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Sohu CEO on China government's Role

|Includes: Inc. (SOHU)

Last week Sohu (NASDAQ:SOHU), a Chinese online media firm, held a forum, Chinaview Forum 2010, to discuss the future of China. 

The opening speech by Charles Zhang, Sohu CEO, made quite some impact because it challenges the role of the China government on economy. Typically you hear such a talk from a dissident or an economist, not a successful entrepreneur, who knows fully well that kissing the government's ass is a must-learn skill.

To show my respect, I translated the whole speech for the English speaking community here. I made certain changes in my translation to make it reads more natural in English; it is by no means an exact translation. I bolded certain points to help impatient to skip through the lengthy talk and added certain notes to provide missing context. 

Many of us should still be alive in year 2049, most likely with quite a few grandchildren. The question is if our grandchildren are going to live with happiness and gain respects from the Americans at that time. The answer to this question has much to do with everyone of us, with the present, and with if we, at the present, are making smart or stupid choices. If we don’t make smart choices and we fail to make China strong and rich, our grandchildren are going to let us know how dumb we had been.

Chinese are among the most hard-working people in the world. Confucianism teaches us to be worldly and progressive -- The life is like boating upstream, putting in no effort meaning going backward. We Chinese are good at using opportunities.

Chinese government officials are the most diligent officials in he world; Chinese society also has much lower tolerance of corruption than Russia, Brazil and India. The reform for a market economy in the past 30 years has given hard-working Chinese chances to prove themselves. The blue collars are working for long hours and low pay; the government officials are putting in efforts to lead their people to become richer, out of peer pressure.

The hard-working of the Chinese people and the free market in the light industry field have created the miracle of ‘Made In China’, cheap products made in China having taken nearly all the market share of the mankind for the low-end industrial products. And this is the root cause of China’s economic miracle of the last 30 years.

The accomplishment of the past 30 years has been enormous, and therefore we have been enjoying the joy of success, even to the degree of self-intoxication. We are boasting the resurrection of the big kingdom, collecting enthusiastically every piece of praise from the westerners who we still envy, as if we were back in the old days of Middle Kingdom, when we were still worshipped by subordinating countries as the center of the world. This is hallucination! The westerners are yet far from thinking of us that high.

In fact, we have just participated the regular season of the economic game and entered the playoff, our opponent being the US, the most powerful and advanced country in the world. If we keep the status quo, we probably should research on an academic subject: If Confucianism plus an incomplete market economy can beat the individualism plus a fair and complete market economy. I believe that we have a sure answer though disappointing: We cannot beat the US!

The problem is the incomplete market economy. Quality and excellence come from all-out competition; innovation roots from fair competition; an incomplete market economy is doing everything in its capability to curb fair competition.

In China unfairness does not sound such a big thing, but on the other side of the Pacific Ocean, the US government is spending quite some effort in studying how to protect competition, which is to protect innovation. Private enterprises in China are attending the all-out competition, but the state-owned enterprises are only completing in product quality and price, not in its capital structure. Their survivals are not threatened due to the government support or monopoly, regardless of their quality of business. The management bears little responsibility of the state-owned enterprises, since they bear no economic consequences. In comparison, those surviving private enterprises are among the best due to the market selection.

For example, private enterprises are competing so efficiently in the consumer staples sector that we sell to the whole world, which is good, but far from great. Our workers make far less profit in producing toys or shoes than Boeing in manufacturing airplanes. In the high value-added product manufacturing, we do not have an efficient market due to our legacy in planned economy and the lack of understanding of the market economy by the government. Our government slogans are integration of resources, complementation of advantages, active advantage seeking and etc, but no such extremely important phrases such as protection of fair competition.

In airplane manufacturing, we idolize the ‘all-out efforts from the government’ kind of mechanism left by the legacy planned-economy and we squeeze out the private enterprises. Yet we have forgotten that Boeing is a company that survived from a hundred years’ competition.

We rely on many state-owned enterprises for weapon production, but the US relies on private companies such as Raytheon, Hughes, and Honeywell, who survived market competition and audited government procurement pr. If we keep the status quo, I believe that the US is still the number one in the world in 40 years, owning the best weapon and speaking the loudest.

In auto industry, the West has the most successful companies out of a hundred years’ competition and, yet, we had many state-owned enterprises signed unfair contracts to trade our so-called market, i.e. equity and brand, with their technology. Now they have regretted and are trying to have their own brand after the foreign brands made 10 years’ good money. There are simply too few Geely and BYD (note: two national brands).

In the financial sector, Goldman Sachs and Morgan Stanley are heavy weights of the world, and our state-owned banks are still like toddlers after 20 years’ development.

In the media sector, the state-controlled newspapers and TV stations are not competing in a true sense; they are not organized to possess independent mind and media integrity, and thus they do not gain authority and respect. People of the world pay attention to the Wall Street Journal and New York Times because they believe. China lost its voice in the world due to the lack of respectable media. The China brand promotion organized by the government media (note: recently China has Made In China commercials running in the American media channels) is destined to have little effects and uncompetitive since it’s not a product of market competition.

In the movie sector, China’s movie industry should rather be called movie workshop than movie industry since the lack of competition caused by state controlled media channels and the lack of protection of intellectual properties. Avatar the movie awed the Chinese, but it only represents the tip of the iceberg of all the excellent Hollywood movies. A good movie excels not only in its technology but also the story, the performance and even the values. And all that is the result of efficient competition in movie investment, scripting and production. The “Soft Power” of the US created by its media and entertainment business is unreachable by us.

I am pausing here on our problems since it is becoming depressing. The question is what we should do now that we know our problems.  

The answer is obvious. We have no way out other than keeping reforming our market. Without efficient and fair competition, we will not have quality, excellence, job opportunity, peace, or true resurrection of China.

What should we do exactly? We do not have an easy answer there, but the essential point is to have a limit over the government power and an all-out seeking of the fairness. Only when individual and organizations can compete in a fair environment will we see the creativity and prosperity in our society. Otherwise we are not going to have a true market economy, but rather capitalism for the privileged. The government should stop competing against private enterprises for profit, but protect the fair competitions.

I do believe that the economic system has something to do with the existing culture. For example, the Confucian legacy is possible to allow the government function more efficiently than the West government, the democratic government, and therefore assume more social functions. But it is only a matter of degree. Chinese and Americans are all human beings; we are similar in our pursuing of happiness. We should ask ourselves how much we should emphasize the difference of Chinese and refuse the proven values from the West, especially now that we have the benefit of competition already proven in economic realm.

My answer to the question I raised is yet very sketchy. I hope media platform like Sohu can help continue the seeking of the true resurrection of China, and help our grandsons and granddaughters live happily thereafter. Thank you for putting up with my lengthy and superficial talk.

Disclosure: No Positions