APCO Worldwide’s China Chairman James McGregor on China’s identity shifts

James McGregor is Chairman of global communication consultancy APCO Worldwide’s greater China region and a renowned China author, first with One Billion Customers: Lessons from the Front Lines of Doing Business in China, published in 2005 and more recently with No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism, published in October 2012.

After serving as the Taiwan bureau chief for The Wall Street Journal from 1987 to 1990 and China bureau chief from 1990 to 1994, he spent seven years building Dow Jones’ media business in China as CEO of Dow Jones’ China, establishing CNBC China, a Chinese language form of wsj.com, Dow Jones’ Chinese-language newswires, Chinese stock-market indexes and the first weekly business-television show in China.

He has been actively involved with the American Chamber of Commerce in China (AmCham) for more than a decade, serving as chairman in 1996 and currently chairing the Chamber’s US Government Relations Committee. McGregor is an esteemed member of the Council on Foreign Relations, the Atlantic Council, the Asia Society, the National Committee on US-China Relations and a board member of the US-China Education Trust.

In this interview, McGregor reflects on China’s identity shifts. Excerpts:

Q. You’ve experienced China in many different contexts: journalist, businessman, advocate, critic. How have these various chapters of your China life impacted your ideas about China’s economy and political system?

A. I came here from Taiwan in 1990 after Tiananmen, and it was a very bleak time, and I was able to travel all across the country. I was the only journalist from The Wall Street Journal so I had the whole country to myself. China was trying to figure out this huge shock that had just happened after this elation of change in the 1980s, and it was trying to figure out where it would go. So there was a lot of interesting talk even out in the provinces. I would run into people who had been involved in the demonstrations and were now starting to do business in the provinces. I was from The Wall Street Journal so they were all welcoming me and asking: ‘How can you help us get foreign investment?’

After Deng Xiaoping’s nanxun [southern tour] things really started rocketing here. I moved on to the business side of Dow Jones and was building media businesses, and in those days there still were not a lot of rules and restrictions on the media business, so we were doing cooperations with newspapers, magazines and whatever.

If I had to point to a turning point, it would probably be the Olympics. In the run up to the Olympics there was a lot of hope, and a lot of activity and China went out of its way to do positive things with the world, to have a positive image. At the opening games, there was such pride in the room at being Chinese, at what they’d accomplished and all of this glory that the world was seeing. It wasn’t very long after that that things started really turning sour. I think what happened is you have the global financial crisis, and there was kind of a reaction here that the foreigners need China more than China needs foreigners, and part of that was a payback for all the less than ʻbright bulbʼ congressman that come in and shake their finger at officials and say, ‘You should do this, you should do that.’ So there was a lot of ‘The China Model is superior, you should listen to us.’

Since then, I think China is just kind of scrambling to see what it becomes because it’s a very big player in the world, but it is still very local in the way the politics work and the way they think about policy. I think China now is at a real turning point. That whole evolution has been fascinating to watch.

Q. On one hand, we hear of political rhetoric in China on liberalizing the economy and there have indeed been some policy actions that seem market-driven. But on the other hand, we’ve also seen political discourse that emphasizes the need to return to Maoist roots. To what extent do you see contradicting behavior from the top?

A. Whether the Party now is using its traditional tools and motivations to move things towards the future, we don’t know. This is still unfolding. It’s a very unusual time. I think China doesn’t want to be what it used to be, it doesn’t want to be a poor country that’s not a player in the world. It doesn’t want to be a country where the politics are eating the place alive like what happened in the Great Leap Forward and the Cultural Revolution. I don’t think it knows what it wants to be. Remember, China has never joined the world before, this is the first time, and all of a sudden China is a global power and it is connected all over the world. But it still wants to be China, and it doesn’t want the foreign forces and foreign ideas to change China. Of course they will change China, but China is also going to change the world. Never before has a system like China, with the velocity and the size and the power, come in contact with the world, and there is a bit of an incompatible interface between the world as it exists and China as it exists.

Q. You have advocated for fair US trade policy toward China, China’s World Trade Organization (WTO) membership being one of many examples of this. But you have also been fairly scrutinizing, if not critical, of top-down economic policies, particularly in your most recent book, No Ancient Wisdom, No Followers. What led you to switch gears from advocate to critic and write the book?

A. The reason I wrote the book was that I was very strong with AmCham for many, many years, lobbying in Washington for fair-minded trade policy with China for MFN [most favored nation status] and then the WTO, and after China had been in the WTO for 10 years, I decided I would have the standing to go back and look at what had happened and where it was going. What we say in the book is not much different from what Chinese entities are saying, they just say it in very couched terms and we say it very directly; that this system has run out of gas. It cannot continue growth under the current system, and they need to rejig the system to keep growth going and that is now what [Premier] Li Keqiang is saying every day. If you are going to continue to go down this same road, then you are just digging your hole deeper.

