💭 China: Notes from the Middle Kingdom

On social credit, governance, and Hong Kong

Dear readers,

A few weeks ago, EV reader Kevin Werbach guest-edited Exponential View, following his two-week trip to China. You can read his EV here.

He kindly shared his notes about China with the members of EV Premium tier, and now we’re making them available to you as well.

Kevin is one of the smartest thinkers about technology I know, and he wrote the best book about blockchain that I’ve read: The Blockchain and The New Architecture of Trust.

Premium members can connect with Kevin and discuss his writing here. Upgrade your subscription to do this—now with 28% off ($72/year instead of $100/year) until my birthday at the end of the month!

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Enjoy,
Azeem


I recently spent sixteen days visiting seven cities in China with a small faculty group, meeting with companies and alumni to gain a better understanding of the country. 

The dominant themes one hears in the West are that China is very very big, and authoritarian. Both are true, but only part of the story. In some ways, China is a radically decentralized place. Local governments and individual entrepreneurs are empowered to experiment unlike nowhere else... within certain limits, of course. Be skeptical of anyone (including me) generalizing about what China is like, or what the Chinese government does. 

We visited a large factory run by the company that makes one-sixth of the shirts sold in America (you’ve never heard of it). They’ve restructured their entire production process for modularity and customization; their typical order is just 400-500 units of each garment. The same was true of the Flextronics assembly plant that was building personal robots right next to power inverters for solar panels. Yum China, which runs 8700 Kentucky Fried Chicken and Pizza Hut franchises in China (#362 on the Fortune 500 as a standalone company) introduces sixty new products a year, after testing over 200. 

Shenzhen, a vast tech-driven metropolis that essentially didn’t exist forty years ago, feels very different than Beijing. It replaced all its taxis and buses with electric vehicles overnight to reduce pollution. It’s the home of Tencent, creators of the ubiquitous Wechat super-app, with 1.1 billion users. More than one contact told me that mobile payments took off because the Chinese government didn’t move fast enough to regulate a new offering from a tech startup far away in the south. 

Last year there were $40 trillion of mobile payments transactions in China, mostly on WeChat and on Alibaba’s Alipay (which started as an escrow service to overcome the trust problem for e-commerce). No one except foreigners uses cash any more, at least where we visited. The government forces the taxis to accept my 100 RMB notes, but sadly they couldn’t force them to carry any change. And there was not a single ATM beyond security in the cavernous Shenzhen airport; who would need one? 

Cryptocurrency advocates have brilliant speculations about what a digital-native financial system might enable, but we’ll soon see the real-world second-order consequences of a very different one. Although the People’s Bank of China may also be the first major country to launch a blockchain-based central bank digital currency. It announced this week the completion of five years of development work. 

People laughed when I asked about Social Credit. They didn’t recognize the dystopian nightmare described in the West, where every Chinese citizen is given a score based on social media behavior and government records that determines their access to services. And not because they were ignorant of the potential. This recent article in a Chinese newspaper talks about how local authorities reversed the use of Social Credit to discipline a teacher after it generated a storm of outrage. 

Social Credit is actually a hodgepodge of private and public systems, including some of those local government experiments. One reason for the relative lack of concern is that China faces a huge gap in trust, which reliable reputation scores may help close. And Social Credit shows that, even in China, major IT integration projects rarely succeed. The comprehensive system envisioned in the original 2014 planning document seems nowhere close as its planned 2020 launch date approaches. The dangers are real, but they are more similar to those posed by personal data aggregation systems in the West than we tend to admit.

I arrived knowing that China is not fully subject to the rule of law, because the Chinese Communist Party stands above the legal system, and because corruption remains significant. Environmental and food safety problems are widespread. So I wasn’t prepared for how many companies talked about regulation driving their business decisions. 

A luxury retailer in Chengdu described how Chinese cosmetics regulations requiring animal testing for safety posed a conundrum for global brands, which advertise they don’t test on animals. A medical device startup outside Shanghai described how FDA approval in the US was much easier than similar approval within China, which requires clinical trials on human patients for the category. And at a General Motors joint venture, we learned how Chinese environmental regulations are pushing the rapid growth of their electric car offerings (including outside China), as GM mothballs American factories building anything other than gas-guzzling SUVs and trucks. 

China is growing and innovating at a breathtaking pace. Beneath the surface, though, I sensed worries that a golden age (for the largely wealthy and cosmopolitan people I was dealing with) may be ending. Growth is slowing. Inequality is rising. Debt levels are unsustainable. The domestic car market, the biggest in the world, turned south last year and is worse this year. Even for electric vehicle manufacturers. No one knows how far the trade war will go. The rest of the world is protesting human rights abuses against the Uighur minority in Xinjiang. And Hong Kong, where we started our trip, is the site of months of demonstrations against overly intrusive Chinese rule. 

The Hong Kong protestors are resolute in their demands, despite tear gas, arrests, and menacing sabre-rattling by the People’s Liberation Army. They are using the technological innovation of which China is so proud against the regime, from employing laser pointers to disrupt facial recognition systems to deciding on march routes in real-time through social apps. They even use the dating app Tinder and Pokemon Go to communicate around government controls. 

Last month, 600 drones in the sky above Shenzhen spelled out ‘I love HK. I love China.’ (Check out the video.) Whether one can do both is a hard question. China is a magical success story on the knife-edge of catastrophe; it will remain so even if, as we all hope, the current Hong Kong unrest is resolved without violence.

‘Greater China’ is the term for the notional One China encompassing Hong Kong, Macao, and Taiwan. I returned from my trip convinced that the real Greater China is the macrocosm of our global economic and technological interdependence. For the sorts of people who read EV, it’s a place that deserves your close attention, whatever your conclusions. 

Kevin


Kevin Werbach is a professor at the University of Pennsylvania’s Wharton School, focused on emerging technologies. He’s helped develop US internet policy in the Clinton and Obama Administrations, hosted the Supernova technology conference, and wrote Esther Dyson’s influential Release 1.0, back when tech news arrived monthly on paper. Kevin has concentrated on telecommunications regulation, wireless innovation, social technologies, gamification, AI and data ethics, and blockchain, among other topics over the years. His latest book is The Blockchain and the New Architecture of Trust. @kwerb