The key to breaking into new markets is to brand yourself by building strong relationships with the most important clients. Goldman Sachs’ initial route into China went through Hong Kong, and one of the most important businessmen I met early on was C. H. Tung, who would eventually become the first chief executive of the Hong Kong Special Administrative Region, the successor to the British colonial administration. He would serve from the Handover in 1997 until 2005.
C.H. ran Orient Overseas Container Line, founded by his father, C. Y. Tung, a visionary shipping magnate who built one of the world’s biggest fleets and famously bought the ocean liner RMS Queen Elizabeth to convert into a floating university (it caught fire during refurbishing and capsized in Hong Kong Harbor). Orient Overseas had run into trouble in the mid-1980s during a global shipping slump, and had been helped in part by mainland Chinese sources.
Orient Overseas did not have much business for us, but C.H. was a font of wisdom, an astute observer of China, and a big fan of America. C.H.’s closeness to China’s leaders had convinced him not only of the seriousness of their long-term vision but also of the nation’s likely success. He was a strong supporter of Deng Xiaoping’s economic policies and advised me that Goldman Sachs should focus on China if we truly intended to be a force in the region.
On one of my early trips to Hong Kong, Henry Cornell, a young real estate banker who would eventually run our private equity business in the region, described a prime piece of real estate that C.H. was looking to develop in Beijing. Plans for Oriental Plaza called for an enormous multipurpose development, the largest in Asia, with offices, residences, shopping venues, hotels, and restaurants. It couldn’t have been better located: the corner of Chang’an Avenue and Wangfujing Street, a stone’s throw from Tiananmen Square, and arguably the best real estate in China. As a way to get to know the market, I asked C.H. if Goldman could invest alongside him, and he agreed.
In 1992 I joined C.H. and some other investors when they flew up to see Chinese leader Jiang Zemin about the project. I had worked in the White House in my twenties and had met with President Nixon on numerous occasions, but I still found myself awed to be meeting with the general secretary of China’s Communist Party. Jiang Zemin was a force of nature, with a big, outgoing personality. He had been picked by Deng to run the country in 1989 after the Tiananmen crackdown because of his adroit handling of student protests in Shanghai, where he had been Party secretary. Jiang could be easy for foreigners to underestimate because he had a disarming manner, with his thick black-rimmed glasses and unimposing appearance.
We met with Jiang at the Great Hall of the People, the cavernous Soviet-style building that stretches a fifth of a mile along the western edge of Tiananmen Square in the heart of Beijing. Perhaps because I was the only Westerner among the group of eight or ten, I played an outsize role in the discussion. Jiang began speaking in English to me, rattling off the names of U.S. companies like General Electric, Boeing, and IBM, and stressing how important it was that China adopt U.S. accounting methods. He was right, of course: Chinese companies’ books were generally a mess, and until the country embraced transparency and adopted stricter accounting standards, it would be impossible to sell the shares of its big companies overseas. He looked me right in the eye and said, “Assets equal liabilities plus equity,” and I almost burst out laughing. As I have said since, I’m not sure that our country’s leaders could have summed up a balance sheet as succinctly as this born-and-bred Communist.
The trip took place right after the 1992 Olympics in Barcelona, where Michael Jordan and the U.S. men’s basketball “Dream Team” had put on such a show. The world had also been treated to the spectacle of the Chinese women swimmers unexpectedly winning four gold medals. Jiang asked me if I had been following the Olympics.
“Yes, of course,” I said.
“What did you think of our swimmers?” he asked. He watched me closely. The Chinese team had come from nowhere to win at record-setting paces, and there were widespread rumors of illegal doping.
“Very interesting,” I said, searching for a neutral tone. Jiang nodded, then said with a smile, “Chinese bodies, foreign technology.”
