 Now, welcome back to Think Tech. I'm Jay Fiedelsen. I want to block this as global changes with a retired Second Circuit Chief Judge. Judge Shackley-Rofetto, who pairs a lot and has been to China a lot. And he's happy to talk with us about cultural changes in China, namely the book by, let's see, Desmond Shung, called Red Roulette. It's very interesting. Shackley, welcome to the show. Nice to see your smile and face. Thanks, Jay. Good to be here. Good to see you. So, OK, so we look from the outside in because China is a kind of a place that has guardrails around it these days. And everybody wants to go there. But we need to study it for so many reasons. And one of the things we study is the books coming out, the testimonies provided by people who've been on the inside. Desmond Shung is one of those people. And he wrote these books in the United States, I guess. And he wrote this book and it's like a best seller because it has an insight into what goes on in business and, for that matter, in social experience in China, which is dramatically changing. You've read the book and you've seen a video, which was very good, of Desmond Shung talking about his book. Where is he coming from? What is this all about? Well, he was a Hong Kong boy who came from a poor upbringing and then was educated eventually in the United States, went back to Hong Kong and then started working, I guess, in an investment fund organization, ended up in Beijing running their office and then branched out on his own. And it became extraordinarily successful, but it seems that it had a lot to do with Whitney, his wife, that he met, who also had a similar background all over from a different area. But she was very good at networking and she was able to establish a close networking relationship with the wife of then Premier Wen Jialao of China. And that opened a huge number of doors for them. And he describes that in great detail in the book. And he goes into a really interesting detail. We're all on the outside, so we just guess it's a stuff, but this guy was actually right in the middle and made billions of dollars on zero. And so he knows what he's talking about. I have a couple of paragraphs, which I'd like to read if you don't mind. Please, I'd like to field the pros of it. OK, he starts out, Whitney and Auntie Zhang, that's Wen Jialao's wife, and Whitney is his wife, had a verbal agreement that Auntie Zhang would get 30% of any profit from our joint enterprises and we and any other partners would share the remaining 70%. In theory, the Wens were responsible for putting up 30% of the capital as well, but they rarely did. And the few instances that they provided capital, it was always after the project was sure bet. Auntie Zhang never took any risk, so we deducted their investment stake when we distributed the profits. Nothing was on paper, it was all done on trust. The arrangement generally followed the industry, quote, industry standard, unquote. Other families of high-ranking party members extracted a similar percentage in exchange for their political influence. The template was always fungible and could be tweaked to accommodate investment opportunities as they arose. Chinese officials, executives at state-owned companies, and private businessmen who are close to the party presented insiders like Auntie Zhang with opportunities all the time. But the deals weren't as sweet as those available to China's red aristocrats. Those would be the children of the people who founded the Communist Party. They would get deals like they could sell all the water on all the trains in the Chinese railway system. You know, they're making billions of dollars. Finally, let me just read this, this is interesting. This is about how you network. It says, neither Whitney nor I felt much discomfort spending more than $1,000 on lunch. To me, it was just the cost of doing business in China in the 2000s. That's how things were done. The big element was the Chinese concept of face. Everybody knew we were paying ridiculous prices for the soup, the fish, and even the veggies. And it was precisely that fact that gave our guest face. If I'd been buying lunch for my personal consumption, I would have looked at it as a value proposition, that I wasn't there for fun. I was there for business, and I wanted to do business in Beijing. And that's what lunch cost. Pretty interesting. Wow, of course, the owner of the restaurant was also in on it, wasn't he? Yeah, he was all the way to the bank, right? He was related to the guy with the water. You know, to give you some perspective, you know, I first went to China in 1984. I was coming back from Navy duty in the Philippines and I went to Hong Kong. And that was just five years after Chairman Mao died. And you couldn't even go into China before that, I don't think, and it was still hard. But I happened to stop at the China travel bureau. I said, hey, you know, and the guys said, well, do you have a visa? And I said, no. He says, you got $10. I guess he went in the other hand and he came back with a visa. So I thought, okay. That's friendly. That was my introduction to mainland China. And I went on this great 10 day tour and near Guangzhou. But it was really primitive. There was like zero trace of Western culture. There were no cars, only bicycles. There were no, this is Guangzhou, which is a huge metropolis now. And there were six-story buildings with bamboo scaffolding and stuff like that. We went to a lot of factories and places, but it was very third world, nothing modern at all. And then I happened to pass through Beijing on a couple of day layover in 1994. And it was incredibly different just in that short period of time. There were cars everywhere, big fancy hotels and hummers and then of course, it's just gotten more and more ever since. And in