China Comment

Energy, Environment, and Economy

Fighting Corruption

Chinese national banks’ regional and provincial branches are audited by the state, and many state employees consider anti-corruption missions quite seriously. But to some degree, Chinese companies suffer from significant systemic corruption.

A Chinese friend served an internship over the Summer with the financial auditing arm of a provincial government. She worked on a team investigating a Shaanxi branch of a national Chinese bank’s accounting books. The team found several irregularities in the numbers, and they reported to their supervisor, who confronted the bank’s director.

The director offered to take the team to dinner and discuss the matter. He offered to pick up the check. My friend’s superior accepted and they ate, drank and discussed. The director argued that the misplaced amounts were inconsequential, somewhere around 7000 USD. He tried to convince the team to overlook the transgression in return for “help” and “benefits.”

The superior declined and the bank was fined. The director kept his job since the amount misplaced was only a “mistake” and the bank director was a “good man” who had long served. China’s system of friendship among bank officials almost guaranteed that unless the crime was disproportionately large, little negative attention would be fostered on the wayward director.

When asked what she felt about this situation, my friend seemed nonchalant. She stated it was common for bank owners to embezzle but she still admired her superior for being so “driven” in achieving his objective. She said most supervisors would probably have taken a bribe. Afterward, her team discussed the tragic situation whereby bribery and corruption are considered the status quo. They recalled their supervisor’s lament that although he always tried to quash corruption, his plans were often flummoxed. He annoyed too many in his bureau due to a “righteous” mentality, and was overlooked for promotions. He feared he could never move to a provincial-wide managerial position. Instead, for his efforts, he was stuck at a mid-level job, where he could be overruled if political considerations superseded a need for economic honesty.

China disciplined 115,000 Party members for corruption in 2005, and has dealt with an “average of 130,000-190,000 Party members each year for various types of misdeeds and crimes since the early 1980s,” according to Minxin Pei of the Carnegie Endowment for International Peace. For various reasons, “24,000 of the Party’s 68 million members” were expelled from the Party in 2005, according to Edward Cody of the Washington Post.

The country could have grown even faster without the stultifying effects of late-1990s corruption. According to Chinese economist Hu Angang, cited by Will Hutton in The Writing on the Wall, the annual cost of corruption “is between 13.3% and 16.9% of China’s [potential] GDP.” Admittedly, that number is difficult to believe and I would like to see it backed up by another independent evaluation. Still, when confronting the anecdotal evidence and the recent Gome and real estate scandals, it is not too difficult to perceive millions of RMB flowing where it should not.

My friend’s view of corruption is a common one, and she could not say she would refuse a bribe if it had been offered to her. The bank director was a powerful man and held lots of influence. Without protection, she may not dare confront such a man. She admired her heroic supervisor, but wondered whether she could emulate his courage.

Positively, the number of prosecuted corruption cases has risen in recent years. But negatively, many former Party and government members have “jumped into the sea” of business, and used government connections to flout laws, “grease wheels,” and avoid bureaucratic regulations.

Without a reevaluation and a recognition that everyone is equal under the law and none are more “equal than others,” people like my friend will hesitate in acting honorably and working against corruption. Eventually, they might do the right thing and oppose corruption, but without a change in its culture of privilege, China could face a very stormy and increasingly corruption-filled coming decade.

Links and Final Comment

Pei: http://www.carnegieendowment.org/files/pb55_pei_china_corruption_final.pdf

Cody: http://www.washingtonpost.com/wp-dyn/content/article/2006/02/14/AR2006021400672.html

It is far beyond the scope of this article to evaluate various countries’ approaches to fighting corruption. Corruption seems to be present everywhere in the world. Every few years the United States suffers something along the lines of an Enron, a Tyco, or a Bernard Madoff scandal; Germany suffers a Siemens scandal, Korea suffers a Samsung scandal, and so it goes ad. infinitum.

Note: This article was originally written in January 2008, and was recently updated.

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2 February, 2009 Posted by | China Business, China Economy, China Future | , , , | Leave a comment

Isn’t that Odd?: Plastic Bag Entrepreneurs

China has long been a country of entrepreneurs, from its urine merchants, to the indigents who walk around recycling plastic bottles and aluminum (they are ubiquitous, despite some efforts to remove them, both high and low tech [The former is an electronic recycling machine; the latter, a poignant transcript of a UK special on a “clean up” of homeless who make a living collecting plastic bottles]), to the proprietors of hundreds of mom and pop shops.

