The Overseas Chinese: A Driving Force

The Economist. Volume 324, Issue 7768. July 18, 1992.

As the 17th century, European travelers described the Chinese living in South-East Asia as being like Jews. The parallels are many: long exile from a mother country to which a deep cultural attachment nonetheless persists, apartness at best and genocide at worst in many of the adoptive countries, a strong commercial bent. The difference is the mother country. Israel matters only because it slots into the interests of greater forces. China is a giant that could dominate the 21st century.

If so, the overseas Chinese—ethnic Chinese living outside China—will have had a big hand in the proceedings. This seems odd. Even if the 21m in Taiwan and 6m in Hong Kong are included, they number only 55m. They are politically powerless in most of the dozen Asian lands and handful of western ones through which they are sprinkled. How can they drive the modernisation of a poverty-ridden continental power with a population of 1.2 billion?

The first answer is that they command resources far beyond their numbers. Of Asia’s four “tigers”—the poor world’s fastest developers over the past 30 years—only South Korea is not Chinese. Almost all the citizens of Taiwan and Hong Kong are Chinese. So are three-quarters of Singaporeans. Another four South-East Asian countries have ambitions (of varying degrees of plausibility) to follow in the tigers’ paw-steps. All four—Malaysia, Thailand, Indonesia and the Philippines—have Chinese minorities that account for an astonishing share of their economies.

Quite what that share is can only he guessed at. But all the guesses point the same way. A study of Indonesia in the mid-1980s reckoned that, of assets owned neither by foreigners nor by the government, 70-75% belonged to ethnic Chinese. A more recent study found that Indonesian Chinese, 4% of the population, controlled 17 of the 25 biggest business groups.

An observer of Thailand in the mid-1970s reckoned that ethnic Chinese, 8-10% of the population, owned 90% of commercial and manufacturing assets, and half the capital of the banks. The Philippines, no tiger yet, still has the stripes of one. Fewer than 1% of people in the Philippines are pure Chinese, but Chinese-owned companies account for two-thirds of the sales of the 67 biggest commercial outfits. Chinese dominate the smaller companies even more.

Malaysia’s Chinese, who make up around a third of the population, have a much larger share of economic power than that. The Malay-controlled government tried for 20 years to whittle this down by forcing the transfer (often faked) of Chinese-owned company shares to Malays. Last year it threw up its hands, in practice if not in principle. Too much investment was being lost to more hospitable Asian destinations, including China itself.

Overall, one conservative estimate puts the 1990 “GNP” of Asia’s 51m overseas Chinese, Taiwan and Hong Kong included, at $450 billion—a quarter bigger than China’s then GNP, and, per head, at about 80% of the level of Spain or Israel.

This performance rests on sturdy foundations. The Chinese are prodigious savers and investors. In the Chinese parts of Asia, savings rates run at 25-45% of GNP. The reasons are diverse: an ancient habit of laying aside money against frequent calamities, the high real interest rates available through informal Chinese networks, low income-tax rates, non-existent taxes on savings. The result is one of the world’s deepest pools of liquid capital. Taiwan, with only 21m people, has foreign-exchange reserves of $83 billion. Bank deposits alone in Taiwan exceed $300 billion; add in gold and deposits in the underground financial system and the figure for ready capital is at least twice that.

Worldwide, the overseas Chinese probably hold liquid assets (not including securities) worth $1.5 trillion-2 trillion. For a rough comparison, in Japan, with about twice as many people, bank deposits in 1990 totalled $3 trillion.

The Diaspora

This capital has been accumulated and is deployed through a distinctive form of social and business organisation. One Chinese writer described Japanese society as a block of granite and Chinese society as a tray of sand. Each grain in the tray is not an individual but a family. They are held together not, as in America, by law, government and public ideals, nor, as in Japan, by a concept of national solidarity, but by personal acquaintance, trust and obligation.

That was already true in China itself; it was intensified by the experience of the Chinese diaspora. The successive waves of emigration which, over the past 600 years, have carried people out of China often deposited them in places, or under circumstances (as in Hong Kong and Taiwan after 1949), where they felt besieged.

Except in Malaysia, the formal discrimination of the old days has disappeared. But as recently as 1960, 90,000 ethnic Chinese fled Indonesia over a three-month period fearing for their lives; five years later, at least 500,000 Indonesians, many of them ethnic Chinese, were slaughtered after the overthrow of President Sukarno.

