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Faculty Viewpoints

Can markets change society?

Professor Zhiwu Chen has been watching what’s happened as China adopts such financial instruments as mortgages and mutual funds. He was born in a rural village in China, and when he goes back, he says, he sees a country that’s being remade by markets.

Q: How have markets changed China?

Interpersonal relationships have been changing. Confucian culture has always emphasized kinship networks. Most of the time, in traditional Chinese societies, economic exchanges and risk sharing and resource sharing do not go beyond the kinship network. But that is being transformed in a very extensive way because of markets.

The Confucian emphasis on the family has worked for over 2,000 years to insure enough probability of survival for Chinese families, generation after generation. But now population mobility and job opportunities in places far from your birthplace, and all of the changes resulting from market development and modernization, have totally changed the social structure. So you cannot rely on the traditional extended family network as a way to insure your future financial needs and to hedge against natural disaster risks or health uncertainties. Rather, the insurance industry, the mutual fund industry, and the banking system have come in. This whole area is developing really fast in China. I am fascinated by these social consequences of market development and globalization.

Q: Is that what you were studying when you were in China this summer?

I've been writing and doing research on this for over two years. I plan to write a book looking at the impact of financial market development and goods market development on culture and social structure. I've been collecting data in China and in different Asian countries, and doing surveys to see how people's cultural values and especially attitudes toward extended family, marriage, and interpersonal relationships have been changing these last few years.

I've done two different surveys, one two years ago, and again this summer. One of the fascinating results is when we ask the subjects, "Why do you want to have children?" And that question is a multiple-choice question. One answer is for support in old age, and the second answer is for the love of children and emotional relationships. We found that the urban resident versus rural factor is the most significant. In the countryside, about 70% will say for economic reasons, support in old age. Whereas, in Beijing, roughly 15% of the 300-plus people we surveyed said yes to the economic reasons. The people living in cities are more likely to say for emotional, non-economic reasons.

But besides the urban-versus-rural differentiation, the second most important explanatory factor is whether the person has bought or made use of any kind of externally provided financial instruments. This is a very significant factor among people who answered that they want children for emotional relationships. It was so surprising to us.

Q: Do you think the market change drives the culture change, or does the culture change make the market possible?

It is a two-way, interactive process, but I would say that over the last 20 to 30 years, the financial development and market development have transformed a lot of the cultural values, without most people knowing it. From the survey data we have collected, I would say the values towards the family by people in Beijing and Shanghai, the cities, are very close to American values, and a lot of people don't realize it.

When you observe the way the father and the mother interact with their children in big cities like Shanghai and Beijing, it is becoming more and more like what you observe in an American family, in the sense that the father usually does not try to impose an authoritative position on his child. It's not a top-down, one-way, command posture. Rather, you see more parents talking to their children in a very equal way.

To me, the parents don't look at their children as insurance for their old age. They don't have to feel like, "Gosh, if my children don't obey me, I may not get any return on this investment in my children." They buy their own insurance policies, retirement plans, mutual funds, and other investment accounts. So, economically, they don't feel like there's that much of a need for them to depend on their children. Maybe emotionally they still like their children to be very close to them, but then they realize that, if you want to have your children be very close to you, emotionally, you cannot force them.

Sometimes when I go to visit friends I try to observe how they deal with each other. And more and more, I see parents really try to have a conversation with their children. I mean, that's very untraditional, anti-Confucian.

But not so much in the countryside. In the countryside, where I grew up, you still see most people treat their intra-family relationships mostly from an economic perspective. So emotional exchanges and real heart-to-heart conversations are still very rare in the countryside.

Q: Would you have anticipated that the introduction of insurance and mutual funds would have this kind of effect on intimate relationships?

Yes. This is something I have been doing a lot of research on. To my way of thinking, I view the family as serving two main functions. One is to facilitate economic exchange, financial exchange in particular, communicating and sharing the risk across family members. Historically, common biological heritage is a big bond that you can never divorce yourself from and which provides a natural foundation for trust. Whenever any interpersonal exchange involves the payment of wealth or income across different time points, then trust is very, very key. Very much unlike physical good exchanges, where you pay money today and you get the chair — a one-time deal. That's why the family has always served a very important financial-exchange- facilitating function, so you have reduced risk of uncertainty, of default, and so on.

The other main function of the family is in the emotional, nonmaterial exchange. And those nonmaterial exchanges cannot be replaced by the market. You cannot contract easily on emotional exchange, emotional help, friendship.

When financial markets come into place, one important impact is that the financial markets can gradually remove the economic exchange function from the family, so that the family can be, using my terminology, redefined not on the economic exchange function, but more on the emotional, nonmaterial exchange function.

I see this change going on in China at a very fast pace. Of course, in American society, that change took place during the second half of the 19th century and then during the first half of the 20th century, with Social Security and the mutual fund industry and the insurance industry and the banking system, especially the mortgage market. In America today, when people think about borrowing money, getting insurance, mitigating risk, saving for retirement, most Americans don't think that they can do that with their relatives. They would rather do that with the market.

