see data on pretty much anything we want to see. There will always be someone tearing apart something to find something interesting, so something interesting will be found. My friend James Altucher has always been great on this subject, ripping holes in pretty much every data-driven rule of thumb by which people claim to trade and/or find market tops and bottoms. They mostly don’t work.

Anyway, I’m torn on the subject, but I’m also increasing skeptical of any and all comparisons to prior historical periods. I don’t buy trough P/E, or recession length, or relative valuation, or interest rate, or sectoral rotation arguments, or… you get the picture. I love data, but I’m increasingly close to being an outright nihilist when it comes to over-reliance on historical financial data without any truly coherent supporting rationale. We are in a grand experiment with no real history to draw on, and anyone who pretends otherwise is deluded or selling something, or both.

Robot density map

From ForeignPolicy's Blog:
Anyone know how to say "Resistance is futile. You will be assimilated," in Japanese? Not suprisingly, the land of the rising sun blows away the competition on IEEE Spectrum's robot density map.

Some basic pattern in Chinese history

Francesco Scisci from AsianTimes:

In the past 150 years, China's complex cultural values have been under constant attack, forcing revision. That is, not only did China have to undergo the same structural changes as the West in a shorter period, at the same time it also underwent dramatic cultural changes.

(...)China arrived to the fast phase of modernization pretty late, with a larger gap to fill in less time. China also didn't have much confidence, as it had been defeated by foreign powers, invaded and almost totally conquered by Japan, and had won only a small war against India. It managed to gain an almost honorable draw with America in Korea in the 1950s (with Russian support) and with Vietnam in 1979 (with some American assistance).

Furthermore, China had no affirmed tradition of digesting foreign culture into its own mold and changing itself in the process. It had the opposite tradition, of making anything foreign "Chinese", which occurred several times in Chinese history. The last time was with the minority Manchu invaders, who eventually were completely Sinified (or Hanized). One could argue that Buddhism vastly changed China, but the current perception is that, in fact, China changed Buddhism even more. Now, the situation is completely different, and there is no doubt that China is changing to adapt to a Western values-dominated world, rather than the contrary.

The country that faced the "foreign devils from the ocean", yang guizi, during the Opium Wars in the mid 19th century dramatically changed in the following century and a half - to the point that contemporary China can be regarded as only superficially similar to the country it was during the Opium Wars. In fact, the whole social and personal context, which defines and influences ideas, ambitions and world-views, has been totally transformed in these 150 years.

The change started with the family, the cell and basis for society and the state. The ideal family in the 19th century was unchanged from the times of Confucius, some 2,000 years before: three generations under one roof. The older man had many wives and even more children. Each male heir also had many wives and children, all living together in a large courtyard, resembling a small village of dozens of people.

In the courtyard, there were also many servants. The females of the clan were betrothed to neighbors, who then gained a closer relationship with the family. In this way, whole villages or even towns were under the control of one family. Each relative had a name indicating his precise relationship to the speaker. There were no vague appellations like "aunt", "uncle" or "cousin". There were terms such as "uncle, first younger brother of my father" (da shufu) or "uncle, second brother of my mother" (er jiufu), and so on. Cousins also bore different names, accordingly.

It was an intricate cobweb of relations in which each individual had his or her precise place. A male child grew up thinking that if he studied hard and if he were virtuous and filial, he would pass official exams, become a successful mandarin, inherit the family fortune and establish his own large family home. Then, he would pick the brightest of his heirs and support that child through his studies, continuing the glorious family tradition.

That was an ideal. Most men had only one wife, as they could not afford more. Some men, poor, had no wives; and some, just a little less poor, had to share a wife with their brothers. Yet, the ideal family was one man, many wives and many, many children.

For the emperor, this was an issue of state security. The emperor had many wives to make sure he had many children and could choose the fittest from them to succeed him. The successor had to be male, but not necessarily the first born from the first wife, as was the situation in Europe. The Chinese system tried to make sure the emperor was not incompetent, which could be the case with the European system where God chose the successor - namely, the first-born.

The issue of family and keeping only one wife was the stumbling block in the conversion of a Qing emperor to Catholicism. The Wanli emperor might have entertained the idea of converting to Catholicism, as many of his closest advisors were Jesuits, but he could not accept the idea of having one wife, as this would alter the rules for succession in China. However, the Jesuits in the 17th century knew that they could not compromise on the rule of succession: the king's many wives and their children had been the very issue that had caused a split between England and Rome the century before with Henry VIII and Elizabeth. Elizabeth died in 1603, seven years before Italian Jesuit priest Matteo Ricci's demise in Beijing in 1610.