Despite much intermarriage in Thailand, Indonesia and the Philippines, ethnic awareness there is never far below the surface. Thai Chinese, almost all of whom have Thai names and mixed blood, and few of whom speak a word of Chinese, assure visitors that assimilation is complete. Yet one Thai Chinese businessman, when asked to scrutinise a list of 100 top Thai business families, immediately identifies which are Chinese and which (only a handful of them) are not.

One way a rich but politically vulnerable minority can protect itself is by making mutually beneficial (and sometimes corrupt) bargains with those in power. Joint ventures between Chinese businesses and government enterprises, ruling parties, military interests and presidents’ families are not uncommon in South-East Asia.

However, the main response of the overseas Chinese has been to avoid government and its nuisances (especially tax) as much as possible. Except in Singapore, which has an unusually intrusive government, this has been as true of countries with Chinese majorities as of those with Chinese minorities. The result has been a highly decentralised business structure based on secretive, entrepreneurial, family-owned firms that are run autocratically but cooperate smoothly and informally with each other, often across national borders which, for these purposes, might as well not exist.

The Ties of a Kinship

The global network through which money, goods, ideas and occasionally people flow from one firm to another has been made possible by a peculiarity of the Chinese diaspora. Many of today’s overseas Chinese originated in Shanghai, notably the textile-makers who fled from communism to Hong Kong in the late 1940s and gave the British colony its first industrial boom. But most have come from southern China. By one reckoning, more than half of the entire diaspora can he traced to just two provinces, Guangdong, next to Hong Kong, and Fujian, across the strait from Taiwan.

Wary of governments and laws, the Chinese found that dialect, kinship, a common origin in a clan, a village or (at a pinch) a county gave a sure doting of trust for a business deal conducted even at great distance. However widely separated in the diaspora, Hakka tended to deal with Hakka, Chiu Chownese with Chiu Chownese. The certainty this gave and the informality it allowed shaped the loftiest transactions as well as the most humble. In the days when Taiwan had strict foreign-exchange controls, it was possible (as it still is) for someone to deposit a large sum with a gold shop in Taipei and for arelative to withdraw the equivalent next day from an affiliated gold shop in Hong Kong.

The Family Rules

The knots in this worldwide net are family-owned firms. Even in listed companies, the founding family’s control and accumulation of capital are principal aims; lines of authority are drawn to serve these aims. This accounts for the autocratic, “father-knows-best” management methods for which Chinese firms are famous.

It also explains the obsession with bringing younger family members into the firm: they can be expected to safeguard family interests. The sense of obligation is surprisingly strong. Heirs who have become doctors or physicists in America are summoned home to take over the family firm on the death of the founder. Even today, they come. There is, as yet, no sign of the now familiar western pattern of founding families becoming coupon-clippers, as they hand things over to professional managers and institutional investors.

Many of the biggest Chinese firms, like Li Ka-shing’s empire in Hong Kong and Charoen Pokphand in Thailand, have successfully incorporated professional managers, but never at the cost of diluting family control. The most sweeping, and amusing, demonstration of the power of the family idea was the careful carve-up by Y.K. Pao, a Hong Kong shipping and property magnate, of his enormous empire before his death. His four sons-in-law—one a Shanghai-descended Hong Kong businessman, one an Austrian businessman, one a Singaporean-Chinese doctor, the last a Japanese architect—were each given a piece of the business to run.

The high, market-set real interest rates which (together with low taxes) encouraged the family firms’ capital accumulation also helped to shape the structure of the overseas-Chinese economy. Throughout the Chinese diaspora—including North America and other remote outposts—there is a single informal market for capital. With none of the government allocation of low-interest credit that created (for example) South Korea’s industrial behemoths, overseas-Chinese businesses have tended to be relatively small.

This has not stopped the occasional giant from popping up. The companies owned by Liem Sioe Liong’s family are thought to account for 5% of Indonesia’s GDP. Taiwan boasts a dozen billionaire families controlling large conglomerates, Hong Kong nearly as many. But these are merely the highest features in a wide landscape where thousands of small firms rise swiftly to success, fall and are replaced.

Problems of Succession

A business system based on a multitude of autocratically owner-managed firms with intimate links to others like them has two big advantages: fast decision-making and acute sensitivity to markets. The disadvantages are institutional. As the firm gets bigger, it will eventually outgrow the overseas Chinese network for the partners and capital it needs. How will decisions be made when personal connections cannot be relied on? How can the firm possibly be run by one or at most a handful of people, once it passes a certain size? How can a succession be achieved? Sons do not always have the founding father’s touch.

