This is China! blog

David Pilling writes in his column in the Financial Times about the confusion China’s policy of “non-interference” in the affairs of nations – including its own – is beginning to create both at home and abroad. It’s workers in other lands are increasingly becoming marks for disgruntled guerrilla fighters, greedy warlords and merciless pirates. Keeping out of the domestic frays that are typically the cause of the seizures is becoming difficult for China’s leadership. One day, the country may just have to send in the marines, as an increasingly vocal citizenry is demanding.

Life outside the Great Firewall is about to become a lot more complicated than two thousand years of collecting tribute from neighbors ever prepared it for.

Technorati Tags: globalization

The recent squabbles between Hong Kong citizens and mainland political and media commentators reminds me of a story a Hong Kong lady told me about what angers HK people so much about their over-bearing cousin. The Wall Street Journal has written several articles about the incidents, which seem so far to have been more vocal than violent. Of late, protesting Hong Kong residents are raising placards branding the Mainlanders visiting HK as locusts.

The Hong Kong woman told me that Mainlanders gather at any of a handful of towns at MTR metro stations on the Mainland side of the border. The MTR is the Hong-Kong company that runs the city’s subway system. Just after their water has broken, and while in labor, the Mainland mothers-to-be rush to the metro line to the emergency rooms of hospitals on the HK side of the border. Talk about an uncomfortable – and possibly, unsightly – ride for other passengers on the unfortunate carriage. The emergency rooms of publicly funded hospitals are obligated to accept all-comers. The result for the newborn? Instant HK passport, education and social services.

Private HK clinics are not so keen to see the flow of Mainland birthing-tourists restricted, as they apparently make a huge amount of money from the business, according to the woman. Still, it’s the social welfare that finds itself under yet more pressure with each additional birth from a Mainlander, whether the infant is born in a public hospital or private clinic.

Locusts should be so clever.

I’ve always advocated that looking to what Wenzhou business is doing around the country is a leading indicator of where the rest of Chinese business will be following. They were amongst the first Chinese to burst onto the export manufacturing scene in the 1980s: Zhejiang province – compared with northern China, especially – was relatively free of the encumbrance of State-owned Enterprises. They were also amongst the first of the migrant workers to settle in the periphery of Beijing in the early 1990s to set up small manufacturing and trading operations, and to have their settlements destroyed and the migrants sent packing home.

Their revenge since that time has been to build an export base in the city that manufactures the majority of the world’s trinkets, including cigarette lighters 60-percent, apparently), creating one of the highest concentrations of millionaires in the country. Wenzhou wives are reputed to work in local circles to pool their money to buy up real estate around the country, in cities in Shanghai, then to sell off the properties after they’ve risen in value.

Now, Wenzhou is signaling exporters are increasingly having a difficult time getting bank loans to continue or expand operations. The Wall Street Journal reported, “that 90-percent of Wenzhou’s 360,000 small businesses” are not able to get loans for their businesses from local banks. So, what, you might say, it’s been tough for most small and medium sized businesses in China anyway.

Even Chinese consider Wenzhou people special businesspeople, however. Wenzhounese are especially cliquey. They have especially tight ties within their business community and with one another throughout China. The tight circles of relationship and reciprocal obligation are called guanxi in China. So, if Wenzhou guanxi with their local banks is not enough to facilitate loans with their own ilk, that’s as clear an indicator as any that the SME-exporters in other parts of the country are in for a tough time.

The report concludes that some of the Wenzhou businesses are on the verge of closing down. We may be at the threshold of another export manufacturing shakeout in China, very much like that which began in the Fall of 2007.

Stay tuned.

Technorati Tags: Doing Business in China, economic trends

The Wall Street Journal has a DIY Guide to Exposing Dodgy Companies that reminded me of a due diligence trip I took in China a couple years ago. I was leading a group of European investors through deepest Zhejiang province. They were interested in acquiring a Chinese company in the home decoration industry. We had identified three potential targets. All it took, though, was a visit to the first company for the group of straight-laced Westerners to understand how businesses operate in China – and just what sort of business model many Chinese companies are attempting to export to the world.