What follows is an amusing prediction for this week’s Isn’t That Odd.  If you’re in China and you see this happening, please post here- I’m asking my contacts to look out for this.

I predict that China’s new plastic bag policy is going to create a new wave of self-employment for their urban poor. Why? Well, first, let’s examine the policy:

1.) A National Policy Designed to Reduce Plastic Bag Waste
The policy of charging for plastic bags (at .2-.6 yuan), and phasing out the ultra-thin bags will hopefully decrease waste as people begin toting canvass and bamboo bags to the stores. However, some problems have been realized due to this policy, as a recent Xinhua article examined; ranging from vendors who are still utilizing the ultra-thin bags, to others who are not charging for bag usage.  “At a small grocery near the Carrefour, the shopkeeper still offered customers free plastic bags. As he said: “I sold vegetables worth 0.7 yuan. How can I charge 0.5 yuan for a bag?”

Other problems include:

It is more difficult to tote canvass bags everywhere when one goes outside. Penny-pinching people have to plan before going shopping, instead of previously being able to use free store-supplied plastic bags or to purchase new canvas bags at the grocery.

Also, at markets, fish-sellers now wrap fish in newspapers instead of inside plastic bags. This causes newsprint to leak onto the fish, which makes the food untasty and unsanitary. And places where the plastic bags are still used have suffered problems of people grabbing extra bags to use for private purposes- creating a shortage at some stores, as the Xinhua article goes on to explain.

Consequences: Depending on how much of a price these plastic bags might be oversold at, I wouldn’t be surprised to see some Chinese entrepreneurs standing outside stores, selling and undercutting the stores’ prices for plastic bags. They might grab a few extra bags when they are in the stores, they might repurpose previously-used bags, or they might (if they have some capital) go to a manufacturer and purchase bags in bulk.

If you’ve ever read Carl Crow’s venerable 400 Million Customers, you know how hardscrabble the Chinese can be in seeking out entrepreneurial opportunities.

My favorite tale of Mr. Crow’s (he wrote in the 1930s but his words are still relevant and amusing today- and inspired another informative book- James McGregor’s One Billion Customers.) is how Crow organized an ad promotion with a US manufacturer who wanted to introduce a better brand of soap (I think-I read the book a few years ago so my memory is slightly hazy) in Chinese stores. The manufacturer gave stores free soap samples to hand to their customers.

A month later, the manufacturer was quite upset, because brand awareness hadn’t increased. So Crow went to investigate. He found the stores and discovered several problems.

1.) Many stores were selling the “free” samples; because they figured it didn’t matter if one brand of soap was more popular than another; because they weren’t in the business of selling soap, consumers could buy their soap anywhere so giving soap for free would do nothing for their store! (They didn’t believe they could build store-brand loyalty with customers by giving something away for free- see point 2). And by selling the soap (cheaper than other brands), they could gain extra money that their neighbor stores wouldn’t get and could still win a little customer loyalty since customers would be glad that store A offered better prices!

2.) If something was free, many customers figured, it must be lower quality, or spoiled. So they didn’t want to take free samples. Only the poorest of the poor took the free samples, and they couldn’t afford to purchase this expensive soap anyway, so the marketing tactic fell flat!

 Oh, China- such an Odd and wonderful Capitalistic place.

4 July, 2008 Posted by | Book Review, China Business, China Environment/Health, Isn't That Odd? | , , , , , , , , , , , | 1 Comment

The Visible Hand of China in Latin America

Off the Shelf:

The Visible Hand of China in Latin America (2007), edited by Javier Santiso of the OECD, is a great pamphlet with a lot of hard data about China’s role in that part of the world.

While much is often stated of China’s trade surplus with the rest of the world, China actually ran a trade deficit with Latin America for much of the 2000s. China is the continent’s third largest trading partner, after the United States.

Eduardo Lora opens the book with a discussion on whether Latin America should fear China. From the data he presents, the answer appears to be “not yet.” He points out several economic weaknesses faced by China.

