Monthly Archives: September 2015

Origin of the Term ‘Chinese Wall’

A ‘Chinese Wall’ is a commercial term that means a virtual barrier that is applied within a company or organisation to maintain confidentiality between the two parts.

But is this term a comparison to the Great Wall of China? if so on what basis, and how did it originate?

In order to get to the bottom of this one it is first necessary to understand something of the history of the ‘Great Wall of China’ or more accurately the history of Chinese ‘Walls’

There is no doubt that China is famous for ‘The Great Wall’ but the first point to understand is that the picture postcard image of the wall that we usually associate with it is a relatively recent structure built during the Ming Dynasty and that wall building in China has a much longer tradition stretching back more than two thousand years before the construction of this most recent phase.

Many of the Chinese dynasties built or rebuilt walls for various reasons, the earlier ones to fortify smaller kingdoms that are now just regional boundaries in current day China. Later building was to lengthen, join up separate sections and to improve, and building on such a grandiose scale served to glorify and strengthen the dynasty as much as to provide physical defence.

The scale of the walls is without doubt impressive; at over 5000km total length and at many different separate locations they are still not all comprehensively mapped and surveyed, geographically let alone historically. Further sites are still being discovered and unearthed even today, the wall is monumental in years as well as in kilometers.

It is very likely that reports of Chinese walls got back to Europe from as early as the 13th century by way of the overland merchants and travellers using what we now call the Silk Road trading route. The Venetian Marco Polo is the most famous of these people however any mention of a ‘Great Wall’ is conspicuous by its absence from the chronicles he published and to which he owes his fame.

This absence can be explained in several ways, but the essential point is that at the time of his visit eight hundred years ago, the Ming Dynasty wall in the Beijing region which we are all now familiar with, had yet to be built. The term ‘the Great Wall’ is purely a western invention and was certainly not established in Marco Polo’s day.

Also his hosts, the Kublai Khan and the Han Dynasty were not wall builders at all but had effectively breached the wall built by earlier dynasties when they invaded from Mongolia in the north in order to gain power over the Chinese in the south. The walls would therefore not have been considered by his hosts as their own creation and may even have been viewed with some contempt. It is also likely that having ceased to serve any purpose almost one hundred years before, in many areas the walls were in a poor state of repair at the time of his travels in the 13th century.

During the Han Dynasty the walls took on new purposes and no longer performed purely as defensive structures. In some regions the walls became an important feature to exert control over the conquered Chinese, initially providing defence to the Chinese in the south against further attack from the uncivilised Mongols of the north in return for which taxes could be collected. Later the walls prevented travel and migration in both directions with the advantage that the dynasty could capitalise on the resultant trade. The walls provided a useful focus and means of communication for the governing organisation of the day.

With the benefit of this limited history it is now easier to see how the ‘Chinese Wall’ term has arisen:

If a company chooses to operate a Chinese wall, the workers and more junior management can be likened to people on opposite sides at the bottom of the wall. Each is able to manage its own part of the company in isolation but with complete privacy from the other part of the company on the other side of the opaque ‘wall’. The executive level of the company on the other hand, can be seen as stationed on top of the wall and because of this position, have complete vision and control over both company divisions below. They can if desired, facilitate limited communication between the two sides such that confidentiality is maintained but more importantly can exercise high level management to maintain the integrity of the Company.

This arrangement closely resembles the modern day features of a Chinese Wall arrangement and although whilst admittedly short of conclusive evidence provides a neat answer to the riddle.

It only remains to say that it is common knowledge in business that a Chinese wall, whilst often theoretically providing a solution, in practice is usually less successful and in some instances may be considered not appropriate. For example where legal confidentiality is required to avoid conflict of interest there is often a problem.

In its more general sense, the management structure of many modern day Asian companies and conglomerates feature a very deep, multi layered and firmly established hierarchy with a high degree of opacity laterally which can be said to feature the Chinese wall principle. This model is considered to provide managerial benefit even though it is not widely promoted under western style management principles.


Delusions of Growth

Growth is the word that gets used more often than any other in economics reporting and in some respects we have lost sight of the fundamentals behind it.

It refers to GDP (Gross Domestic Product). This is the value of ‘the’ economy. Or could be compared to the turnover of a company. Growth is the annualised increase in GDP usually expressed as a %.