Does this mean that, in a generation or two, Chinese firms will of necessity start to resemble the more institutionalised companies of the West, Japan or Korea? Some changes are already visible. Victor Fung, the chairman of Prudential Asia Capital and a scion of a Hong Kong business family, says that the days are gone when deals were done solely on the basis of a common birthplace or ancestor. Another network, that of second-generation overseas Chinese who got MBAs at the same American universities, is beginning to overlie the first.

The return of sons and nephews with MBAs is bringing at least an awareness of more systematic management to family firms. So too is the growing number of non-family, often expatriate, professional managers, especially in Hong Kong. But such things have brought no fundamental change. Nobody in Hong Kong imagines that the Stanford education of Li Ka-shing’s two sons, both in their 20s, has much to do with their recently being given pieces of the Li empire to run, or with how they will be handling those businesses. Even those who foresee a sort of westernisation coming in, through the reluctance of heirs to put in the 16-hour days that their fathers did, cannot imagine families allowing their interest in a company to be reduced below 35-40%.

This means that both the size of the Chinese firms and the lines of business they go into could be limited. One observer who thinks so is Gordon Redding, a business professor at the University of Hong Kong. He points out that the businesses in which the overseas Chinese have done best—trading, property, commodities, shipping, mining, timber—are lines in which, even on a global scale, an instinct for the right price, time and place counts for more than complex management skills. One man can still make the important decisions on his own. An interesting test of a Chinese company’s ability to move beyond this familiar ground will be Li Ka-shing’s telecommunications and satellite-television ventures.

Yet why exactly, Mr Redding asks, should one expect the overseas—Chinese system to change? It may pose a problem for the individual firm, constrained by an inability to grow beyond a certain size or to arrange a smooth succession. But as a system, with entrepreneurial firms coming and going in quick response to market pressures, it works fine. The conditions that created it—the low-tax, high-interest, mostly little-regulated business environment—are still largely unchanged. If that continues, so may the ways of Chinese business.

Going Home

Indeed, the old ways are being given a boost by the opening of a great new opportunity for the overseas Chinese: China itself. However distressing China’s politics may be, the overseas Chinese have always felt the cultural, linguistic and often familial pull of the place they came from. “The family spirit elevated to national scale” is how one Hong Kong businessman puts it. Deng Xiaoping has managed to cultivate this spirit among the overseas Chinese, and it has already borne much fruit in the form of universities, hospitals and high-risk investments provided for the mainland by overseas-Chinese businessmen.

Now there is much more. Mr Deng’s reformist policies have enabled China to enjoy one of the world’s fastest rates of economic growth over the past 15 years. His recent go-for-broke push for a market economy promises even better.

The most striking element of the Dengist reforms—and the likely reason for their success—is their extraordinary dependence on foreign trade and foreign investment as engines of development. Foreign trade is now equivalent to more than a third of China’s GDP. Foreign direct investment is pouring in: $11 billion in commitments last year, as much in the first half of this year. Probably uniquely, private foreign investment is even being used as a main way of building up infrastructure.

Though Japan is China’s biggest source of foreign loans, far the largest part of direct investment is coming from the overseas Chinese. Hong Kong and Taiwan together account for two-thirds of the direct-investment flows. The Chinese of South-East Asia add another 10-15%. And it is direct foreign investment—with the technology, management skills and export potential that it brings—which is really transforming China’s economy.

The investment is arriving through familiar channels. The overseas Chinese have started by doing business with people, provinces and even villages they are connected with. Four-fifths of Hong Kong’s investments have been going into Guangdong province, where four-fifths of Hongkongers have relations. Most of Taiwan’s money goes to Fujian. If the political hostility between Taiwan and the mainland makes this seem surprising, recall that the diaspora developed its particular methods of doing business not least to ensure that politics did not get in the way.

Western and Japanese firms can only watch enviously as the overseas Chinese exploit their contacts to snap up the safest and best of the opportunities which, by the estimate of one Hong Kong banker, yield average returns four times higher than investments in South-East Asia. China, for its part, enjoys a development resource that Russia, with essentially no ethnic Russian businessmen overseas, can only dream about, and India (with 11m overseas Indians) can only partially copy. If the recent enthusiasm of the overseas Chinese is anything to go by, the transnational Chinese economy, which in some ways already rivals Japan as a business influence in Asia, is poised for a great leap forward.