the past 15 years or so, I've been there many times and for long periods, I've been to probably 20 different cities in China and lecture with the schools and, you know. Well, what impresses you is beyond the fact that it's way different than it was the last time you looked is that while you're watching, it's growing. And I remember my first trip to Shanghai, we arrived late, it's dark and we're looking at these buildings and there are lights, construction scaffolding lights all over the buildings. Those guys worked 24 by seven. That building was gonna go up and really soon. And I said, well, this is a city that grows while you watch, dramatically, yeah. You know, when I was there in 84, people were really poor and there'd be motor scooters or the big basket with chickens in it and stuff like that, but no one was sitting around. Everybody was going here, going there, doing something, selling something. That was sort of the beginning of selling things, but the energy was unmistakable. No question of eating it. Hong Kong was of course the same, but in mainland China, you just felt it. I mean, I just sort of felt at the time why big things are gonna happen here. And you still feel that kind of energy when you talk to the students. I'll say this too. I met a lot of people in China, I made some good friends and they're great people. I always had a wonderful time. I did get cross-rides with the government a little bit at one point, but aside from that, I always had a wonderful time in China and that's some really nice people. Well, Desmond Xu's wife did not have a wonderful time. So you may have been friendly with Auntie, was it Auntie Zhang? But at the end of the day, she paid a terrible price for knowing Auntie Zhang. Can you talk about it? Well, I just, I haven't finished the book, so I don't know the real details, but I saw his interview and he basically said that they had parted ways, so they were divorced, but they had, they built a huge complex onto the Beijing International Airport, which was used for customs and international trade. They were into real estate. This was a real estate development operation, yeah. Yeah, and then they built a huge office complex someplace in Beijing and she was, I guess, running that. And then one day she went to work and she was disappeared like the Canadians who were just released and she's still disappeared. And he said that he was living in London at the time, I don't know if he still lives there, I guess the Sun is with him. And he said that the day before it was to come out, the book that he wrote, which is basically a tell-all, he said he got a phone call from her. You don't know where she is, he hadn't heard from her, no one had heard from her, and then he got a telephone call asking him not to publish the book. And he said it was too late right now and it was already out in the shelves and about to be announced. So- Yeah, that's sort of the sort of reticule and he said in the interview that that was a really ridiculous call because they don't print it on the day they released it, they printed months before. It was already printed, as you say, it was already on the shelves. And some bureaucrat who didn't know better was forcing her to call him, trying to stop it. I'm not sure that he could have stopped it even if he wanted, but he didn't want to stop it either. I recommend the book to anybody who's interested in how China actually works, especially during the big go-go period when it was expanding. And one of the points he makes is that both of them, he and his wife both believed that China was in an expansionary period but also an evolving period where the rights would be more easily protected and that it would be a continuous opening up process, which of course doesn't look like it's continuing. But they all believed that at the time and they thought that they were contributing to making China great again. And so they believed in what they were doing. While it was helping them and they could prosper, they were also doing something good for their country. She was a pretty serious player for her to disappear like that, it's troubling. But I guess she was caught at the tail end of the, what was his name, Wen Xiaobo scandal where Xi Jinping decided that when Xiaobo was not loyal to him and all of a sudden there was this big corruption charge. And I think it's clear from Desmond Xu, that corruption is just another way of doing power, of doing control, of getting rid of your enemies. It's not really corruption at all. Yeah, one of the things he reiterates which I've learned myself is that the judicial system is just another instrument of Communist Party control. And they use it whenever it's necessary. And also they're constantly changing policies and changing the legal requirements say applicable to development and getting permits and it gets more and more complex. But they're also, he said very vague so that it's really easy to charge someone with violating the law. And that's what happens in these corruption scandals is that they can always find something. And when they pass a new law, they make it retroactive. So you can't win. You can't win, hence I win, tales you lose. But with anybody with a legal background, without a legal background, that'd be illegal in the United States. Exposed facto law. But in China, it's a tool of Communist Party control. I mean, that's pretty frightening if you think about it. Well, Desmond Xu managed to navigate through it. And he talked about a given project where he had to get, I think it was 167 permits. Yes. And they all cost them some money. But he had to go around and develop Guangxi with all levels of the bureaucracy. He couldn't just convince the top guy because the lower guys control the top guys. And it's just quite an interesting story. In the