This ideal of the family persisted until the communists took over in 1949. After the May Fourth movement in 1919, the idea of one wife was introduced as progressive and modern. However, Kuomintang (KMT) leader Chiang Kai-shek had more than one wife, as did many senior KMT officials.

Conversely, the Communist Party broke the old mold and introduced puritanical rules imposing just one wife. This was already a major break with tradition, but an even greater break came in the 1980s with the one-child rule. This completely reversed the old pyramid of relations. A hundred years before, a grandfather could be served by scores of grandchildren all vying for his favor.

In 1980s, one couple, some of them being two single children of single-wife marriages, could have as many as four grandparents all hovering around their single child. Then, there would be six adults spoiling one child. This is the phenomenon of the "little emperors". The children were spoiled, but also under enormous pressure. They had the responsibility to succeed for their family's glory.

In larger families, this responsibility was spread among scores of siblings who first had to learn to live with each other. The one child born after 1980 had to be number one in his class to be sure to get into a good high school, which, in turn, guarantees a place at a good university in the extremely selective Chinese education system.

But this, of course, is impossible. What happens, then, in most families, if the one child fails to get into a good university and has no hope for a good job? How do the children reconcile themselves with their lot? Will they be frustrated and angry? They are no small number - millions of children fall into this generation. How will these people impact society, the state, the world and culture in the next 20 years?

One thing is sure, China has never experienced a generation like this, and neither has any society in the world, so it is difficult to forecast trends. Because the situation is so widespread, the Chinese government has realized the problem and is trying to address it. But before turning our attention to the answer, first we have to look at how the Chinese government itself has dramatically changed.

Since unification in the late 3rd century BC, China was ruled by an emperor, a supreme head of state, ultimate source of power and decision-maker. Possibly, there were "emperors" even before then, such as the son of heaven (tianzi) of Zhou times, but he was likely more of a religious and ceremonial figure than a real political monarch.

The imperial system really started with the first emperor of the Qin Dynasty (221 BC-207 BC) - Qinshi Huangdi. The system underwent many changes, but there was always one constant: the emperor did not run the administration of the country. That duty was largely entrusted to a body of ministers and officials who were selected on the basis of merit. The emperor embodied the interests of the state, as the state was his. It was a mechanism similar to that of modern companies differentiating property and management. The owner, or major stock-holder, sets the goals and decides the broad direction and the interests of the company, such as its stability and welfare. The emperor's interests coincide with the interests of the population, or in our comparison, the employees in a company. The citizens want to lead comfortable safe lives, and creating this environment ensures a stable hold on power for the emperor.

In the middle, between the emperor and the people, there were officials who had the job of running the country and maintaining stability. It is easy to see how people recognized their interests as coinciding with those of the emperor, and as a result both the emperor and the people blamed officials if something minor went wrong. If something major was wrong, it meant the emperor had lost his marbles, he did not understand his and his people's interests, or heaven did not want him to rule - and that was the end for him and the dynasty. They would be replaced by a new emperor and dynasty, setting new standards for the old stability game.

In the 20th century, Chiang Kai-shek and communist leader Mao Zedong also followed this pattern. Although they did not call themselves "emperors", they were the ultimate embodiment of the interests of the state and the ones who set the grand directions. Deng Xiaoping's rule (1978 to the early 1990s) was softer, but he still commanded great respect. Jiang Zemin (president from 1993 to 2003), was something in between.

However, the real radical change occurred at the beginning of this century, with the smooth transition of power from Jiang to Hu Jintao, the current president. That transition confirmed that both men were not emperors. They are Communist Party officials promoted because of merit to become head of state, but they do not embody the ultimate interests of the state. They cannot make the ultimate decisions alone - they have to reach a consensus among top leaders.

And they cannot even choose their own successors: Hu's post was decided by Deng (Jiang might have preferred Zeng Qinghong), and Hu's successor Xi Jinping was not decided by Hu alone (who might have preferred Li Keqiang). Both Jiang and Hu are top managers, but this raises a new question: who embodies the interests of the state and of the people?

In democracies, those interests are represented by the electoral body, which votes for the head of state and other representatives. In modern China, there are no elections and the "legitimization" offered by the leaders is simple: we are in power because we are in power. If nobody topples us, then we are legitimized to stay. We can stay in power by granting economic growth and development that spreads welfare to the whole population, although unequally.

