Volume 1, Number 9
7 May 2001

Can We Understand Asian Values?

Dear Friends,

I was once told that I could not understand Asian values because I am a Westerner. Believing that I can understand anything I want to, if the time is long enough (say, ten thousand years), I took up the challenge. Start with economic values.

Consider the Overseas Chinese, found in Malaysia, Singapore, and other Southeast Asian countries. Why do they dominate the economies wherever they are, and why have they been so successful? A popular answer is loyalty in the Confucian tradition. They have a network of relatives, friends, and acquaintances who trust each other completely, do not betray each other, and do not compete with each other. It is also suggested that Chinese who go abroad are the more entrepreneurial type. All this may be true. But a different story comes out of research by two professors of the Chinese University of Hong Kong and an economist from the World Bank.

"For many huaqiao [Overseas Chinese], they found, the answer lay in 'pyramids,' ... layers upon layers of subsidiaries, as well as cross-holdings and informal links with yet more companies. Almost always, the pyramids included at least one bank with a licence to take deposits, and several publicly listed subsidiaries that could issue shares in the open market. The purpose of these pyramids was to draw outside capital into the family group while retaining control over the use of this capital within the family..."

"To see how this works, picture a pyramid at the top of which sits a private holding company owned by the patriarch and his family. [This holding company] owns 51% of subsidiary A, which owns 51% of subsidiary B, which owns 51% of subsidiary C, which owns 30% of company D. Separately, the family also has another (wholly-owned) vehicle, F, which owns 21% of D. In terms of voting rights, the patriarch and his family therefore control 51% of company D. At the same time, the family can claim only 25% of company D's profits (51% times 51% times 51% times 30%, plus 21% through company F) (The Economist, 4/14/01).

Through this arrangement, the family has greater control over the operations of the pyramid than it has investment in them. It arranges to transfer assets from (say) Company D to Company A at a price lower than market, or from any company to any other at values higher than market. Through these sales, the profits (in the form of assets valued at more than market) become moved up the chain to the patriarch and his family, while the subsidiary companies are squeezed. So their dividends are flimsy. Both the patriarch and minority stockholders lose through the scanty dividends, but the patriarch alone gains more than he loses in dividends, because the profits have really been passed upward to him through the trumped-up sales. The minority holders are unfairly squeezed.

Because the pyramids are so complex, it may take years (or decades) for the minority holders to discover what has happened to them. Meanwhile, the patriarch may have liquidated some companies and started new ones, whose reputation will not be sullied for years to come. Asian values? Judge for yourself.

Let us turn to the Mainland Chinese. Once the People's Republic had won the revolution in 1949, they declared all previous laws of China null. They would start over again. As a result, they had no legal concept of "companies" nor of "property." Ideas of "assets" and "liabilities" and "equity" had no legal standing. Bankruptcy, contract, law, fiduciary, conflict of interest, and principal and agent were not part of the vocabulary. Instead, small businesses were declared to be national property (usually under the same management, now reporting to the government), and industry was run primarily in state-owned enterprises (SOEs). Farms were collectivized into communes.

In the Great Leap Forward of 1960, Mao ordered farm families to eat in common dining halls, and women and children to plant and harvest crops. He also ordered small steel mills to be built on the communes throughout the country, and men to work them. As a result, crops died on the vine, coal and iron were hauled uneconomically across the country (steel would have been more efficiently produced in Manchuria), and hundreds of thousands of Chinese died of starvation, partly because of a drought, but more importantly because of gross bureaucratic inefficiencies.

Outrage throughout China was so great that Mao's position was threatened. To preserve it, he organized the Great Cultural Revolution (1966), in which students and other young admirers were organized into the Red Guards. The Red Guards trashed universities, burned libraries, and forced intellectuals into the country to learn the true meaning of Chinese communism on the farms. Thus Mao re-established power until his death in 1976. Those students are now known in China as "the lost generation."

Since Mao's death the Chinese economy has grown enormously, mostly through the introduction of private enterprise, but also because the communes have been dismantled and private farmers now grow most of the crops. (But they have their problems too; see TQE #1). Most of this growth results from starting at a low base, but much of it represents inflated statistics. Each producer (farm and industry) reports what it thinks Beijing wants to hear, and the totals become "prodigious economic growth."

The present government has laid off workers of inefficient SOEs massively, but the growing private sector cannot absorb them all. Again a quote from The Economist (5 April 2001):

"But if China is aiming for well-governed companies bought and sold on well-governed bourses, the odds appear stacked against it. For example, there is a growing suspicion that the domestic stockmarkets' stellar performance reflects nothing more than market manipulation by a few dominant brokers (colluding naked in bathhouses, according to some reports, for fear of being bugged). In February, one of the country's most respected economists, Wu Jinglian, complained that China's stockmarkets were 'worse than a casino'. Securities regulators have now begun a crackdown so fierce as to send the markets diving.

"The balance sheets of Chinese companies are, by common consent, a joke. In January, the government's official auditing body admitted that more than two-thirds of the 1,300 biggest SOEs cook their books. Johnny Chen, the Beijing head of PricewaterhouseCoopers, says that even this is an understatement. Quite simply, the SOEs' numbers are whatever the key man wants them to be. And without genuinely independent directors to chair an audit committee, that will not change."