interview, the panel of three interviewing him, they asked him, what about Guangxi? Guangxi's important, isn't it, in China? And you have to have Guangxi to do business. And his answer, if you recall, was really interesting. The old Guangxi is dead. It's over. Guangxi, if you want to even use that term, it's different now. Do you remember that conversation, Shackling? Yeah. And he basically said, you ingratiate yourself with someone and you make their life better. Usually economically. It's transactional. And Whitney was apparently really an expert doing that. And he recognized that and they made a good combination because he had a financial and accounting background. And so he was able to bring that to the party and she was really good at networking. The great team, they were too bad they fell apart. But maybe it was under the pressure of what was happening to her and possibly to him. It's not clear to me that he could go back. I don't think he could go back. Oh, and after writing this book, there's no way in his life that he can go back because he really pulls the rug out from under the PRC. But one thing that sticks with me, Shackling, and I wanted to ask you about it because you're much closer to it than me, is that he talked about the hierarchy of power. And this is a sort of an extension of what I was saying about Guangxi. And that was expressed in the way the table at this $1,000 lunch, for example, was ordered. And everybody had a seat at the table in a special place and it was hierarchical. And it was not necessarily family, although the children of a powerful government bureaucrat would be powerful also, but it was based on power, not necessarily Guangxi or old times forgotten, but power. And my impression of his discussion on that point is that this was new. This was new, this had emerged even in recent years and it was emblematic of the change in culture, if you will, that's our title of our show today, the change in culture, business culture, government power culture that has happened in China. The ordering, the simple ordering of the table. Well, I think that that's partially traditional because I know when I've been, our friend Russell Liu helped me a lot find my way around China. And he and his dean invited me to lunch. I actually had lunch for them several times. So when I went there, they put me on the farthest side from the door and I didn't know what it meant. And Russell told me later, well, that means you're the important guest in the room. So I think that some of that's just Chinese culture, but then they take it to extremes. It's like Feng Shui, it's physical, it's the geographical location of the people involved. Yeah, yeah. I think if you went into a traditional Chinese dinner and you were set by the door, it would tell you something. Like kitchen. Or the lavatoire. Or they didn't have a private room. Yeah, right. You know, the thing is, the point he was trying to make in that little discussion which left me in wonderment is that the way things work in business is different now. It's more transactional. The way that the government has its tentacles into everything, including business, is transactional now. You know, you spoke, for example, of the fact that years back, not that many years back, 10, 20 years ago, that was when I was making my trips there. There was this sense of we're going Western. We're comfortable for you. We'll serve you a hamburger if you want, Frankies. Frankies in Beijing was an examiner restaurant there. And we'll work together. We'll make deals with the West and you can be part of that. Although they retained all that thing about the holy-owned woofy and that requirement to have a local partner and all that, there was a certain opening, a fresh opening, as you mentioned. And what he was saying, I think Desmond Schum, and at least in his discussion on the interview, was that that's changed now. Before the holy, the government-owned enterprises were like fading from the scene, fading from power. Now they're back and they're more powerful yet and they control everything now. And private companies are not nearly as powerful. You recall that part of the discussion. Yeah, and I think the one of the big crisis going on now is what looks like the bankruptcy of Evergrande, which is the second largest property developer in China. It apparently has the largest debt of any property developer in the world, over $300 million. Billion, billion. Billion, billion, oh my God. It's by Chinese standards. And the latest thing I heard is that the plan will be for the government to allow it to fail but break it up. And so it'll end up being owned by state-owned enterprises. And that makes sense. I mean, within China, they can always print as much money as they want, which they've done in the past. And the one question is that on Thursday, there are dollar-denominated bonds that come due. And I'm assuming that since they're dollar-denominated, they're probably purchased by Americans or others, not in China. And if they default on those, it may affect companies like BlackRock and other investors in China. So we have... I mean, if the U.S. defaults on those bonds. Well, they're dollar-denominated Evergrande bonds. Well, they're bonds out of Evergrande, okay. Yeah, yeah. But we have the possibility that our bonds, our bonds will be subject to default also if Congress doesn't act on the debt ceiling. Yeah, well, China has lots of dollar reserves, as I understand it. So they could probably, if a state-owned organization takes it over and the government banks support it why they can manage all that. But there's a lot of speculation about that right now. So what does it mean with these Evergrande and the $300 billion of debt and defaulting on the bonds because of government intercession? What does that mean? Well, it