However, legitimization is only part of the issue. The larger issue is: who decides the broad direction for the country to take? What are the criteria and standards to judge the performance of officials and top managing-rulers? Here, there are two arenas that have a greater and lesser voice in deciding on performance and setting goals.

The less powerful arena (whose voice is growing) is public opinion, which is conveyed by a number of channels, such as local media, blogs on the web, social surveys and local elections. This does not form a black and white picture, but reveals in which direction general interests are moving, or not moving. For instance, on the issue of environmental protection, 10 years ago people were less responsive to it, now they are more receptive.

A more powerful arena influencing China's leaders is a pool of experts, old party cadres called on to discuss different policies. The opinion of experts is solicited when considering any given policy, and the opinion of retired cadres, who now have no vested interests, is also tapped to consider the promotion of party officials. Tens of thousands were consulted to set the program for the Communist Party Congress in 2007, and 5,000 helped write the draft.

Even after retirement, officials have access to some levels of internal news bulletins and maintain privileged channels of communication with the top leadership. Therefore, they influence the broad decision-making process.

But the system is not transparent, opening many avenues for corruption. For example, middle- and low-level party officials who are backed by companies can try to climb up the official ladder by distributing presents and favors to higher-ranking officials. Companies, especially if they are state ones, can try to move policies by offering gifts and favors to officials.

It was to counter this that the party moved toward appealing to academic experts, with no personal interest in the issues involved, and retired cadres, also without personal interests.

The whole process is secretive and thus not open to wide interference. But even this is not watertight, and the leaders know it. For this reason, they are now pushing for some form of democratization, although they are concerned about the shortcomings of that system as well.

The party faces a major dilemma over how to move forward, especially as, for many people, the ultimate goal is to be "emperor".

At the southern end of Tiananmen Square in the capital Beijing, next to Zhengyang Men ("The Midday Gate") and about 200 meters from Mao's mausoleum, there is a spot where people take pictures of their children dressed as little Manchu emperors, sitting on a throne.

The place is symbolic: the ancient gate once opened on the nei cheng (inner city) and the buildings of the imperial government. Every day, there is a line of parents, mostly from the countryside, holding their children by the hand and waiting to take pictures as a sign of good luck. Each parent wants his or her only child to be successful - to become an emperor.

For centuries in ancient times there were only two ways to be successful. The first was to lead a rebellion or follow one - to topple a dynasty and become the emperor, or part of his circle. This was the method of Liu Bang (the founder of the Han Dynasty, 206 BC-220 AD), Zhu Yuanzhang (founder of the Ming Dynasty, 1368-1644 AD), and Mao Zedong ( founder of the "communist dynasty"). The path is extremely dangerous - one could easily lose his head - and the possibilities of success are very slim.

Second, an ambitious young man could pursue a career as an imperial official. He could take the challenging exams, and if he passed become even the top official of the empire. This path had no risk - nobody would kill the youth who did not pass his exam. And it was relatively easier. Although the official bureaucracy was tiny compared to the population, hundreds of officials were promoted every year, giving the average person a much better chance to succeed this way than by rebelling against the system. For this reason, most people first tried to become an official.

However, the exam system was not perfect, and many rebel leaders began as students who had failed the imperial examinations, like the famous Hong Xiuquan, who started the Taiping rebellion that in the middle of the 19th century almost toppled the Qing Dynasty (1644-1911 AD). If these brilliant people had earned a post, perhaps there would have been no rebellion, or a much more modest one.

There is a less common path to try to make a fortune for oneself - clever people could go into business. This path, however, was not as glorious as the choice of being an official, the top of the social hierarchy. And although not as risky as being a rebel, it was far from secure. Officials could easily concoct all kinds of excuses to seize the property of rich merchants. Business, concentrated in cities, was tolerated but not exalted, and businessmen had to be careful not to eclipse the wealth of local officials, who had to remain officially the richest in the area.

Businessmen could protect their assets in two ways: befriending officials or having their son pass state examinations and become an official. The second choice was safer and considered more socially respectable than the first. The remainder of the people, the vast majority of the population, were peasants who were bound to the land and had all types of constraints to leaving their place and moving on.