Asian values? In fact, the Chinese — both Overseas and Mainland — lack most of the institutions that grew up gradually, over centuries, in Japan and the West. For the legal system, let me quote from a 1992 book of mine (Centuries of Economic Endeavor, pp. 172-3):

  • The main purpose of Chinese law is to preserve state power, not the rights of the individual.
  • Traditional Chinese law sees little or no distinction between criminal and civil. It is more concerned with penalties than with righting civil wrongs. Thus rules and judgments regarding trade, sales, and production were not part of the legal system before Western ways were copied after 1912.
  • Inequality and hierarchy have been legalized, with different rules applying to persons of different rank.
  • For much of Chinese history, only government officials were allowed to know the official law. If commoners knew the law, it was believed that they would become litigious and defy authority. This concept changed with the Ming dynasty, but the present rulers still do not go out of their way to see that their laws are widely understood.
  • Codes and statutes were highly developed in the early centuries. Their principal purpose was to inform provincial magistrates on the content of the criminal statutes they were expected to enforce. Common law, or the use of precedents, has been rare.
  • Unlike northwestern Europe and Japan, the basic nature of Chinese law has not changed much over the centuries. Principles from the Shang Dynasty (1766 to about 1122 BCE) still govern the legal actions of the People's Republic.

[ This book is now available on the web: http://tqe.quaker.org/wealth-and-poverty/12china.htm — LC ]

It is in the context of these principles that the Chinese government wishes to enter the economic world of the West, to accept investment from foreign companies, and to modernize its legal, corporate, and trading systems. Western businesses are perplexed as they encounter these systems. In the West and Japan, the laws of corporations, contract, debt settlement, transparency (e.g., through the Securities and Exchange Commission), conflict of interest, principal and agent, fiduciary, banking, investing, and other means of doing business evolved over centuries, through negotiations among producers, traders, farmers, financiers, and governments. For the most part, they were not imposed from on top. As all this happened, state power was diffused into the democracies we have today. In 2001, the Chinese government is attempting to impose from on top a Western set of economic institutions, while at the same time trying to preserve state power.

Do Quakers understand Asian values? Do I? Despite all my travels abroad, in which I have learned other cultures, I am still a Westerner, and I see Asian values through a Western prism. Please let me know how you see them. If you have had different experience in Asia, please share it.

Sincerely your Friend,

Jack Powelson

Readers' Comments

Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

Joan and I just came back from three weeks in China, our first trip there. Five days on the Yangtze, some in Beijing, Xian and Shanghai. Also just read your China piece [TQE #9]. It seems a bit overweighted towards Chinese overseas, a special group, rather than the Chinese mainland. It is a remarkable country, and its history certainly strange to us. A professor Dali Yang from U of Chicago was with us; we came away with a strange sense that this country of 1.2 billion could be moved this way and that by a strong central leader, something that we do not understand.

Jack, you must have spent every day since we were last together in DC, many decades ago, studying, traveling and introspecting. The spirituality of your efforts (a West Coast word, now even part of the Jewish movement) come through more explicitly than in the days of thee and thine that we appreciated in your family.

— Don Green, Jewish, San Francisco (CA).

I enjoy reading your essays, but I was taken aback by this one [TQE #9]. I gather your answer to the title question is "no", you cannot "understand" (i.e. condone) those values, as illustrated by the portrayal of Chinese business methods. According to this essay these Chinese business practices are apparently engineered in bath-houses, of all places. My wife Annette is a Quaker from Devonshire Meeting, Sydney Australia, currently doing a research project on bath-houses in Hangzhou, China. If you have any data (or even any sourced anecdotes) about bath-houses, whether or not they support the views in the letter, would you be able to pass them along? In return I am sure that Annette would be happy to pass on what she knows about bath-houses.

— David Brett, Sydney, Australia. [10 Nov 2006]

Reply: The quote in TQE #9 which concerned you (about deals being made in Chinese bathhouses), came verbatim from an article in The Economist, dated 5 April 2001. If you have a subscription to that journal, then you can read the entire article on the web (click here).

I think that the real reason why Chinese business practices are so different is that the Chinese history of institutional development followed a very different path. That history (and its many consequences) are laid out in two chapters of Jack Powelson's book A History of Wealth and Poverty, which you can find online (click here: Chap 11, Chap 12).

If you read these two chapters, you will see that he places primary emphasis on how institutions evolve in the power diffusion process, and almost no emphasis at all on underlying values. It's possible that what many Westerners see as a difference in human values is really the consequence of differences in institutional development. In this view, Chinese business practices take place in an institutional structure that is radically different from what is found in Western countries, and therefore they appear to the naive observer to have different human values. This appearance is illusory. — Loren Cobb, Editor. [10 Nov 2006]


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Herbert Fraser, Richmond (IN) Friends Meeting.
  • Asa Janney, Herndon (VA) Friends Meeting.
  • Gusten Lutter, Mountain View Friends Meeting, Denver (CO).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Wilmer Tjossem, Des Moines Valley (IA) Friends Meeting.
  • Faith Williams, Bethesda (MD) Friends Meeting.

Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2001 by Jack Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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