 Think Tech on OC16, Hawaii's weekly newscast on things that matter to tech and to Hawaii. I'm Damon Cabildo. And I'm Elise Anderson. In our show this time, we'll cover a talk by financial advisor Richard Wertheimer at the monthly meeting of the Harvard Club. He is well familiar with business in China and gave us an in-depth look at how its economy affects global market. Richard's background gives him a unique perspective into this important but often baffling topic. He is originally from New York but has lived and worked in China, Hong Kong and Taiwan for the last 30 years. As one of the first Americans to live in China after the restoration of its diplomatic ties with the West, he is one of a handful of Westerners who has been witnessed to and a participant in China's remarkable transition from a planned economy to a market economy. He has been on the ground in China and Asia during this extraordinary period of the region's development and this has given him a special insight into China's role in our increasingly interconnected world. He divides his time between the U.S. and Asia, managing a global asset portfolio at Morgan Stanley. At his talk at the Harvard Club, Richard was introduced by his Morgan Stanley colleague Dean Spagnoli and Arke Kale, program director at the club. I graduated from high school in New York in 1982 and decided to seek my fortune in China and learn Chinese. I went off in 1983 to learn Chinese and I got to China and I had no problem getting in and I was there for a little while and I said I wanted to stay and they said you can't because back then it was fairly closed, particularly if you had to have a student visa and so they said I want to learn Chinese and they said well you have to go to Taiwan and I said I don't want to learn Thai, I want to learn Chinese. So I was not very well informed, I was young and impressionable to say the least. So I've taken a rather non-conventional approach to China, I've never really studied it as a historian and I think there are reasons for that and there are very few historians today and that's got to do with the fact I think when the Chinese Communist Party came in they really did some severe housekeeping and cleansing of the historical past and so that's just a I'd say a side note. I was in Taiwan for a number of years, I did a number of very crazy things. I drove a taxi, I was probably the first and probably the only foreigner to drive a taxi in Taipei. I played rugby for the national Taiwan team and I went and I took the Chinese entrance exam in Taiwan called the Lien Call I guess in China the Gal Call and I failed miserably but they thought it was so strange that this little foreigner wanted to be in the university they said they let me in so I guess the reason why I bring this up is my approach has not been one of just trying to be on the ground like I mentioned trying to be more Chinese than the Chinese until one day I realized that chicken feet, no hamburgers, yes. I still do chicken feet but I kind of you realize it as a foreigner you're a foreigner and you can't change that. The main criteria for understanding what's happening in China is whatever it takes to keep the Chinese Communist Party in power and then from there try to analyze and understand what that means. So if something happens in the South China Sea where China makes an announcement about something I'm always trying to think about what does that mean for the China's Communist Party to stay in power and the formula that I use for that or that I borrow from a friend of mine Frank Hawk who is the Stanford, head of the Stanford Business Center in Beijing who is part of the original eight students that go into China in the late 70s is it calls it the three B's and it's basically belief, butter and bullets and what the belief stands for is legitimacy. So how does in order to stay in power they have to be, it has some form of legitimacy and obviously because they're not voted in then that is even more important by the people they have to see that they're getting something for letting them basically maintain power. The hot topic today is anti-corruption and the party's attempt or initiatives to basically minimize or eradicate corruption within the party which is extremely difficult because it's endemic in the system and in some ways if the anti-corruption drive continues the way it is today it will actually end up right on this front door because it's so inherent in the system that you have to ask yourself while it's the right thing to do that it almost poses a risk to the power themselves but it is something they have to do in order to maintain legitimacy because your average person if they don't feel, if the people don't feel that they're getting, if the power to be and they continue to enrich themselves in a corrupt way that's obviously not good. The other part of legitimacy is the we're seeing this more and more and when I was first in China you didn't see it so much but through foreign policy and nationalism and again if you pick, the data doesn't go by where you pick up the newspaper and you see the South China sees the news that China is expanding there, the point on that I would say primarily as well as not 100% but a strong part of it, this is posturing and pandering to the local audience