Furthermore, officials and peasants were the stronghold of stable power, the guarantors that nothing would change and the imperial power would be unchallenged. Business, with its drive to accumulate wealth and invest in new ventures, was a force for instability and change. This had to be tolerated for several reasons, but the imperial power could not allow business and enterprise to grow to threaten the emperor's stability.

This situation has changed in the past 30 years. Officials are still selected through a complex party system, with courses and exams, but now business is exalted for the first time in Chinese history. Business is central to the drive for fast development, which is the paramount task for the nation to recover its former might and glory. This has many consequences.

On a personal level, being a businessman is now as glorious as - or perhaps even more than - being an official. When the best kids at university are chosen to join the party and have an official career, they feel it is an honor that they must accept. But this career is long, very difficult, full of traps and rewarding only at the end - if, at about age 50, one has managed to survive the political selection and become a senior official.

Most young people prefer to try to become businessmen. They can be successful early in their lives, they are freer since they are not subject to strict party discipline, and they can enjoy themselves with the money they make. A businessman can have his own enterprise and decide what to do with minimal official interference. In other words, each young person can become the little emperor of a small empire, a possibility that did not exist in the imperial past.

Besides, trying one's hand in business is easier and far less risky than trying to start a revolution to become emperor.

On a social level, the changes brought by business and enterprises must be "digested" at every level by the system. Formerly, the imperial system could stop businesses from threatening the status quo. Now the nation wants to improve the status quo, and therefore it has to push for new businesses and then factor in the constant changes to the social and political fabric of the nation. Moreover, business-driven growth means urbanization, depopulation of the countryside, decimation of the peasant class, the end of ancient rural China and the birth of a new, urbanized China. This course will follow the only existing pattern for urbanization - the Western one.

Most importantly, the overall system has discarded the ancient notion of stability and embraced the notions of change and development. This is a deep cultural change, confirmed by the official Chinese rhetoric about stability. When the leaders stress the need for stability, they are looking for some balance in a situation that has inherently rejected it. And if everything fails, the government thinks, there must be something to appease the public. In the West, those appeasements were traditionally sports and religion.

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The Mozi (Mocius), by the philosopher Mozi (470 BCE ca - 391 BCE), possibly the earliest text of systematic philosophy in China, begins its earliest part (4th century BC) by discussing the importance of promoting capable people as high officials (Shangxian pian, or to venerate the wise). It is claimed this is an ancient tradition from the Shang Dynasty (2nd millennium BC), which in turn was taken from the most legendary ancient Chinese emperors - Yao, Shun, Yu and Tang - who selected their successors on the basis of merit, regardless of origin. Shun and Yu had very humble origins.

Confucius, about a generation older than Mozi but referring to the earlier cultural tradition of Zhou (starting around 1,000 BC), also stressed the paramount importance of education and upbringing over birthright in the promotion of officials.

The original and enduring Chinese cultural belief is of a self-made man - the senior official born out of a peasant family or the top general starting off as a foot soldier. In this sense, social mobility was encouraged, and this may have created a strong bond in society.

In fact, as we have seen, there were two channels for upward mobility: the selection of officials, which was open to all, and the revolution (geming). The second is particularly important in comparison to Western tradition. Since the early first millennium BC, there has been a tradition of change (ge) of the Mandate of Heaven (ming).

Essentially, the idea was that the dynasty would rule until it was overthrown. The toppling was seen as legitimate when it was successful, evidence that heaven had withdrawn its graces from one emperor and granted them to another. The emperor, Son of Heaven, had to hold onto its power. His success in so doing proved his ritual and religious legitimacy. Large natural disasters and social uprisings confirmed the waning of heaven's favors.

Besides selected officials, each dynasty had its court of aristocrats - relatives of the emperor or descendents of the closest comrades of the founder of the dynasty. They, and the relatives of the senior officials, had varying influence. But this influence faded with the decades, as the generations grew away from the original connection. Furthermore, each change of dynasty completely wiped out the former aristocracy and established a new one. The Mongols eliminated the Song aristocrats, so did the Ming with Mongols, the Manchu with the Ming, and the communists with the Manchu.

This created a situation in which there is no aristocratic continuity stretching back hundreds of years, as there is in Europe. At most, Chinese aristocrats can claim a lineage of 300 years. Presently, there is no official aristocracy, but the siblings of senior leaders are called taizi dang (princelings). However, even they can claim an aristocracy that is less than 100 years old. This means that social mobility is strong, and aristocracy has not played as conspicuous and continuous a role as it has in Europe.