Interesting interview with Tim Clissold, the author of Mr. China. He discusses his book and reflects on how the China story has unfolded ~30 years after his initial adventures. Some brief notes below (these are for personal reference only, any errors in transcription are my own).

He ended up in China in the early 1990s. Shortly after, he met a Wall Street banker who wanted to start a direct investment business focused on China. They managed to raise ~US$400m quite quickly and invested in about 20 JVs all over China. Got themselves into all sorts of trouble because they assumed that business in China would function the same way as it did in the West and, of course, it didn’t. His book discusses the process of raising money, investing in China and then realizing it was all going terribly wrong and the story of how they sorted it out. The events of Mr. China took place from the second half of he 1990s until about 2005. So it is quite dated. Since then, he has gone on to work in distressed investing with GS and is now involved in dispute resolution. Anything that’s complicated in China he finds interesting and intriguing.

The reason he wrote the book was because he had an incredibly intense experience of conflict involving very large amounts of money in a foreign environment. Writing helped him make sense of what happened to him. It was just meant to be a story through which people might learn a bit about China. Primarily introspective, never thought of it having any overt message. The lesson, if any, is that you have to adapt to a civilization that has been tremendously robust over vast periods of time, with a well thought out set of values and philosophy. The West has to adapt to that. The best way to look at modern China is not through the lens of communism or will it become more like the West. There are deeper trends at play since imperial times. If you go into China expecting to behave in a Western way, you will get the shock of your life, which is what happened to him.

Part of the problem was all the incentives were misaligned and that led to conflict. He was pressed in between the American investors on one side and the reality in China on the other; over time, he started to feel he could understand the Chinese narrative. One example of this was when he was negotiating the salary of a Chinese factory manager in a remote area of Sichuan. The manager’s salary was ridiculously low and he was mandated to increase it by a factor of ~4x, but the manager wouldn’t accept it. Eventually compromised and settled on a lower amount. It made no sense from a Western perspective, but the manager was leading a group of people, all of whom were on very low wages in a much more closely connected local society in a small town in Sichuan making motorcycle wheels. The manager felt that if he took this enormous salary, it would start to break the cohesion of that little local society. He has hundreds of examples like that. The behavior was tremendously human and understandable and relatable but under a different set of incentives and social mechanisms. To be fair, all the Americans wanted was to see some sort of financial return, but it wasn’t approached in a way that was sensitive to the cultural context.

On China today – he thinks the opportunity and complexity of dealing with China are still quite similar to the 1990s, but much larger and much quicker. There has been a shift from the mainly state way of thinking; 70% of people had the factory manager type mentality, primary function is not to make money, but to support 3000 workers. Now it has shifted in the opposite direction. They have really gone up the learning curve and developed their own ideas on top of that. What has really changed, however, is China’s position in the world – there was a Brookings Institution report published about 18 months ago which estimated that, between 2015 and 2030, consumption by the global middle class will increase by US$29tn. For context, the current run rate is US$36tn. Essentially a doubling. Only US$1tn of the US$29tn will occur in US and Europe. China is about US$8tn, India is about US$6tn, although he doesn’t quite believe that. The role of China in nucleating this colossal change in economic activity from the West to East is completely irreversible and has tremendous consequences about the way the West should design their strategy in the coming decades and how we should view China.

He think some of the geopolitical tensions are fairly transient in the scale of things – if you are 30 years younger than him, try to think what will world be like by the time you’re his age. If you have correctly evaluated the way the world is changing, you have an enormous tailwind behind you. Other thing is that the Chinese have made it their business to understand the West. They woke up in the late 70s and said we are so behind, there must be something that we’ve got to learn to try and catch up. The Chinese have changed their ways of doing things to be much more Western than the West has the other way. There is a robustness that won’t change but they are very practical, will import ideas.

Problem now is they know more about the West than the West knows about them. Puts the West at a disadvantage. For example, he spent 7 years trying to create a new A-level course about Chinese civilization. You have the largest change has occurred in our lifetimes (globalization with China in the center), the UK is leaving the EU etc. He created a syllabus in consultation with 10 universities, raised some money for it. Put a proposal together, met with the department of education and they just said no. The West has to improve their game about China. There must be something worth learning from them. More broadly, we can learn something of tremendous value to ourselves by looking at other societies and the way they do things.

China’s political response to criticism – this is a function of the breakdown of trust between China and the West. Far too touchy but there are all sorts of reasons for that. Tremendous yearning to be better understood, not necessarily agreed with or admired. Massive imbalance of knowledge, which is the core of the problem. The Chinese have done an amazing job raising all these people out of absolute poverty, building infrastructure, removal of carbon out of medium distance flights by substituting with HSR. Largest renewable sector in the world. Of course there are also many issues, but there is also tremendous value in Chinese art, culture, technologies etc.

Disengaging will have consequences, and there is a risk of being passed by by history. When he first went to China, UK GDP was 2x China. Now China’s GDP is 6x UK. That is a factor of 12x just over the course of his career. The attitude today is perhaps reflective of the West’s broader approach to emerging markets – these are our values, you have to correspond to them, otherwise we won’t invest. The West believes in the universality of values which overcomes the issues of sovereignty. China’s approach reminds him of the Groucho Marx quote “these are my principles, but if you don’t like them, I’ve got plenty of others”. China has a system that has developed over 2000 years, which the Chinese don’t think will work outside of China. They have a core where there is tight control, then layers of influence going out. Series of concentric circles of ever decreasing influence.