“Old China” Vs. “New China” – The Importance of Understanding Change in the Middle Kingdom

January 8, 2016 Posted by China Briefing Reading Time: 5 minutes

Op/ed by Daniel R. Joseph

More than 400 million Chinese people moved from farms to the cities in the three decades ending in 2010. By 2010, roughly 400 million Chinese had also connected to the Internet. Among developed countries, those two major societal developments—urbanization and digitalization—were separated by at least 100 years. In China, they are happening almost simultaneously.

China is changing. Not as quickly as some people think, but more quickly than most could have imagined. The example above is one of my favorites because it is so dramatic. But there are no shortages of other examples—like the skylines of most major cities. Or the way in which cars now seem to outnumber bikes. Or how China was a completely closed society 35 years ago and now, every year, more than 100 million Chinese travel abroad and more than 100 million foreigners visit China.

Of course, all of this change is primarily a result of China’s 30+ years of exceptional economic growth. You certainly don’t need me to tell you that China is growing. The point I’m trying to make is a bit more subtle and often overlooked. The change that we see on the surface, the change that is related to an increase in material prosperity, is a result of changes that are occurring below the surface in China.

There are differences in China’s “local conditions”, primarily its economic structure, business environment, and culture, that make China challenging to foreign companies. It is changes in these same variables that are driving the change in material prosperity in China. These variables are changing because of China’s transition from communism to capitalism which, in the end, will fundamentally transform the lives of the Chinese people and the entire fabric of Chinese society.

Change has created prosperity for China and opportunity for business. But change also creates confusion. More specifically, change makes China harder to understand because change makes China a moving target. You have to make sure you understand China as it is now, not as it was, and your understanding of China should probably anticipate how it will be in the not-too-distant future.

Adding to the confusion is the fact China is changing unevenly across sectors, regions, and many other aspects of the economy and society. In other words, some aspects of China are changing faster than others which means if you’re in one sector/region of China (for example, energy or Western China) it will have a very different feel than another sector/region (business services or Eastern China). The example below helps illustrate why this is important.

I was talking to the CFO of a middle market American company, along with one of their key employees from China. They were having problems with their Chinese partner in a joint venture they had formed a few years earlier. The JV was not performing well. They had cycled through multiple general managers and were now having trouble agreeing on a new one. The Chinese side seemed to have very different criterion for what a good GM would do. Our discussion eventually got to the point where the Chinese staffer made the comment that the partners were “old-style” Chinese. I thought I knew what she meant, but I asked her to elaborate nonetheless. “Everything for them is guanxi (personal relationships) and low cost. That’s how they do business. That’s all that is important to them. They aren’t interested in technology or anything like that.”

I love this story because it illustrates the concept of “Old China” vs. “New China.” Parts of China are very “Old China,” parts are very “New China,” and most everything is somewhere in-between. Whether you are formulating a strategy for China, selecting a partner, managing staff, or doing almost anything else a business does, it is important that you understand exactly where along the “Old China – New China” spectrum you are operating. This applies to economic sectors, markets, suppliers, customers, agents, managers, staffers, and just about everything else that relates to business. The company in my example didn’t realize it was partnering with “Old China.” It’s a shame they didn’t hire that Chinese woman before they formed the joint venture.

Understanding “Old China vs. New China” is critical to managing well in China. In closing, it is also worth noting that change also plays a huge role in the controversies and debates that are constantly swirling around China. Relative to so many issues, whether a person has a favorable or unfavorable view of China often comes down to how much emphasis they place on how China is changing. The China haters or doubters tend to focus almost exclusively on Old China while the other side will focus on New China, or at least how China is progressing towards New China. As long as China keeps changing, which will only happen if that transition from communism to capitalism continues, then the China optimists will be right. If not, the doubters will win the day.

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Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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