1.) Allegedly, China still has poor corporate governance and inefficient state-owned companies. Lora notes that the amount of state-run underperforming assets has massively declined over the years, but he makes much of the nonperforming loans and debt that burdened Chinese banks until restructuring and bank sheet balancing resulted in NPLs at only 9.5% as of late 2006. Considering how flush with reserves, investment and other cash China currently is, and how their companies are modernizing business practices, I do not think corporate governance questions is necessarily a crippling problem for China to overcome with investments in Latin America… especially when compared to indigenous Latin American companies’ problems with inefficiency and corruption.

To back up his assertion, Lora goes on to argue (27) that the three largest firms in main economic sectors are state owned and that China is propping up 30-50% of those firms as “national champions” by giving them loads of state support so they will become globally competitive multinationals by 2010 (27). He argues this will lead to inefficiencies.

For comparison for how strong China’s companies are. As of 2007, China managed to get eight companies into Fortune 500’s World’s Most Admired Companies (The US had 135; Japan, 61; Britain, France, and Germany, 26 apiece) . A good amount of the top companies, however, are state owned. [I find it odd though that Huawei, Lenovo, Haier, Baidu, and Galanz were not listed as admired companies– a lot can be said for them as Donald Sull (2005) discussed in Made In China.] And indeed, being listed on Interbrand’s listing of Top Global Brands still escapes Chinese companies. As of 2007, China still had no companies on the list (Here’s the report). The Best China brands are examined here. An easy chart of them is here.

2.) Lora gets a bit technical by discussing how China’s financial system is still undeveloped (28-30). Keep in mind though that a lot he discusses as being undeveloped has evolved since his article was written (in late 2006). He complains how until 2006, foreigners could only buy nonvoting B-shares in several sectors (infrastructure, utilities, and finiancials). Now, he says foreigners can purchase A shares, but to ensure stability they are required to buy over 10% of shares and hold for longer than 3 years. Lora argues this lack of easy-foreign investment will eventually damage Chinese companies’ ability to efficiently expand. (Then again, China has a lot of money even within its country, so maybe it will escape these problems.)

3.) Allegedly 50% of GDP (31) is locked up in savings and investments. Lora states this could be good, but it prevents capital and labor from moving to the most efficient sectors.

4.) Lora points out that 40% of private entrepreneurs with companies that have incomes over $120,000 USD are CCP members (31). This could be a neutral comment, or it could imply possibility that corruption rather than efficiency might govern China’s future capital markets.

Lora then discusses weaknesses that are shared between the countries:

5.) Weak higher education. (More on that in a later article)

6.) Corruption/Weak Rule of Law

As of 2007 there were 122,000 Chinese lawyers at one per 10,650 people [In the US the ratio is 1 per 270]  (“Chinese Seek a Day in Court”, WSJ, July 1, A12) but most judges are retired from the PLA and lack legal expertise.

I don’t particularly believe Lora’s view that China’s companies are doomed to not meet expectations of world-dominance, since China is confronting many troubles he identifies. However, the points he raises have at times been overlooked by people willing to too-quickly crown China the next world hegemon.

Chapter 2, by Jorge Blázquez-Lidoy, Javier Rodríguez and Javier Santiso discuss whether China’s markets complement or threaten Latin America’s.

China’s export-mix competes the most with Thailand, Hungary, and Mexican goods (53). Costa Rica also, to a lesser degree, faces competition (54).

Brazil and China are highly complementary in trade (55).

In a chart on (54), Santiso excellently documents, through use of his own data tables, how Venezuela, Peru, Chile, Columbia and Argentina have very little competitive overlap with China.

Mexico and China share interest in IT, consumer electronics, clothes, and manufacturing. Transportation equipment is Mexico’s only advantage.

Latin America allegedly has too inefficient ports, so they cannot gain in transport cheapness vis-a-vis China in trade with other countries and regions. Customs are too slow, taking up to seven days on average to clear across the region. However, Latin America will still not be overly burdened by China competition since the two regions specialize in different products.

Latin America, for example, gains in trade to China by sending copper, oil, soybeans, and coffee.

According to the article, “in 2004, 1/2 of Chinese FDI went to Latin America, exceeding the 30 per cent that went to Asia (70).” I’m not sure that’s completely true and will have to consult my other sources, but it bears examining, because it’s quite interesting, given all the media attention lavished on China-Africa relations.

In essence, Santiso concludes that “China will benefit other emerging economies in [Latin America in] the long term.” “Latin America faces few if any short-term trade costs” (55), except in Mexico and Costa Rica, of course.