Two brothers in their early thirties owned that first company. The factory was actually in the middle of the city, in a compound that had once been the site of a State-Owned Enterprise. The brothers were soft-spoken, courteous even, and solicitous. Settled in the spare conference room, the parties talked about the business and prospects for growth. The Europeans asked to see the accounting records for the company. One of the brothers and an assistant, a young woman in a factory smock, brought out two great ledgers, hand-written. Two books? the Europeans queried.

“Oh, one book is for us and the other for the tax authorities,” one of the brothers answered blithely. “They don’t want us to report too much income, so we have to keep the records elsewhere.,” he explained. Apparently, the difference in actual vs. reported was negotiated and channeled to tax patrons. Neither of the brothers considered maintaining at least two sets of books or tax negotiations or contorted shareholding structures at all improper. It was just the way things ran in China. Visits to the remaining two targets revealed the same modus operandi.

It’s no wonder, then, that Chinese businesses seem genuinely aggrieved that Western shareholders and stock exchanges consider their business dealings improper at best, down-right illegal at their most dramatic. After all, what’s worked for a society for thousands of years must be good for the rest of the world.

Mustn’t it?

image credit: factsanddetails.com

It seems a Chinese export has caught the private equity group up in the questionable activities of a couple of its investments:  fakery. According to the Financial Times,

China Forestry, a Hong Kong-listed plantation operator in which Carlyle has an 11 per cent stake, and China Agritech, a Nasdaq-listed fertiliser maker in which Carlyle has a 22 per cent stake, have both had their shares suspended from trading in recent months.

First off, Carlyle should have known better. Any company that skirts the hard work involved in setting one’s glass house in order for all the world to see inside is clearly sneaking in under financial regulatory radars: it’s like buying your way into  MIT – frankly, either you got what it takes to qualify for the big time or you don’t. Other signs included China Agritech going through three auditors in three years and China Forestry’s auditor KPMG said books and records were incomplete.

Carlyle internal auditors definitely should have red-carded the companies and protected investors.

Sometimes, though, the money is just too good to ignore.

image credit: 12economics.edublogs.org

The Wall Street Journal recently ran a piece about Western companies putting together contingency plans in case China falls to pieces or explodes or does both. It’s not a bad bit of advise. Within the eight short years I’ve been based in China I’ve seen multiple instances of the society rejecting foreign-direct investment the same way a kidney-replacement patient’s body rejects a new organ.

Interestingly, most of the rejection has been of Asian companies; expressly, Taiwanese (Foxconn) and Japanese (most recently the car plants in the south whose workers went on strike while Foxconn staff was suicidal; and the rampant protests in Chinese cities against the Japanese in 2005). Mostly, Western companies, which in general tend to pay their workers more than their Asian FDI counterparts and – again, generally – tend to treat their staff with a bit more respect  than Asian investors – have gotten off with little more than job-hopping youngsters who will quit and join another company for a 50 RMB raise in salary.

Still, that’s not to say that Western companies should be complacent about social upheaval in China that could affect their operations. Recall the boycotts of French brands and retailers in 2008, when the French government made gestures that drew the ire of Chinese hardliners: Carrefoure and Auschan had a tough time of it while thousands of Chinese protesters all but ransacked the hypermarkets. American businesses must remember the ritual stoning of the American embassy in 1999 (oops, we bombed which embassy?) and then again in 2001 (spy planes like us).

As I write in my book, I am of the mind that the Chinese leadership has the ways and means to completely shut down the Chinese internet  and blackout all communications for the entire country in the way it had during the Xinjiang protests of 2008. It was months before communications was restored to an entire province.

That was just a warm-up.

Is your company prepared for a real performance?

image credits: moebesart.com

Technorati Tags: china, globalization

Near-hysteria has destocked shelves along China’s eastern seaboard of salt. I first heard of the rationing of salt in restaurants when I was in Shanghai yesterday, eating lunch with Chinese friends. I wanted to put salt on my french fries. One of my companions offered to get the salt for me from the order counter. She mumbled something about salt being precious. I thought it was an odd comment. I looked around at the other tables in the restaurant to see none of them had salt shakers. I didn’t think anything more of it.