Q: Are the financial vehicles that are replacing the family economic exchange more efficient in some way?

Definitely. They are much more advantageous. I've been collecting stories and cases from China in which family members get into big fights because one party will claim that the other party has not paid back according to the implicit rules.

For example, you typically have parents give all their savings to their children who are getting married. That's very typical, even in big cities, still. The parents give all their savings to their children, so that their children can get married and buy a big house instead of getting a mortgage to buy a house. The Chinese parents think, "Why do we want our young children to carry the burden of monthly payments?"

But the problem is, when the parents are really old and don't have their own income, there is no contract that says the children will have to pick up the burden of providing financial support. Imagine a very interesting scenario: The old retired parents just have to wait passively for their children to give them the money to survive. That's a very unfortunate position to be in. They cannot ask, because they may feel like their own dignity and personal respect and pride will not let them ask their children for money. Just imagine how that will impact their consumption behavior. They cannot spend any money. Even after they receive some payments from their children, they still don't know if next year the children are going to forget. Or maybe next year the children's income will not be high enough. And then the children may have their own families. Then it is very common for the middle-aged couple to fight a lot over the need to pay one side's parents.

So you have this situation: The children's family life and relationships are strained. The old parents at some point probably have to lose their dignity, because if they really don't have any money to spend to survive, they have to ask.

I've seen many situations and read many stories in which the aging parents would just feel like, "Why do I have to be so healthy? Why don't I just die, because I'm counting on somebody else to continue living?" That's not really good for the self-esteem. And the children may look at their parents as a burden on their own lives.

I have another example. In 2002, one 30-some-year-old guy in a small city was lucky enough to buy a lottery ticket and win 5 million RMB. So that's roughly 600,000 U.S. dollars. The guy was really happy to get that 5 million RMB. But then he had an uncle, his uncle's children, his brothers, and his parents, each making a claim on the 5 million. He actually gave out 1.5 million to his relatives, as a payback of all the different relatives' investment in his education. When he was growing up, if there was a need, his relatives came in to help, right?

And then, that 1.5 million RMB payment to the different relatives was not enough. So his brothers did not talk to him. His uncle did not talk to him. And then, later, they went to his house to beat him up and beat his wife up. So a confused property-rights system created these totally messed up claims and counterclaims. The traditional extended family system, where all the investments and counter-investments are implicit and not written in explicit contracts, can lead to such unintended, messy situations.

That's why, for purity of human relationships, it is very important to take economic exchange transactions out of the family, and from other social organizations, so that when an economic transaction is done in the marketplace, then it is a pure economic transaction. When you pay off the contract obligations, the deal is done. It's simple and non-emotional.

Q: The market probably results in more individual liberty.

Fundamentally, that's the deeper reason that I'm interested in this research. During the early 20th century, there was a major enlightenment period in China. Freedom, democracy, and science, those concepts and theories were introduced into China. And then, the more progressive scholars, intellectuals of the 1910s, 1920s, and 1930s, played a major role in making those concepts better understood and better accepted by the larger Chinese society.

But in retrospect, I think those generations actually missed a major point. That is, first of all, without private property, we cannot have any economic basis to have personal liberty or democracy and other rights. Because then you will not be able to stand on any strong base, economically, to claim your rights. And secondly, they missed the importance of an externally developed financial market system to breaking away from the Confucian tradition of relying exclusively on the family.

In retrospect, to my way of thinking, without an alternative way to ensure one's economic security for the future — retirement, sickness, and other circumstances — at the end of the day you realize that the family would be the only thing you can count on. So without a very well developed financial market, you end up having to go back to the so-called Confucian Temple to get the support that generations of Chinese have relied on.

And this is not just for China. It's for India and other traditional societies. I think it's very important to see that, in some ways, financial market development plays a very important role in liberating the individual from dependence on any authoritative organization such as the family or the church or the government.

I'm not against family. I just think that the family should be defined on providing emotional security. In my mind, I always have my village as the background. In my village, sadly, almost nobody puts the personal relationship first. In some sense, it's really understandable. In societies where markets are not well developed, where material productivity is not high, survival in a material way is always the top priority. And you think and do everything for that very first central purpose, and social relationships and other organizations will all be around that main purpose. Happily, with the strength of the significantly improved productivity due to industrialization and industrial technologies, finally, material survivability is no longer a challenge.

Q: What kinds of financial vehicles are being used now, in China?

The most important area of financial products is insurance products. That industry is developing very fast. Right now, the total insurance asset value is about 2.5 trillion RMB. That's roughly 300 billion U.S. dollars. Compared to the U.S. market, that's not too big, but that's roughly 12% of the Chinese GDP. Compared to the 1970s, when there was no such market, that's a big step.

So the insurance market is the first, and then banking — mortgages and so on. Since 1998, mortgage loans and then auto loans have been made available to the Chinese families.