I’ve often thought since of that phrase: Chinese bodies, foreign technology. I learned later that it echoed the words of Zhang Zhidong, a 19th-century Qing Dynasty official who championed opening his country to the outside world, advocating, “Chinese learning as a base, Western learning for practical applications.” This approach explained much about China’s rise over the past few decades: it is the essence of Reform and Opening Up. The Chinese took their enormous store of human power, their brawn and their brains, and coupled it with knowledge and innovation and best practices that they’ve begged, borrowed, bought, and, frankly, stolen from the West. The combination has allowed the Chinese to turn themselves into an extraordinary colossus that boasts the fastest-growing military among major powers and a rapidly expanding GDP that is expected to pass that of the U.S. in the not-too-distant future.
The idea of China challenging the U.S. for economic superiority any time soon would have been unimaginable back when I met Jiang. China was only just waking up from the political and economic nightmares of its recent past.
When Mao Zedong proclaimed the founding of the People’s Republic of China in Tiananmen Square in October 1949, he was charting a new course for a country hobbled by more than a century of colonial oppression and internal rebellion that had culminated in two decades of widespread, constant conflict—against warlords and the Japanese and between the Communists and the Nationalist armies of Chiang Kai-shek in a long-running civil war. In short order, Mao imposed Soviet-style command and control economic planning on the country, collectivizing agriculture and shifting resources to a massive industrialization program that focused on heavy machinery manufacturing, with scant attention to consumer goods and services. The economy grew as it recovered from wartime disruptions, and China made strides in meeting the basic needs of its people. But the imposition of misguided policies and disastrous planning in the midst of a political reign of terror wreaked havoc. Mao’s attempt to accelerate industrialization by mobilizing ordinary citizens in the Great Leap Forward (1958–1961) led to widespread famine thought to have killed 30 million or more.
Maneuvering to hold on to power, Mao subsequently initiated the Cultural Revolution, purging the senior ranks of the Communist Party and unleashing the Red Guards to persecute millions throughout the country in the name of class struggle. Universities were shut and educated youth sent to the countryside to do manual labor. Many of today’s rising generation of leaders lost years toiling in rural areas before the country’s nightmare ended with Mao’s death in 1976.
By then the country was in shambles, isolated internationally and adrift economically. Mao’s radical egalitarianism had triumphed in a perversely dystopian way: the masses—farmers or factory workers—were all more or less poor. More than half of China’s nearly 1 billion people lived in dire poverty, on less than $1 per day, and the country suffered from chronic shortages. Staples like grain and cloth were still rationed into the 1980s and beyond. By contrast, during the years of Mao’s reign, the U.S. enjoyed a postwar surge in prosperity: from 1949 to 1976, GDP grew almost sevenfold, to $1.8 trillion, while per capita income nearly quintupled.
In 1978 Deng Xiaoping, who had survived repeated political banishment to emerge as the paramount leader, set the country on a course of profound change. He began by rejecting Mao’s corrosive politics and focusing the Party on economic development, encouraging the adoption of market principles to shape “socialism with Chinese characteristics.” A pragmatist at heart, he famously said, “It doesn’t matter whether a cat is black or white, as long as it catches mice.”
The first significant reforms occurred in agriculture. Farmers, forced into collectives, had been required to concentrate on growing grains to meet constantly raised targets and to sell their produce for low prices, effectively subsidizing urban industry. Productivity stagnated and China routinely had to import food. Spurred by Deng, the leadership decided to give the collectives more leeway. Many imitated experiments under way in places like Anhui and Sichuan Provinces that allowed farmers to cultivate small, private plots. Before long, collectives across the country had adopted the so-called household responsibility system in which farms were divided into smaller family-run plots. The households contracted to meet certain quotas and were free to sell any surplus on the open market. With these new incentives, productivity soared. The grain yield rose by 34 percent between 1978 and 1984. By then collectives had all but disappeared. Farmers had expanded into more lucrative cash crops and livestock, giving the Chinese people richer and more varied diets and putting money in the farmers’ pockets to spend.
