A few good posts over on Paul Midler’s The China Game blog over the last couple days. In the first, he reproduces a letter from a reader drawing an important distinction between China’s financial and “real” economies, and how exposed each is to external forces:

One point that I think needs to be borne in mind is the difference between the financial economy and the real economy. In China’s case, the financial economy is not integrated into the global economy (you can’t move large sums in to invest or repatriate or invest-out large sums without bureaucratic approval and good reasons), which is one reason people say Western financial conditions have limited impact on China. This is why many large financial firms are clamoring to get into China, not only because it’s a promising new market but because it represents diversification in the way few overseas markets do these days. As far as the real economy of imports and exports etc. goes, I think there’s little doubt that China is significantly integrated into the global trading system, for good and for ill.

In another post, Midler highlights a welcome introduction to the (English-language) China blogosphere, Pomfret’s China written by John Pomfret of the Washington Post, formerly that paper’s China bureau chief and the author of Chinese Lessons, which is a great read. He’s only starting, and like most blogs that have mentioned T!b3t in the past several weeks, it’s already attracted swarms of comments that are as valuable for their insight into the massive support the crackdown has received in China (and by native Chinese abroad) as they are disposable for the quality of their reasoning.

Finally, there is an interesting post from today on a Chinese drug firm that may have accidentally disqualified the Greek weightlifting team from performing in the Olympics by supplying it with “tainted” health supplements:

A surprise inspection of the Greek team by the World Anti-Doping Agency revealed that 11 of the team’s athletes had unapproved substances in their systems. The Chinese firm has already apologized for providing the bad product, saying: “We send [sic] you L-tyrosine mixed with something else that it [sic] only for research purposes.”

Last week we mentioned a talk in Shanghai by Kerry Brown we attended, and that we had some questions for him. As promised, here are his answers:

Q: You said we write about China in a very ‘ahistorical way’, can you expand on that? Do you mean the popular Western press? And what do you mean by ahistorical?

A: I think that a lot of commentators on China tend to write about the China of the present, that is to say, the last few years, and have little knowledge about how China has got to be where it is today - what happened, for instance 50, or a hundred, years ago, and what sort of path the People’s Republic of China took in order to achieve what it has in 2007. Many write as though China sprung into a new kind of existence in the late 1970s after the death of Mao,and there was a complete chasm between his period, and Deng’s, and afterwards. In fact, many of the reforms China has instigated in the last few years were partially tried out in the early 1960s under Liu Shaoqi and Deng Xiaoping. China’s years of real [enclosure] and state autarky were about 1957 to 1974. What is happening now, I believe, is a natural continuation of what China was trying to do in the 1930s to 1950s. Even a little knowledge of this history can enrich our understanding of what is happening in China now.

Q: You said something to the effect of China’s strategy of welcoming FDI for the aim of technology transfer having largely failed. Can you elaborate on that a bit?

A: I don’t think it has largely failed - but when you look at the simple statistic that of China’s high-tech exports, 88% are made by foreign invested enterprises (FIE) in China, you start to see that there have been real limits on the technology transfer by foreign investments to Chinese companies. They are simply not yet performing on a global scale. ‘Made in China’, as someone commented, means either made in China for the domestic market (that’s what something like 85% for instance of American companies in China do) or made by FIEs to export abroad. Earlier forms of contractual investment at least meant there was some technology transfer. The current system means that a foreign company can set up a factory in China, import partly finished goods, use cheap labor, then re-export, and basically give nothing in terms of know-how and expertise.

Q:In your talk, you touched on what Hu Jintao lies awake at night thinking about - “the great underclass”. Can you explain that some more?

A: There are estimates of 200 million migrant workers - men on building sites, women in factories or in the sex industry. Since the relaxing of the internal passport (hukou; 户口) system, and the laying off from state-owned enterprises (SOEs) of so many workers, this class has burgeoned. There are no real ways of keeping tabs on them. The only time you really get a feel for how vast they are is during Chinese New Year when they tend to go back to their home towns, and the Chinese transport system clogs up. The rest of the time they are invisible. in many ways, their sweat and labor is building the new China - but they are denied access to health care, social welfare. They are the real losers of the reform process.

Q: You also noted that the last peasant uprising ended up putting the CCP in power. But aren’t there significant differences between China’s direction and velocity then and now? The tide is rising now, and generally there is hope in the air, although an underclass no doubt still exists. In the past, there wasn’t much hope on the horizon, and salvation seemed to lie only with radical new ideologies.