The way things always happen in China is that the first experiment is with the biggest, best-developed cities, and then they move down. Happily, now, certain insurance policies, like life insurance and accident insurance, have been sold in the countryside. But property insurance, health insurance, those things are not available in the countryside, mainly because the Chinese constitution and development laws still have not made houses in the countryside transferable or saleable private properties. You can live in a house, but don't do anything else. You cannot sell it, or even rent the house to anyone else. For that same reason, real estate mortgages and auto loans are still not available in the countryside.

Q: What about the stock market?

The stock market is booming right now, and the mutual fund industry has been developing since 1995. There are maybe a couple hundred mutual funds available for Chinese citizens to invest in. And those mutual funds invest in equities and bonds. Just two days ago, the Chinese government opened the door for Chinese citizens to invest in the Hong Kong financial markets without any quota. That's a good development.

Q: How connected are the Chinese markets to the other global capital markets?

The financial markets in China are still quite isolated from the global markets. Just look at the fact that, over the last two or three weeks, the Chinese stock market kept breaking new records, day after day, higher and higher, while the rest of the world was falling.

It's pretty isolated, mainly because the Chinese government has not really allowed foreign investors, individual or institutional, to come in and out of the Chinese capital market freely.

Q: Does the recent news about product-safety problems with goods made in China show that there is a global market for the production of consumer goods?

Oh yes. In all the manufacturing firms, even agriculture, China is very tightly integrated into the global markets, so the interdependence level is really extraordinary.

It's going to take a long time to correct those quality problems. From an incentive perspective, the local governments face a very different challenge than the central government. The central government ministries face more abstract objectives. They tend to say, "You've got to control quality, you've got to control safety." They don't face the reality of having to deliver job opportunities. When I talk to the mayors and the people in the local governments in different provinces in China, they will say, "Well, we all know that quality and safety are very important, and so is cracking down on intellectual property violations. But at the same time, we realize that if we do enforce the rules, some of the factories will have to be shut down. And then that means immediate reduction in the local government's revenue. And then there will be fewer jobs available for the local population." They have to deal with those issues more directly.

Those are real conflicts in incentives and objectives that are a major part of the day-to-day activities of officials at the different levels. It's going to take a long time for those problems to really be corrected or resolved. Maybe the first real step is to free up the media in China. These sorts of problems have been going on inside China for a long time, but as long as those problems were domestic, the government had not really taken them seriously. There are many different government bureaus that control quality and safety in this area and that area, and corruption has been very high. The media have been forced to not report on such cases when those cases took place only inside China.

Q: How do you see markets continuing to develop in China from here?

I do see that there is some level of nationalism rising in China. Which may not be too surprising from a historical perspective, as well as from a comparative perspective, in that there are increasing protectionist calls in the U.S. and Western Europe and other countries

A lot of the rising Chinese nationalism has been really a reaction to the protectionist attitudes in the United States Congress — especially, I think, the controversy over CNOOK's efforts to acquire Unocal. That episode two years ago was a real watershed event. And then people in China used the Carlyle Group's attempt to buy an 80% stake in the largest engineering machinery manufacturing company in China in April 2006. The whole country sort of stood up and screamed, "Don't let the Carlyle Group control this national brand. This is a very strategically important business in China." So this whole thing has been escalating. I think the rising protectionism and nationalism in many countries are presenting a significant threat to the globalization trend that has been going on since the early 1980s.

Given the internet and TV and other media today, fortunately, more and more people in different countries will be able to see the different angles presented by the people of different countries much more easily than before. Hopefully, these channels will make more people appreciate and understand the benefits of a more globalized market.

Q: How does the Chinese government see these markets? Are they encouraging the development of financial products like you were talking about, or do they see some threat in markets?

I would have to say from my own interactions with different government officials and important policy advisors in China, the overall level of openness by Chinese officials is probably higher than in most other countries. There are some segments of the Chinese population that are exceptions, but you see that in every society.

One thing that has not been talked about much in the American media is the fact that, over the last 10 years, different governments at the local level, provincial level, and at the central level in China have sent large groups of officials to spend six months or longer at American universities. Usually before they come to an American campus, they have to spend a lot of time learning English. Then, when they come, they usually have to live in an apartment with three or four other officials. They cook their own meals, wash their own clothes, and they study.

I have found that to be really amazing, because those people are usually very high-level people inside China. They can be a mayor, deputy mayor, or division chief in a city of a million or more people. They have chauffeurs, they have secretaries, they go to restaurants. Suddenly, for six months, they have to cook and wash their own clothes. Can you imagine sending any American officials to other countries to study for six months? Forget about it.

On the one hand, I do see that the Chinese government's control of the media is still unbelievable, and still totally outdated. On the other hand, when you look at those efforts to send officials to spend months in other countries, you just have to give them a lot of credit for doing that, forcing the country, from the very top to the lower levels, to be open, to learn and accept other things.

Interviewed by Jonathan T.F. Weisberg

Department: Faculty Viewpoints