Although it’s a figure that is calculated and should therefore simply be a factual result of the millions of activities that make up the economy, it has taken on a much bigger meaning. Even though what happens in the past should not necessarily be a guide to what happens in the future, growth and its forecast is nevertheless considered to be THE fundamental indicator for future financial planners both individual and government as well as for assessing the general health of the economy and supporting the currency.

If we are growing, our living standard is improving or at least not declining, we can relax, maybe even invest in the future. Growth has become our comfort blanket, our security for the future, an assurance.

Western economies have apparently enjoyed almost uninterrupted economic growth certainly for living memory and even recessionary interruptions have not broken the relentless upward trend. This underlying expectation of growth remains the base assumption of economists, and most other commentators, but is it all true?

If we start to examine the fundamentals, the cracks start to appear.

Compounding theory shows that indefinite growth is not possible and that long term growth should not be expected.

If an economy has a 10% annual growth rate, after 10 years the increase in GDP would be more than one and a half times (1.59) the size of the original GDP. For a developing economy where workers are moving from agriculture to industrial production such an increase is possible but for a developed industrialised economy, most unlikely.

If that 10% year on year growth continues for 50 years, the increase in GDP would be more than one hundred and sixteen times (116.39) the size of the original GDP which if prices are consistent is clearly impossible. Most of that increase is the result of compounding and not growth. If the amount of the initial 10% is maintained, the increase after 50 years would be only five times the size of the original GDP which equates to a year on year increase of only 3.5%.

Therefore for a consistent yearly increase in GDP the growth % declines year on year according to the compounding principle. This factor rarely gets a mention by economists and statisticians who seem to assume that past growth should be the baseline for the future.

In practice the annual increment is unlikely to be consistent and an initial high growth % would naturally significantly reduce to less than 5% after industrialisation very much as we have witnessed with China over the past 20 years.

Growth is not equal to increased living standard and despite the many report to the contrary, there is no link. GDP per capita indicates living standard and of course depends on population size as well as GDP.

If the components of GDP are considered together with the propensity for change in each case, a better indication of the current and future expectations for growth can be derived.

Component Past Change Expected Future Change
Production Has already peaked. Scope for increase is a function of available market which is necessarily limited Continued decline. Scope for increase is a function of available market which is necessarily limited
Population Most western economies have had declining endemic populations for some years and any increase is as a result of immigration only Unchanged trend
Employment Declining employment during the past 10 years due to improved technology, automation, globalisation etc. Unchanged trend
Price Increase of approximately 5% Year on Year Decrease

This raises some interesting points:

Production can only seriously be considered in the context of a globalised world. Demand is finite, production is finite and individual economies are competing within a finite market.

If immigration is taken into account, population should also be considered as finite in a global sense. Forecasts of population change are robust and are very unlikely to be significantly incorrect. Western governments in some cases have allowed populations to increase possibly to boost growth, clearly this strategy cannot be sustained for the long term.

Inflation is a vital element of growth and if prices do not continue to increase it will become impossible to maintain any plausible forecast of growth. This is why all western governments hate deflation so much and are effectively still deny its existence in many cases.

So for the western economies, all things being equal, unless markets and production can be significantly increased there is no reason to expect that growth will occur, in fact based on these ‘normal’ components the prognosis for growth doesn’t look good.

Of course the situation is actually much worse, because for the past 30 years growth has been bought and paid for with debt and would not have occurred otherwise. Successive governments have intentionally induced additional growth by borrowing and spending to promote consumer demand and investment. If that artificial stimulus effect is removed from the equation GDP has remained fairly constant, any increase being one or two % only for some of that period.

This would suggest that for a developed western economy sustained growth should never have been considered as inevitable and at the present time any further growth cannot be assumed.

So to complete the exercise it should remain to consider the ongoing effect on the growth to western economies, given the reduction / cessation of artificial government stimulus and possible negative stimulus due to repayment of debt. Of course negative growth is no longer growth but shrinkage. The extent is unknown and there are no established parameters for prediction but based on the above fundamentals, and with no artificial stimulus, it would appear that GDP’s of western economies will reduce at least for a period of several years and possibly for a period commensurate with the period over which artificial stimulus has been applied.

Therefore based on the above there has been no real growth for the past 30 years and we have been lied to or misinformed by governments and economists alike who may or may not have been deluding themselves as well as us.

It is also inevitable that in the years to come, growth will be viewed increasingly as a crude and irrelevant indicator.