Today’s China Readings July 11, 2012

Google may have a declining consumer business in China but it still generates hundreds of millions of dollars a year selling ads on its global, ex-China networks to Chinese enterprises targeting foreign audiences. Google has a decent business from China even though the Chinese government does not trust Google and some in Beijing believe it is a tool of the US government that was instrumental in the 2011 Arab Spring. Last month’s increased transparency about censored keywords only reinforced Google’s position in the eyes of the Chinese government.

Chairman Eric Schmidt again displayed a level of public candor you rarely see from a foreign executive discussing China, and his comments to Foreign Policy’s Josh Rogin will only make Beijing more paranoid about Google. Schmidt declared that the Great Firewall of China will fall:

“I believe that ultimately censorship fails,” said Schmidt, when asked about whether the Chinese government’s censorship of the Internet can be sustained. “China’s the only government that’s engaged in active, dynamic censorship. They’re not shy about it.”

When the Chinese Internet censorship regime fails, the penetration of information throughout China will also cause political and social liberalization that will fundamentally change the nature of the Chinese government’s relationship to its citizenry, Schmidt believes…

The push for information freedom in China goes hand in hand with the push for economic modernization, according to Schmidt, and government-sponsored censorship hampers both.

“We argue strongly that you can’t build a high-end, very sophisticated economy… with this kind of active censorship. That is our view,” he said.

Coincidentally, the latest issue of Caixin Magazine has an essay by Zhou Hanhua, a researcher in the law department of China’s Academy of Social Sciences, arguing that China’s weak rule of law and Internet regulatory regime stifle innovation in the Internet sector–网络创新靠自由. In May James Fallows led a good discussion about China’s Internet controls and innovation in Is China’s Internet Actually ‘Slow’? And Does That Matter?. Zhou Hanhua would likely agree with what I wrote at that time, that “Internet control is a symptom of the political and cultural environment that stifles innovation, not the cause.”

But rumors of a dearth of innovation in China’s Internet industry are exaggerated. China actually has a remarkable amount of innovation, as Pando Daily’s Hamish Mckenzie astutely observes in China’s Surprising Internet Advantage Over the US.

Back to Google, Eric Schmidt’s comments about smartphones will also confirm suspicions held by Beijing:

Schmidt believes that smartphone technology can have a revolutionary effect on how people in the developing world operate and he is researching how smartphone use can help fight corruption and bad governance in poor countries.

Google’s Android has 70% market share in China’s booming smartphone segment, but the Android versions in China are mostly stripped of all connections to Google. It is not clear that Google will receive any direct benefit from Android’s proliferation in China, though certainly there is competitive value in the suppression of market share for Google competitors Apple and Microsoft.

The cover story of the latest Caixin asks how the economy will land–怎样着陆? Caixin tends to be bearish on the Chinese economy, but this is a nuanced article. The report says that the macroeconomy is having a soft landing but corporate profits are having a hard landing (宏观经济软着陆,企业盈利硬着陆), something Reuters also examines in China’s slowing economy claiming firms’ CEOs, profits.

The Caixin article concludes that while China may never return to its blistering growth rates, a crash is unlikely, the situation is better than it was in 2008 and in fact the bottom may not be far off. Do not expect the vocal China bears or most of the well-known financial blogs to give this article much play, as it strays from the dominant China’s Economy: Apocalypse Soon? meme.

China continues to make moves in the South China that unnerve its neighbors. It just appointed a Hawkish commander to head the South Sea Fleet:

A famously hawkish senior navy commander has been appointed as the political commissar of the South Sea Fleet of the Chinese Navy. Vice-Admiral Wang Dengping, previously the political commissar of the North Sea Fleet, will now oversee the fleet that patrols the disputed South China Sea waters.

Leading foreign affairs and military experts urged a Tougher line on South China Sea:

The country’s leading foreign affairs and military experts yesterday called on Beijing to take a tougher approach to mounting tensions in the South China Sea ahead of a key regional summit in Cambodia this week…China should rethink its current policies in handling territorial disputes and act more assertively to strengthen its sovereignty claims over the contested areas, according to panellists who spoke at the World Peace Forum in Beijing.

And China has big plans for the new Sansha city, as Sansha officials are discussing large-scale commercial development:

Situated on a cluster of islands off of Hainan Province, China’s newest prefecture-level city may soon be offering more than just sun, sand and controversy. An inside source said local officials in Sansha are weighing commercial development plans ranging from a tax haven status to building casino resorts.

Vietnam and the Philippines have repeatedly stated their opposition toward Sansha since the State Council moved to elevate the status of the city from county-level to prefecture-level on June 21.

Sansha officials are now flirting with plans to develop the area by building more ports, opening casinos and creating an offshore tax haven, said a source close to the former Administration Office for the Xisha, Nansha and Zhongsha islands…

Sansha is the country’s smallest prefecture-level city by population with less than 1,000 people and a land area of 13 square kilometers. However, it is the largest in administrative scope, with territorial waters that cover 2.6 million square kilometers.

Meanwhile, Hilary Clinton is visiting Vietnam.

Congratulations to my former MarketWatch colleague Dave Callaway on his new job as Editor in Chief of USA Today. This is a great move by Gannett and a real loss for Dow Jones.

Today’s links:

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