The increased productivity meant fewer workers were needed in the countryside. Many of the excess laborers were absorbed by newly created or energized rural factories; these township and village enterprises were frequently owned by local governments but were not included in the overall national economic plan. They were free to act more like private sector companies, churning out goods in high demand in the market or competing with big centrally controlled state-owned monoliths. Rural Chinese began to look farther afield for work. Millions headed for the coastal cities, drawn to the factories mushrooming there, beginning a wave of urbanization unprecedented in human history: over the next three decades some 300 million people would move from farms to urban areas, massively boosting the nation’s productivity but contributing to bouts of unrest and ever-worsening environmental degradation.
Reform came to the urban industrial sector as well. Beijing undertook industry-wide restructuring efforts, hiving off new companies from enormous government ministries. It began to shift its emphasis from heavy industry to consumer goods and took steps to give state-owned enterprises greater autonomy, decentralizing decision making and introducing a dual-track pricing system. Managers were required to meet modified plan quotas but were permitted, beyond that, to produce and sell goods on the open market at flexible prices. This lucrative gray market was meant to help push state-owned enterprises to focus more on profit than on fulfilling plan quotas, and executives were given more latitude to operate and to experiment with incentives.
Keeping his pledge to rejoin the international economy, Deng gave the go-ahead to politicians in Fujian and Guangdong, in southeastern China, to create special economic zones, or SEZs, to take advantage of links with overseas Chinese communities. Shenzhen was next to Hong Kong, Zhuhai bordered the then-Portuguese colony of Macau, and Xiamen and Shantou lay across the strait from Taiwan. Chinese and foreign companies operating in the special economic zones enjoyed lower tax rates, did not have to pay import duties on components and supplies for processing, faced fewer import and export restrictions, and had easier access to investment from foreign sources. Powerful symbols of China’s commitment to Reform and Opening Up, the SEZs served as laboratories that, among other things, embraced incentive pay for workers and competitive bidding for construction contracts. In 1984 Deng Xiaoping visited Shenzhen to mark a new round of reforms that accepted the inevitability that some individuals would become wealthier than others. “To get rich is no sin,” Deng explained to Mike Wallace of the TV show 60 Minutes in 1986. “We permit some people and some regions to become prosperous first, for the purpose of achieving common prosperity faster.”
That message went out to all, unleashing the pent-up energy and ingenuity of the Chinese people, who were eager to improve their lot after years of privation. The economy boomed. GDP jumped by an average of 10 percent annually in the early 1980s, and incomes soared in urban (up 60 percent) and rural (up 150 percent) areas. Washing machines, color TVs, and motorcycles replaced the bicycles, wristwatches, and sewing machines that had been status symbols under Mao. Millions upon of millions of these must-have items were bought.
Entrepreneurs began to make their presence felt. Eager to use their long-suppressed talents, some jumped from stable jobs in government, state companies, or academia to xia hai, or plunge into the sea of business, as a popular phrase from that era put it. Other intrepid souls came from farms to try working for themselves—as street vendors, food stall operators, bicycle repairmen, small-scale manufacturers, insurance salesmen. In the process, they authored improbable success stories to rival any from America’s fabled Gilded Age. Though state-owned companies continued to enjoy enormous government-sanctioned advantages, these pioneers would become the engines of China’s job creation and innovation and the foundation of many of the country’s biggest companies and greatest fortunes.
“People in the U.S. have no way of understanding that before Reform and Opening Up, even if you had the ability, you couldn’t do anything with it,” my friend computing pioneer Liu Chuanzhi once told me. “But reform gave people a choice.”
Liu certainly made the most of his choices. In 1984, at age 40, he and several colleagues decided to leave a computer research institute at the prestigious Chinese Academy of Sciences with the equivalent of a little less than $80,000 in backing from the institute and the use of a former bicycle shed on its grounds. The fledgling entrepreneurs tried selling TVs and digital watches before hitting it big with a circuit card that enabled personal computers to process Chinese characters. Before long, the company was making and selling its own PCs, in addition to distributing those of foreign manufacturers. It soon dominated the country’s computer market, on its way to becoming today’s mammoth Lenovo, and turned chairman Liu into a national icon.