and again it's for the people and it's so that the party can stay in power so it's not so much that China is going out and aggressively trying to pick a war with the United States even though there is obviously that possibility as they continue that trajectory. Ideologically China I think is in a tricky spot, Marxism and people look at China today as being a, are they, is there any Communism, is there any Socialism left? The answer is Marxism is a Western philosophy or ideology, it's not Chinese, it really doesn't fit with, and it's not realistic, I would say those two things are probably important. So what else do they have? They have Neo-Confucianism which I think is a stretch, they are trying to fill that void, you've got the Chinese dream which Xi Jinping, the president, is like the American dream is trying to manufacture but it's hard to manufacture something like that. The American dream wasn't dreamt up by a couple of guys in a room, it happened and it evolved naturally. Christianity is a huge area of concern for the party and they estimate there are probably about 100 million Christians in China today. So there's really this void and I think that's what you're seeing with Christianity, it's not that it's a natural fit for China but people are looking for something and the problem is when you rip out the heart of old China and I think Taiwan is different, anybody who spent time in Taiwan or Hong Kong for that matter but really Taiwan you'll see that there is still a connection with the past and in China it's less so and there really isn't much of a viable alternative. So that's the belief, in terms of butter, that is really the economic contract, the bread and circus of Rome and that had been working for a long time and right now it's fair enough to say that things are not as rosy as they used to be. If you go to China and you talk to people and you take taxis, often the taxi drivers, I'll ask them how are things for them and how are they seeing things and how is their family, often comes back the comment is that their kids can't afford to buy a place and so that the people, it's harder to make money and the things before were easier, particularly with the export economy and that the export competitiveness is declining. Just net net that economic contract is becoming a little bit shakier and that's a problem. I'll talk about this a little bit as well but I'd say the solution in China to about the, as the economy slows and this economic contract becomes at risk is ultimately a political one. Repression is definitely on the rise and this goes hand in hand with what's happening in terms of the beliefs and the economic issues. Internet censorship, you get domestic security budgets are still sky high, equally that of the military budgets in China. I spent, I've done a lot of different stuff in China but more recently I've been working with some of the state-owned enterprises in China, two in particular, one was Haitong Securities, they're the second largest broker in China, the other one is Jiangxi Copper and as we were working on JVs and buying a stake and then people weren't willing to take risks because of all of the repression and the potential fallout for sticking your neck out too far. People would often disappear to have to go to not necessarily reeducation camps but having to do interviews and where they'd have to put down basically what they've done or what they've committed and it is fairly rigorous system so people would have on a file what naughty things you may have been up to. Xi Jinping is, as he goes through grabbing power, he is cracking down on a number of different areas contrary to what people thought when he first came in, be it in education, they came out with a document called number nine where they went after the universities and said Western values couldn't be taught and a whole other host of things. Art, they're commenting on what type of art is acceptable and there's been a lot of news with various artists and cracking down on them. I mean just even the other day I opened the newspaper and I saw a lawyer coming out of court and you could see his underwear, his pants had been ripped, his shirt was half off and he was in court for some reason and the police didn't like what he said or what he did and they beat him up, which is you know one approach. It's effective I guess. It was that ultimately repression only goes so far. It's a very expensive tool to use. As is customary at the club, Richard's talk was followed by Q&A with attendees at the meeting. She basically is looking to save the party because it's at risk. In order to save the party, part of what he has to do is basically this anti-corruption phase and to go after, in his view, to mass as much power as possible so he can drive through the reforms he needs to do. That's one narrative. These CEOs that are disappearing, some of them are related to different factions within the government, particularly those aligned to Jiang Zemin, who's sort of the biggest, the big patriarch and is in a, I would say, opposed to the measures that Xi Jinping is doing. So particularly as an example of that, and I've worked with some of these guys at Chinese Petroleum, Sino-PEC. That group was under one gentleman in particular and was against Xi and so he