goes, it's consistent with what the book says, about the entrepreneurial spirit being dampened down. As I understand it, property development in general is like 20 to 30% of the GDP of China. So it's a huge gap. And it's gonna affect a whole lot of people. And of course the party has to make sure that that doesn't significantly disrupt their society. So they're gonna move on. I don't understand about a hundred property developers have already been bankrupt in China, according to the internet. So that could change things big time, I think, both in terms of what the party does in terms of control and also the interest of outsiders in investing in China. Which is already a problem. Yeah, well, the magic word is control. I mean, we've seen in the past several months and most recently when it occurred to me, and it seemed to me, that Xi Jinping and the PRC was into control. And it was expressing that in everything it did. Just things that come to mind at random is it has been much more oppressive in Hong Kong than it needs to be. It's been much more threatening to Taiwan than it needs to be. And it's actions in the South China Sea much more aggressive than it really needs to be. And then you look at the things domestically. Why permeate the tutoring business? Is that really necessary? Is there a point? And there were several other things that I've heard recently where it seems that Xi Jinping is trying to put controls on everything. And I guess that is, the common denominator seems to be, this is the new China, the new Xi Jinping China. Xi Jinping is like Mao or he wants to be. And he wants to control everything and that's good for China. But query isn't really good for China when you can't even understand exactly what benefit he's earning with it. Well, that's a good question. You would think not, but if control is all you're interested in, you're not, but you know, one of the things that always impressed me was how that, you know, if you teach in a law school there, everybody speaks English, so you lecture in English. And it surprised me how common it was amongst young people. And I realized that the government made the decision that people should learn English. But now Mao has, as you say, shut down the language tutoring industry, which was primarily English as far as I know. And that's a big, that's a real statement, I think, that he's gonna close things down and turn inward, which is difficult to understand because it's an export-based economy. And, you know, they have to import all kinds of natural resources, including oil. So I don't know just how insular they could actually get. Yeah, and there's some of the other things he studies. He's tightened export of intellectual property. The University of Hawaii and a number of other big schools from the mainland recently had a panel program in which all of their cyber people got together and talked about intrusions into American universities by China, which had been dramatically increasing, increasing by Chinese operatives and also by cyber techniques. And that's part of an initiative also. China is active in trying to get intellectual property from the US, but closing down any possibility the US will get any intellectual property from China. This is more aggressive than we've seen. And it's a disappointment as against what you and I saw 20, 30 years ago with the reopening. It's not reopening now, it's closing. And part of it is this cultural thing, part of it is this control of business. Where does this all take us, Shacklead? You know, here's a country that would like to present itself in the United Nations as a bunch of heroes, doing the right thing for the world. You know, high moral standards, which is just, that's fake. You know, doing things in Xinjiang that are unforgivable. They're atrocities, but they're going to the United Nations and telling everybody they want to save the world. It's so visible, it's so obvious. It's so, what's the word, illusory. What's going on here? I think, I don't know. I think, you might add that Belt and Road initiative and the communities in Africa are getting ports and so on. I think they're going to find like we have is that you can't export your culture someplace else. And we just found that out big time in Afghanistan. Yeah, yeah. Right, well, but can you create an image? Can you create, you know, with the press today, even with, you know, the press is being suppressed, right? That's another element of this turning inward thing. It's being seriously suppressed. Not only the American press, but the press in general. Trying to control the message again, control. So, you know, how does that really play when China goes to the United Nations, it takes these lofty positions and tries to get control in the United Nations, but at the same time it's doing, you know, very inconsistent things in China domestically. And as you say, through Belt Road, where does that lead? It's a mixed bag for sure. Is it sustainable? What does the world really think? What is the world really gonna do? Is China gonna be able to muscle its way into these deals? Or are people gonna, you know, get very suspicious? Well, it seems like as long as they're offering profit opportunities, foreigners are gonna continue to pour money in there. I think China is one of the largest economic partners in Germany, for instance, which is dominated by their car industry. So are they gonna withdraw? I don't know, you know, what about the European Union? European Union has a deal on hold, I guess, but they're not happy with America at the moment. So they might go ahead and make a deal. Australia seems to be out and so does the UK, but you know, there's plenty of capital around. And as long as people are willing to invest in China, I don't, you know, they're gonna, that's gonna create power for