There were many stories like Liu’s in the 1980s. Cao Dewang was born in 1946 in Fujian, the province just north of Guangdong on China’s southeastern coast, across from Taiwan. Cao peddled cut tobacco and became a fruit seller and chef after a stint in the countryside during the Cultural Revolution. By 1983 he was running a municipal glass factory. Four years later he set off on his own, launching Fuyao Glass Corporation. He first made panels for water meters, then, specializing in safety glass, he built a global company that is the second-largest, and most profitable, supplier of windows for auto companies like General Motors, Volkswagen, and Toyota Motor Corporation.
Or consider Zong Qinghou: after a decade on a communal farm during the Cultural Revolution, he was peddling popsicles, soda, and notebooks by tricycle in his native Hangzhou. In 1987, along with two retired teachers, Zong, who didn’t go to high school, secured a $22,000 loan and began selling tonics for children and later adults. The drinks caught on and turned his company, Hangzhou Wahaha Group (wahaha is Mandarin for “laughing children”), into China’s dominant beverage company and Zong into the richest person in the country in 2013.
Still, the path of reform was uneven: these early forays into capitalism did not come smoothly or without cost. Political changes lagged economic ones, resources were wasted, pollution worsened, and the unequal distribution of new wealth gave rise to widespread complaints about nepotism and corruption. Reformers had to contend with more conservative elements in the Party that wanted to slow or halt the pace and extent of change. Unintended consequences abounded. The country’s leadership had wanted to prohibit a return to family farming even as it loosened the reins on the collectives, but once unleashed there was no holding back the farmers. Six years later collectives were gone and family farms predominated.
Deng understood that change would be unpredictable and fraught with danger. The country, he said, would have to approach reform like crossing a stream by feeling for stones, one at a time. For much of the 1980s, it was two stones forward, one stone back.
Growth accelerated and stalled in abrupt turns as Deng and fellow Party elders like Chen Yun, who had sponsored Deng’s rehabilitation in the 1970s, wrestled with how much and how quickly to proceed. Early initiatives led to spurts of overheating that were reined in by Chen, a conservative who advocated careful economic planning and slower growth. A member of the all-powerful Standing Committee of the Chinese Communist Party, Chen was known for his “birdcage” theory, which proposed that the free market in China should have just enough freedom to fly like a bird inside the bars of a planned economy.
A particularly difficult time came in 1988, when the economy turned down after a botched effort to lift price controls. Party General Secretary Zhao Ziyang, a committed reformer, had pressed leaders to adopt market pricing for all but a few staple items to avoid the messiness and potential corruption inherent in the two-track system, where goods could be bought by state entities through official channels and sold for more on the open market. Deng allowed controls to be removed on an increasing number of goods, and prices started rising. Rapid credit expansion sparked economic growth, but inflation soared, spooking a public used to the fixed prices and chronic shortages of consumer goods of the central planning era. When Zhao let it be known that the government had decided to completely liberalize prices, people panicked. They hoarded food, yanked deposits from banks, and took to the streets in protest, causing the State Council to reverse course and reinstitute some price controls.
Conservatives wrested control of economic policy from Zhao, and China headed toward a hard landing. Investment dropped, wage increases stopped, bank lending was curtailed, construction projects were canceled. Growth plunged in 1989, even as inflation remained very high. This tailspin, coupled with continued anger over corruption, formed the backdrop to the 1989 student protests that were sparked by the April death of Hu Yaobang, the reformist general secretary who had been ousted in 1987. The military crackdown in Tiananmen Square put further market reform and price liberalization on hold. Foreign governments and corporations cut back on trade and curtailed investment to object to the violent suppression of the protests.