basically went after those guys and trumped up, everybody's corrupt. I mean, if you want to go after somebody, you couldn't survive in China, the system almost forced you to be corrupt. I mean, there have been examples of people trying to do it the right way and ending up in just a whole heap of trouble and you say, you know what, forget it. If I can't beat them, join them. And so I think at the end of the day, if somebody wants to go after you on a corrupt charge, somehow, somewhere they're going to get you. And I think that's what's happening in a lot of these CEOs. So it's real. When we talk about repression and the state of things today in China, I can tell you, and I talked to my friends that are in Hong Kong, that are in China, that have spent time overseas, the intellectuals, these are successful folks, the voices are basically not gone silent. What's happening is repression and this is stymying any kind of reform. When she first came into power, people thought I was going to reform. I think it's safe to say at this point, in the next five years or six years of his tenure, I don't think he's going to change. I think his view is, I don't want to be the next Gorbachev. And the way to do that is basically to bring down the hammer. And I guess to some degree, he's looking at Deng Xiaoping and what he did during Tiananmen and the crack down there basically took a very strong approach. And it worked. You could argue one way or it didn't. Absolute power corrupts absolutely. So I'm sure there's an element of, and it does scare me that he is amassing so much power that that's why I say there's been a lot of talk in the media and amongst various groups saying that he's gathering power now so he can get these reforms through. And there are a lot of different reforms we're talking about. But ultimately, yeah, he's keeping people down. But now he's keeping it down to the point where it's becoming, it's not a positive, it's really a negative. And that goes back to both political reform as well as economic reform. That's why I said ultimately the problem is political. Because in order for the economic, I'll get to this in a little more detail, but in order for the economic reforms to be implemented, it really requires that the government themselves, the party itself relinquishes a certain amount of control. And you have to understand the CCP, the Chinese Communist Party is is the second longest lasting regime around in the world after Korea. And they are, I don't know, freak controls or their addicts, they're addicted to this power. And it's very hard, you know, as this corruption is being endemic, it's hard to change when it's in their DNA. And so there is some of the a lot of conclusions are reached that China is heading for at a minimum of bumpy road. And at the ultimate for a lot of people, they see this as really being in crisis. And, and eventually regime change. I don't know if I agree with that. But that's, that's definitely a possibility. When you look at China on a pair of advantage point of view from land labor and capital, it's not really they don't come out ahead on that. But what would ultimately, in terms of the new economy, in today's world, I would say that innovation and governance is actually more important. And China talks a lot part of the reforms is that they want to do they recognize these are not stupid people, they understand what's going on, they know what they need to do. The question whether they have the, the wherewithal or the ability, the resources to do so, and particularly for innovation and governance. So that allows for this new economy to, to basically grow as an American and as a country, I think we're guilty of taking sort of democracy and our view of, of, of government, our various philosophies, religious beliefs, and we kind of tend to push them on other places. And I don't think that necessarily works in China. So I'm not sitting here saying that we should take that has to be the exact system. But what I will say is this, I will say that ultimately, and to me, this is sort of the crux of it, is it's really the power of law and the ability to have an opportunity. And that really has been the economic contract. You know, you get out of the, leave us alone on the political side, we'll let you make money and be, you know, to get rich as glorious as Deng Xia, right? So I think that's, and that's really the frustration, I think that if you talk to a lot of people in China is that, that was sort of the, the, that example of that lawyer coming out of court being, you know, his clothes ripped apart. I mean, I think that's more damaging than anything. And if people don't have hope, whereas you don't get an equal shake, and then you look at the people in power, the party, you know, that are corrupt and they get, you know, they're indemnified and do whatever they want, that's a problem. And that needs to be addressed. But again, he's trying to do that. So I'm not, you know, it's, this stuff is not black and white. And it's definitely, oh my God, it's not easy. You know, if you're talking about, you talk to people in China, or anybody from China, and you try managing a country of one point close to one point four billion people with some of the limited resources that they have, it's, it's, it's a, you