My wife later that evening told me over dinner how our ayi had bought a kilogram of salt. “It was so expensive,” she told me, “a single small bag can now cost 15 rmb.” Bags used to cost a couple yuan. She explained to me the near-hysteria with which Chinese consumers were buying up salt in fear of atomic radiation blowing in from Japan should a reactor explode at the Fukushima nuclear plant. The iodine in salt, so Chinese wisdom holds, will protect consumers from radiation poisoning. She told me, “I said to the ayi, ‘What are you going to do, eat handfuls of salt?” She said the ayi had no response.

The government has remained mum on the subject, perhaps theorizing that because there is no solution should there actually be contamination, that at least salt is cauterizing pedestrian anxieties.

I joked with a Suzhou taxi driver the next day that Chinese hospitals will indeed see a dramatic uptick in the number of admittances due to fears of radioactive contamination as consumers, intent on seeing some return on their investments, imbibe so so much salt high blood pressure forces them to visit their local clinics.

Salt producers must be laughing all the way to the bank.

One of the most interesting classes I took in University was about the Peloponnesian War, during which Athens and Sparta went after one another throats with a vengeance (yes, it was ONE course). Great stuff; really got the imaginative juices roiling.

Well, how about a New York Times article in which one of my favorite wars is actually used as a parallel with China’s rise within the context of a world dominated by a single superpower: the USA. David Sanger makes the point that

“What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.”

Sanger called the misconceptions both sides nursed The Thucydides Trap, after the author of the history of the Peloponnesian War. The length of the conflict, the casualties on both sides, and the economic toll, it could be argued, made it easier decades later for a true outsider – Philip II of Macedon – to pick up all of Greece.

Technorati Tags: china, economic trends, globalization

Janet Carmosky writes in her most recent Forbes online column:

Here is my best summary of the real attitude of China on the question of wanting to take over the USA: We “Don’t want to, don’t need to, kinda busy, and respect and need the USA way too much.”

The upshot is that China’s leadership has way too much on its hands to rock the boat too much, and understands the relationships within a polarity more clearly than America does (which always seems to need some external bogey man to buck itself up). Good, insightful reading.

And check out her previous article in the same venue on Peak Stuff:

Most everyone who follows energy knows “Peak Oil” as the moment when even the optimists can no longer postpone confronting the limitations of fossil fuel supply. Today I’m writing about “Peak Stuff”, a term I coined about 5 minutes ago to describe the point after which humanity realizes it cannot afford, does not need, and is better off without what can simply be called “Stuff.”

I absolutely love the term and it has stuck in my brain ever since reading it a couple weeks ago. I’m always looking for opportunities to lob the expression at someone in conversation.

Keep up the good work.

Technorati Tags: china, economic trends, globalization

An American friend who works with software development teams around the world gave me a sobering assessment of how talent in the IT sector has moved around the world. She told me over coffee a few days ago, “The Indians have peaked. They’re not as sharp as they used to be. They’re mediocre.” She should know; she’s married to an Indian and ran her own IT outsourcing shop on-the-ground in India. I asked her what she thinks happened to the talent.

She answered, “They sharpest ones took their money and left. And the country hasn’t cultivated the rest.” She was enthusiastic about the Dutch, who are producing some “amazing” technologies, she said. She’s also working with a Finnish team. “The Finns are doing some cutting-edge stuff,” she added. So what else is there to do during those long, cold, dark winter days, I wanted to quip (but didn’t). I asked her about the Chinese software team she had been working with six months ago.

“They were so-so. Nothing really sparkling. And now, because the economy in the States has been so bad, American developers are now costing me about the same price.” She gave me an example. “A Chinese team leader quoted me a price of 300 rmb per hour for a programmer. That’s more than $20 and hour: I can get a really good American programmer for that price – and we’ll have a cultural affinity that I’ll never have with the Chinese, even though they may just be a fifteen minute drive down the road from me (in Suzhou).”

Who knows, perhaps one day American Born Chinese will man call centers from the States to support customers in Mainland China.

Technorati Tags: china, economic trends, globalization