By 1991, when I made my first trip to China, the mighty engine of the Chinese people was about to be jump-started again. In January 1992 Deng Xiaoping, though technically in retirement, traveled through the south calling for the pace of reform to be sped up. In Shenzhen, he said the SEZ experiment had exceeded his expectations, and he proclaimed himself reassured. He rebuked hard-liners who feared these changes would lead to capitalism and said the Party had more to fear from ideologues of the ultra-left than liberalizers on the right. Such was the nature of the politics of the day that it took weeks before Deng’s Southern Tour, reported by newspapers in Hong Kong and Guangdong, made national news. By then Deng had outmaneuvered the hard-liners, and Party General Secretary Jiang Zemin, who had been contending with conservatives in Beijing, grasped Deng’s banner firmly. That fall reformers Zhu Rongji, a vice premier, and Hu Jintao, Party secretary of the Tibet Autonomous Region, joined the Standing Committee. GDP shot ahead by more than 14 percent as credit spigots opened and provinces tried to outdo one another in promoting pell-mell growth. In 1993 the Politburo endorsed the “socialist market economy.”
For the first two-thirds of my life, China was as far from my mind as it was from my hometown of Barrington, Illinois (population 5,012). My grasp of the country was shallow and ill informed. I’d grown up like most Americans of my generation in the shadow of the Cold War, ducking under my desk with my classmates in preparation for a nuclear first strike. My father even built a concrete-lined bomb shelter in the basement and stocked it with canned goods. (My mother still uses it to store Christmas decorations and other odds and ends.) We worried that the Russians would bomb us, and, if they didn’t, that the Chinese would develop the ability to do so. And unlike our experience with the Russians, we’d actually fought the Chinese. Stories of the Chinese pouring across the Yalu River or brainwashing captured GIs were riveting and deeply disturbing to me as a boy. Similar impressions stayed with many.
I was as astonished as anyone when President Nixon landed in China in February 1972. I was working in the Pentagon then and moved to the White House domestic policy staff two months later, just before Nixon’s trip to Moscow kicked off détente. I grasped the brilliance of his moves, triangulating our strategic interests to throw the Soviet Union off balance even as we prepared for the Vietnam War to end. But I was narrowly focused on my job, shaping ideas for tax reform—like a value-added tax to fund education—that had no chance of getting passed. I wouldn’t have predicted that Nixon’s trip would form the basis of the U.S. relationship with China for the next 40 years or that it would ultimately have such a deep—and enriching—impact on my own life.
My first trip to Hong Kong came just after I had been named one of three co-heads of Goldman’s investment banking division at the end of 1990. I was asked to take on responsibility for Asia because, living in Chicago, I was deemed “closer” than my New York colleagues. That will tell you how important Asia was to the firm’s plans back then. Indeed, until the late ’80s, we had had no business in China and not much more in Hong Kong. Then the firm moved Moses Tsang, a stellar bond salesman, back to his native Hong Kong. Moses had graduated from Bemidji State University in Minnesota, after which he had earned a master’s in social work at the University of Iowa, before joining Goldman, where he sold bonds in New York, Tokyo, and London. In Hong Kong Moses quickly built a business selling U.S. bonds to local institutions and wealthy individuals. By the early 1990s the firm had perhaps a hundred people in Hong Kong, nearly all in bond sales or trading. The banking side had only a handful of folks, and almost no business.
When I saw Hong Kong for myself, I was quickly captivated by its beauty, its sleek modernity and pulsating energy, and the straightforward nature of local businessmen. Not long after, I flew to Beijing for the first time with Henry James, the partner who oversaw Asia from his office in Tokyo. What a contrast to sophisticated Hong Kong! The mainlanders, many of whom still wore Mao jackets buttoned to the neck, seemed like country bumpkins compared with the worldly city dwellers of Hong Kong, who sported bespoke European-cut suits fashioned by their famed tailors. Beijing’s streets were filled with bicycles, and riding in the quickly growing fleet of automobiles was harrowing. I remember landing at the old airport and driving to our hotel on a single-lane road jammed with horses and carts, wobbly bicycles, and speeding cars. The driving was so aggressive—ill-advised passing, horns honking—I was relieved that we didn’t get killed, or kill someone.