It’s not unlike America with all this deficit spending and not fixing our finances for all those years, we just made the problem worse, and that is where China is at right now. They are in a real pickle right now because China is addicted to growth. China has to change from a producer mentality to a consumer mentality. One of the things you have to do if you want to build a strong brand or economy is, [because] you can’t order people to take money out of their pocket and spend it. You need people to feel comfortable about government, about government policy, about the direction of the country, about the safety of their own assets and their families. So the Party has to regain and strengthen its bond with the people.

Q. In your first book, One Billion Customers, you outlined some fairly specific takeaways for navigating China’s business environment. Of course, much has changed since 2005. Could you describe some takeaways for non-Chinese entrepreneurs in China that still apply in 2013?

A. A lot of what I wrote in there is still quite relevant. For instance, if you are a business and you are doing business with a state company, remember you are dealing with a political entity and not a commercial entity. It’s a reward system for people who are running it because it’s about their political career. Another example was the need to recognize that people here are moving very fast because, number one, it’s like a gold rush, the thinking that you have to make your money now because it might not last. The difference today is there are a lot of people that think there was a gold rush and they missed it, so there is a sort of creeping desperation for the future. For anybody under 40, this is basically their standard of life, this exponential growth every year where life changes so fast and wealth is created so fast so that now, if you just go to college and get a decent job and get married and live frugally for a while to save and buy something, that’s considered a horrible life, whereas that’s a normal life anywhere else. So people’s expectations are so high here because they have been through such an unusual time.

Q. When would you say was the height of the imperative on foreign companies to get in on the action in China? How would you describe that imperative now? What has changed?

A. Foreign companies go through periods of being gaga about China. When things are good they look at China as better than it is, and when things are bad they look at China as worse than it is. Some of these foreign companies that came here and had big market shares are now focused on market survival these days as much as expansion. There are more and more regulations that favor locals. It’s tougher and tougher for foreign companies here so their attitude is less and less positive and more and more cynical. These foreign companies have to be here because of the growth market, but in some ways China is losing its best friend. The foreign business communities, in their home countries, have been the strongest supporters of China, but they’ve got such an onslaught against them that they are less and less positive when they go talk to their governments.

Q. At times it seems like the China-US relationship is endlessly fraught with complications. Could you describe what you think the Obama administration is getting right, and also getting wrong when it comes to China policy?

A. I think Obama is getting it about right, right now. He and Xi engaging personally for a couple days is a very good thing, as they did in California this year, because they can meet as humans. Both these guys have a lot of domestic headaches, and they can talk about the relationship between the countries without a whole big set of deliverables and a thousand aides and everything else hammering away the usual official meetings. I would really hope they would do this every year, because if these two countries talk to each other at the presidential level one-on-one for a couple of days every year, it’ll be hard to get into real conflict. And that’s important. If you look at the US and China, we don’t really have any real inherent conflict. Our economies are complimentary, our people get along very well, and just because China is rising and America is rebuilding itself, doesn’t mean that there has to be a big cataclysm as a result of that. It’s like a marriage where you have 500 children, you might be kind of tired of each other but you better get along because you can’t have a divorce. And that’s pretty much where the world is with China and the US.

Q. You’ve given analysis on China before in terms of what’s known as ‘the middle income trap’. Could you describe what that means and how China is coming along in terms of overcoming this crucial point?

A. Well this is the core of what they are starting to call “Li-cenomics”. China has to overcome the middle income trap, which is reaching $5,000 or $6,000 GDP per year per capita and your low-cost labor starts to get expensive and so you are no longer a low-cost producer, you have to then innovate and create your own products and develop your consumer market more and that is where China is right now. That’s a very hard thing to do because the people that made money in the first stage don’t want to take their hands off the steering wheel. I think it was 101 countries in 1960 (that) had reached that level, and by 2008 only 13 had surpassed. It’s a hard thing to do, and I believe China will do it. I don’t think China will be a place with a veneer of rich people and a lot of poor people. They have done that for a long time, but in the day and age of Weibo and other social media, I think people will know what’s going on and they are not going to tolerate it.

I have faith in the Chinese people and their ability to adapt, but it may not be a straight line. If you don’t have change from the top, you’re going to have change from the bottom, because the system is not as flexible and it can crack.

Q. You’ve said that China’s entrepreneurs don’t need a lot of direction, they take risks and are adventurous. Could you share an example or story that typifies that characterization?

A. I am on an airplane going to Guangzhou in about 1992, and this guy sitting next to me has a ragged sweater with holes in it and tennis shoes, and he’s writing up figures on cardboard from a cigarette carton, and he has a gym bag on his lap that he is kind of holding in a sort of protective and precious way. So I start talking to him and asking him what he does. He’s basically a guy that didn’t even graduate from grade school, and he goes around the country making money trading foreign exchange, and arbitraging the prices. You know, those people that used to be out in front of the hotel saying, “Change money, change money.” He goes around and he buys money from them and he goes to another city and sells it at a different rate. He lived in a massage parlor in Guangzhou, and was just traveling around the country with suitcases of money arbitraging. If you don’t give Chinese people a business opportunity, they will make one up for themselves.