A: I don’t agree. In the 1920s and 1930s, certainly in the coastal regions, China undertook an exciting process of internationalization. Shanghai was a far more international city in 1930 than it is in 2007. China’s tragedy was the attack by the Japanese, and, of course, very poor and corrupt governance. Historians in the UK like Rana Mitter argue that, without the terrible misfortune they had, the nationalists might have prevailed. They were starting to implement economic reforms. The double whammy of global war, and then civil war, brought them down - as it would any government.

Q: What’s the nature of the control that the central government exerts over the provinces? You used the word ‘brittle’.

A: One of the features of China’s history has been political centralization running parallel with administrative decentralization. In the 1930s, the country effectively split up into warlord territories. In the Cultural Revolution, there were terrible tensions between provinces. This has reemerged in the delegation of economic policymaking power to provinces in the last two decades, where they are able to offer different incentives and compete against each other for foreign direct investment (FDI). This explains the terrible fragmentation of some of China’s key industries - aviation, and automotive for instance, where they belong more to provinces than the country. They are regional, not national champions. The central government, of course, still controls military and foreign policy, and these, in many ways, are the trump cards, along with emotional appeals to the need for unity. But of course this is constantly under attack. It’s possible, though not very probable, that some of the wealthy coastal provinces will get increasingly impatient with the poorer inland provinces, and start to wonder why they keep on needing to carry them. That’s when problems could really occur.

Q: What are your thoughts about the upcoming Party Congress? Can you give us the lowdown on the contenders for top posts?

A: I think most agree the field is pretty much wide open at the moment. The names that occur most are Shanghai Party Secretary Xi Jinping, though his recent elevation might have taken him out of the running. Jiangsu man Li Yuanchao, and then Liaoning Party Secretary Li Keqiang. He figures in a lot of speculation. But it is, of course, just that - speculation. And being the most favored contender in China has never been a good position to be in. You are too open to attack then.

Q: What do you think about the appointments of non-Party members to key ministerial posts?

A: The two that have happened so far have been fairly low-key positions. To me, even if they are not Party members, they are certainly not going to be opponents of the Party. At best they are neutral going on friendly. The bottom line is that power in China begins and ends with the CPC [Communist Party of China]. This changes nothing of that.

Q: What do you think about SEPA’s (the State Environmental Protection Agency) role now that environment is in the spotlight? Will people like SEPA boss Pan Yue be on the fast track to top posts within the party?

A: SEPA is still just 300 people. And while Pan Yue has profile outside of China, he is not that well-known within it. He is not, as we say in the West, really a “player”. And I’ve heard no one say he is going to be elevated to the Politburo. Yes, the Chinese government do realize the importance of the environment. But there are too many pressures on provincial bosses to allow the rules to be flouted for economic reasons. The central leadership talk well about the environment, and it plays a big role in the current five-year-plan. But as ever, implementation and practical steps are still not enough.

The newly revitalized Shanghai Foreign Correspondents’ Club (facebook link) has been organizing some interesting and useful events lately, thanks to a new board.

It invited Kerry Brown, a scholar (now a fellow at the think tank Chatham House in the UK, though he has even lectured at Inner Mongolia University), former diplomat and now author of a new book on our favorite subject, for a talk at Arch on Changshu Lu. It’s called Struggling Giant: China in the 21st Century, and it’s published by Anthem Press.

The venue was rather cramped, but the talk went well - Brown made a few very good points about China from an outside observer’s point of view. We’ll be running an interview with him soon about his ideas on China. Here are some key points from his Shanghai FCC talk:

-China’s strategy of inviting foreign investment was primarily to facilitate technology and knowledge transfer; this has failed, so FDI is now no longer the yardstick the central government uses for provinces

-Foreigners tend to look at China in an ahistorical way, despite the country’s long history and attendant baggage

-NGOs are increasingly tolerated by the government as a way to help plug holes in a tattered social safety net

-Beijing’s control over the provinces is brittle – it can snap quickly and “the whole thing could fall apart tomorrow,” he said

-There’s no clear candidate for the top job when the Party Congress convenes this autumn, unlike previous leadership transitions

-What keeps Hu Jintao up at night? Not economic stability; not human rights and foreign government criticism. He’s worried about income disparities, including the great underclass of 200 million migrant workers, who are disenfranchised in almost every way. And since there’s no democracy, no one really knows what in the world they are thinking.