In those days, standing at the corner of Chang’an Avenue and the Second Ring Road, which circles central Beijing at a distance of just 3 miles from Tiananmen Square, you could see mule-drawn carts bringing in the winter cabbage. Looking out to the Third Ring Road, under construction another mile and a half distant, there were still swaths of hutongs, the characteristic Beijing neighborhoods centered on narrow lanes and residential houses built around courtyards that had stood for hundreds of years.
All of this was quickly disappearing. On subsequent visits I watched the old neighborhoods being torn down as fast as you could blink, replaced by massive buildings housing government ministries and office, residential, and hotel complexes. The pace of change was stunning. Landmarks seemingly disappeared between trips. As bewildering as it was to a visitor like me, it must have been deeply disconcerting to the Chinese.
Yet the energy and work ethic—and desire—that this change reflected was infectious. China’s potential struck me when I visited the special economic zone in Shenzhen, in southern Guangdong Province, where I saw the amazing entrepreneurial spirit in action in factories and ranks of buildings under construction. The skyline was a forest of cranes; fields of bulldozers waited to break ground for new buildings.
Shenzhen was a gold mine for Hong Kong entrepreneurs, who were pouring in money to start businesses they could run at almost no cost. The Chinese government took care of benefits and what little health care there was for the workers, who toiled round the clock. The Hong Kong manufacturers paid bare minimum wages. They transferred their product at cost into Hong Kong, where they paid no corporate taxes. They marked it up and shipped it to the world’s consumers. How could you have a better deal than that?
The arrangement worked for the Chinese, too. I’m not minimizing the dreadful working conditions in some factories—long hours, few if any bathroom breaks, poorly ventilated factory floors—but millions of jobs were being created, and the economy was booming. For the first time, people had money to spend and plenty of appealing and desirable goods to spend it on. People from all over Guangdong were flocking to the SEZs, and people all over the country were pouring into Guangdong and the other coastal provinces where the experimentation was most advanced.
To be sure, I was uneasy in the aftermath of the Tiananmen Square crackdown. I found it hard to shake the haunting image of that lone, fragile-looking man with the string shopping bag standing in front of the tank, and I was deeply disturbed by the imposition of martial law. The protesters had sought greater freedom, only to be denied, harshly, by their government.
But I believed then, and still do today, that U.S. engagement with China makes sense—indeed, that more engagement, not less, is the better course, politically and economically. I was convinced that China was making hard, market-oriented choices to improve the welfare of its people, and that an increase in their standard of living would bring them closer to the world community and to achieving the freedoms we embrace in America. These ideals and rights may or may not come, but they are more likely to be achieved with prosperity than with grinding poverty.
I’m a sucker for action, and the Chinese were nothing if not active. And frankly, I have to say it was quite a refreshing contrast to the gloomy nay-saying that we had gotten used to back home in the States in the depths of the recession that followed the savings and loan debacle. Maybe it was my naïveté and lack of sophistication, but I saw no reason the Chinese on the mainland should not aspire to, or achieve, the success of their brethren in Hong Kong and Taiwan. They would have to make big changes, but it was clear they were trying. I felt we could help them and help ourselves in the process.
I was not without my doubts, though. I remember one trip to Shanghai, when I had a Sunday afternoon to myself and took a long stroll along the Bund. A prerevolution time capsule, the famous waterfront could have passed for Wall Street or the City of London of a bygone era with its historic buildings running along the western bank of Huangpu River. This thoroughfare had been the home of Western and Chinese banks, trading houses, and markets, and they had all but disappeared in an instant after the revolution. The thought gave me pause. Many at Goldman, including such discerning executives as co-chairman Bob Rubin, asked tough, probing questions about China’s prospects, in no small part because it was never certain that the reforms would last. I had to ask myself: What makes me think it won’t happen again, and how can I be sure Goldman Sachs won’t lose its shirt investing here?