them, right? Yeah, so here we are. We're into Xi Jinping for about 10 years now. He certainly has left his impression on things. And what he's doing now is visible. And you know, nobody can miss the general direction of that. But where is it gonna take us? My question is to ask you what you think is gonna happen in the future. This control thing is gonna go forward for sure, it's gonna increase. The threats to Taiwan, South China Sea, Hong Kong, probably gonna increase. But what about business? What about the ordering of business societies, you will? What about the control of large corporations? I mean, look what he did to Alibaba and Jack Ma. Jack Ma had his feathers pulled right out. No big company can exist around Xi Jinping. He's gonna break him up every time. He doesn't want them to be powerful. So is that gonna continue? What do you see the direction, the result of this kind of strategy, say five or 10 years? Well, if he's around, and that's a question mark, I think it's gonna continue the way it is, you know? Xi Jinping thought being taught to grammar school kids. It's just like the red book, Chairman Mao. It's, as you say, the same game plan. And the question I have though is, could China actually turn inward? I mean, that's its history, in the long run. That's what it did, is it's the middle kingdom and folded in on itself, didn't need anything outsiders. I don't see how that can actually be done, but they're pretty resourceful people. But as long as he's around, now I understand that that's not necessarily assured under that system, so we'll see. But I try to make himself, you know, premiere for life, didn't he? Is that gonna stick? Well, so far, he changed the constitution. I think there's a big meeting next year, isn't there, about over that, to see whether he's continued or not. That'll be interesting, but, you know, it's a power place. So if he's still in power, I'm sure that's what's gonna happen. I don't think he's gonna attack Taiwan, though. Okay, the truth. He'll just continue to, I mean, why would he attack Taiwan? He might lose, and then what? You know, that'd be a disaster. So I don't think he would take that chance. It's better for him to turn inward, control what he can, and deal with whatever problems he has inside where he can control it all. Last question, Jack Lee. Okay, given that, how do we adjust foreign policy to deal with him? How do you and I adjust our view of China? You know, the point on that is that 10, 20 years, 30 years ago, it was a luscious pomegranate. It was great to go over there, love the people, love the culture, love everything around you. So this is one of the most active, vivacious societies that ever happened on the planet. Now you really can't say that nor can you go back. So how do we adjust our conduct? And if we're business people, our business with them in the next five years, how do we calculate for, I mean, how do we compensate for what's happening? Oh, compensate. Well, I think we're out of luck in China for the time being. I'm looking forward to going back to Taiwan. All your Mandarin words are not lost forever. It's a great place. It is. It is a democracy, God bless. And it has lots of Chinese culture. All the best things. Yeah, I mean, you know, are you worried though, honestly, are you worried that somehow this control, this, you know, one person government, okay, this thing that's turning into what amounts to a dictatorship, subject, of course, to that meeting next year, and whatever other machinations you see in the Politburo, aren't you worried that a dictatorship of that size where the guy who runs it is so powerful that what he wakes up on, you know, every morning could affect the world? Is this good for the world? Is it good for us? Is this something we need to be concerned about? Well, I don't think it's good, but I think it's going in a direction where things might change. You know, if anything's gonna change in China, it's gonna change because the Chinese people change it. And I've asked friends in China, I said, you know, China has a government structure and then it has a Communist Party which runs everything and controls the army. So they have a government and they have a judiciary. So if they didn't have the party, you know, they would have a bureaucracy in place so they could operate. I asked them, you know, given that, if you could get rid of the Communists, or if you ever, if the Communists were deposed, could that be done in a peaceful way so you could just transition to a normal goodness? They said, no, it won't happen. And I think that's true. It'll take another revolution of some sort. And I think that the closing down of China is gonna promote that. That's my own take. Very last question, which, you know, your last comment provokes me to ask this, you know. It was a huge mistake, but now organized a cultural revolution in the 70s. Was it turned out to be a disaster? Maybe you could make some left-handed argument that it helped to shape modern China, but I think it was more negative than anything else. And so one of the implications, in fact, it was specifically discussed with Desmond Schum, that, you know, we, they might be in another kind of cultural revolution right now. Do you agree with that? Seems like it could be, yeah. Yeah, this, you know, emperor worship kind of thing that's going on there. I think it's a sign that things are destructing, but we'll see. We'll see, we'll talk about it again. I'll tell you, if China ever emerged as a democracy like Taiwan, there would be no stopping it. Don't hold your breath on that, okay? Well, it's not my lifetime, I guess. One can hope for the best. Okay, thank you. Judge Shackley-Refetto, thank you so much for joining us. Really appreciate this. We have to follow up on it, you know that. Take care. Aloha.