know, it's a, it's extremely difficult. It's easy for us to sort of throw, you know, to criticize it, but to actually do it's another, another sense. They fear political instability, they fear instability period, which stops them from making the reforms that they need to do, whether it's political or economic. And obviously those are both related. So that's, that, that is why, again, this whole sort of power, his, the starting point for, for Xi to basically amass power makes sense, to be legitimate and also so he can control. When I first went there and I look at it today, and with the changes, it's just, it's phenomenal. It is, it is mind blowing. What they have achieved, and, you know, even Larry Summers, for President of Harvard, President, right? Former, sorry, former, sorry. Yes, yes, pit stop. So he, he made a comment saying that the, that the, China over the last 30 years is the third most important economic event in the last 500 years after the Industrial Revolution and the Renaissance. And he's right. I mean, you know, I just look at it from what I've seen. I remember going to Pudong, which is on the east side of the Poo River, Pushi River, Poo River, sorry, which runs through Shanghai. And I was there, I don't know if you saw it back then or anybody else. It was just fields. There was nothing there. And I went to this company called Lujiazui, which was the area within, now developed within Pudong. And they had this model. And it's really, it was in a, one of those buildings, corrugated buildings that was just thrown together. And the model had all these big, beautiful skyscrapers, even that beautiful. Just all these things sort of helped the Skelter and this massive city. And I said, this is what we're going to build. And I'm like, yeah, right, that's not going to happen. Sure enough, you go to China today. It's gone beyond what I mean. When you go there, it is the future. And this is what I think a lot of people, I'm sure most of you here either can feel this or have seen this or been part of it. But it is shocking. And if anybody here has not been to Shanghai in particular, Beijing as well, you got to go. I mean, that is, it is a, there's this antiquated view in the West and the US in particular, as far as the business that I'm in. And I've seen this empirically time and time again they have this image of China as old China that it hasn't changed and it's not the future. And they're not aggressively changing. And so there was almost this tale of two worlds. And they're both not that one's right and one's wrong. But it just, it shocks me. And I guess one of the things I really want to leave as a conclusion here is that when, you know, despite what happens in China and what your conclusions may be, whether the regime falls apart, the economy blows up, whether it slows from six percent growth to three percent growth or below, there's a hard landing or a soft landing, it doesn't matter. We as Americans have to recognize that it is the second largest economy in the world. It will be the first largest economy in the world. It is just, it's, it's a, it's a, you know, and it's growing regardless. It accounts for, in many cases, 50 percent of the worlds of the imports of various commodities exports, something like 13 percent of the world's exports. So it's, I mean, I can throw a bunch of statistics at you, but ultimately you can't ignore it. And so that's really what, what sort of my, one of my conclusions is regardless of what you believe, you have to pay attention. We have to get educated. And it's happening. It is happening. I mean, the US, maybe we don't see it in, in, in all areas, but I think, you know, in some areas, like the military is spending a lot more time looking at China and confronting China. And we're seeing it in South China seas. And I think we're going to see the US approach to China is changing. I think it's morphing. Cyber security. Again, this, we don't always see this stuff and I'm not priviting this stuff. My sense is that we are starting to react. My hope is that China is smart and continues to follow more of Deng's approach of a, of a more balanced growth and doesn't challenge the US and then doesn't do silly things. I don't think they will. That's not their motive. Again, their motive is to stay in power. And I think they're really, their attention is on the, on their, on their domestic audience. It's not the challenge of the US. I, I definitely do not see in any way, shape, or form China challenging the US's preeminence in terms of the world system. I think over, over time that could change, but I don't think that that's something we have to worry about. That we have to worry about more is is China going to be at risk of economic and political instability? Because that will affect us, for sure. Thanks to Richard for this talk. We appreciate the opportunity to share in the programs organized by the Harvard Club. If you want to know more about the club, see hchc hawaii.clubs.harvard.edu. And now let's take a look at our ThinkTech calendar of events going forward. ThinkTech broadcasted talk shows live on the internet from 11am to 5pm on weekdays. And then we broadcast our earlier shows all night long. And some people listen to them all night long. 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