I recently wrote a column suggesting that while some overheated Chinese markets, such as real estate, may offer shorting opportunities, I'd be wary of the argument that China's economy today is just one big short-inviting bubble, a la Dubai. Your honor, I'd like to revise and amend my remarks.
There is one short position that does intrigue me. If China forces out Google, I'd like to short the Chinese Communist Party.
Chinese companies are more backward and more advanced than most realize. There are two Chinese economies. There is the Communist Party and its affiliates; let's call them Command China. These are the traditional state-owned enterprises.
Then there is a second China, concentrated in coastal cities such as Shanghai and Hong Kong. This is a highly entrepreneurial sector that has developed sophisticated techniques to generate and participate in diverse, high-value flows of business knowledge. I call that Network China.
What is so important about knowledge flows? This is the key to understanding the Google story and why one might decide to short the Chinese Communist Party.
John Hagel, the noted business writer and management consultant, argues in his recently released "Shift Index" that we're in the midst of "The Big Shift." We are shifting from a world where the key source of strategic advantage was in protecting and extracting value from a given set of knowledge stocks — the sum total of what we know at any point in time, which is depreciating at an accelerating pace — into a world in which the focus of value creation is effective participation in knowledge flows, which are constantly being renewed.
"Finding ways to connect with people and institutions possessing new knowledge becomes increasingly important," said Hagel. "Since there are far more smart people outside any one organization than inside."
And in today's flat world, you can access them all. The more your company or country can connect with relevant and diverse sources to create knowledge, the more it will thrive. And if you don't, others will.
I would argue that Command China, in its efforts to suppress, curtail and channel knowledge flows into politically acceptable domains to sustain the control of the Communist Party — i.e., censoring Google — is at odds with Network China, which is thriving by participating in global knowledge flows. That is what the war over Google is about: It is a proxy for whether the Chinese will be able to search and connect wherever their imaginations and creative impulses take them, which is critical for the future of Network China.
China has world-class networked companies that are "in the flow." The orchestrators of these companies' networks, Hagel said, "encourage participants to gather among themselves in an ad hoc fashion to address unexpected performance challenges, learn from each other and pull in outsiders as they need them. More traditional companies driven by a desire to protect and exploit knowledge stocks carefully limit the partners they deal with."
Command China has thrived largely by perfecting the 20th-century model for low-cost manufacturing based on mining knowledge stocks and limiting flows. But China only will thrive in the 21st century — and the Communist Party survive in power — if it can get more of its firms to shift to the model of Network China. That means enabling more Chinese people, universities and companies to participate in the world's great knowledge flows.
But China seems to be betting it can straddle three impulses — control flows for political reasons, maintain 20th-century Command Chinese factories for employment reasons and expand 21st-century Network China for growth reasons. But the contradictions could undermine all three.
Command China, which wants to censor Google, is working against Network China, which thrives on Google.
For now, it looks as if Command China will have its way. If that turns out to be the case, I'd like to short the Communist Party.
THE NEW YORK TIMES