Chapters 3-5 were okay, but didn’t reveal too much of immediate interest. The pamphlet-book is a good read, and I’ll recommend it even though it is fast getting out of date. There simply aren’t that many good articles/books written on China-Latin America relations, but of the ones that do exist, Santiso’s is certainly a gem.

OTHER RESOURCES

* Mohan Malik, writing for PINR has a digestable version of Sino-Latin American Relations.

* There is a 2005 CRS Congressional report on China’s influence in Latin America.

* PBS had a radio program on China-Latin America ties. One Brazilian disagreed with Santiso’s statement that China benefitted the Brazilian economy. He called attention to textile competition.

2 July, 2008 Posted by | Book Review, China Business, China Economy, China Future | , , , , , | Leave a comment

Who’s #1?

Reality check here. China’s economic power is great, and getting greater every day, but it is important to note where China stands in relation to the world.

ECONOMICS, EXPORTS, AND IMPORTS

Despite being hot on the heels of Germany in striving to become the world’s third largest economy, and despite surpassing the US in April 2008 as the world’s second largest exporter, China still trails the United States in global economic heft.

People may now buy more Chinese products than those made in America; but there is an argument that much of China’s rise in exports is due to its new position as a final assembly-point for goods made elsewhere in Southeast Asia and the world. “These patterns are reflected in the Morgan Stanley estimate that 60% of the US trade deficit with China is due to imports from subsidiaries of US firms,” according to the EU’s European Commission.

 And although people don’t buy as much “American” as previously, Americans still buy much of the world; purchasing $2 trillion in imports, compared to China+Hong Kong’s $1.2 trillion.  Contracts and contacts with foreign countries can restrain their actions and influence their internal policies.

THE BUSINESS OF BUSINESS

Where United States companies go, and where its IMF and World Bank head, countries shake.  WalMart’s GDP in 2006 was larger than that of 144 of the world’s 170+ countries’ GDPs. 

China lacks an indigenous globally recognized top brand (See BusinessWeek/Interbrand’s 2007 survey); the US has 7 of the top 10. (A discussion of the top 20 Chinese brands such as Haier, and Lenovo is HERE). (IBM discusses the problem HERE on page 7.)

UNITED NATIONS

The US still accounts for the greatest percentage of UN funding (22% to China’s 2%, Russia’s 1%, and Germany’s 8% as of 2006. Only Japan’s 20% comes close to the US’ level of contribution.) Without US funds going in, the UN would largely be inoperable.

GDP

Additionally, the US had a 2007 GDP of over $13.7 trillion; China possessed a GDP of $3.249 trillion; The US stock of foreign FDI investments in 2006 was worth$2.3 trillion in 2006; China’s net worth of foreign FDI investment stock was $93.75 billion in 2007. France and the UK both realized values of over $1 trillion. China ranked 23rd on the CIA/WorldFactbook list list, behind Brazil. Even with Hong Kong factored in to China’s total, however, (since many Chinese businesses mainly do business with the outside world through Hong Kong; the total equals 534 billion, placing Chinese stock of foreign FDI investments in 8th place behind Germany, Switzerland and the Netherlands and just ahead of Spain.) It should be noted, however, some of Hong Kong and China’s listed FDI is an overlap, since despite the countries being unified; Hong Kong investments in China are counted as FDI investments.

Of course, if China keeps developing at the fast economic clip it has set, over 10% year-on-year for the past 10 years, and at over 9% through 2009 according to the OECD, the country could come to pass the United States in GDP size around 2035.

AGING CHALLENGES

However, it should be remembered that China is aging fast. By 2020, China’s population aged over 60 will be 16.7% (equal to that of the US’ elderly population in 2000); up from 10.1% in 2000 (AARP Bulletin, June 2008, 24). The US’ proportion will have grown to 22.8% by that time- on par with Japan’s proportion as of 2000.  China’s One Child Policy, instituted in 1979, will begin to be harshly felt after around 2016- the date where the number of over-65 persons exceeds the number of under-18-year olds.

Worries about who will take care of the grandparents will put stress on China’s social welfare system to provide increasingly greater proportions of their GDP, similar to, and perhaps worse than America’s current social security and medicare crises. [A later article will examine China’s aging in detail.]

RURAL-URBAN ECONOMIC PLATEAU

China is growing fast, but with growth can come hiccups as an economy reaches a plateau. Once a majority of rural farmers have moved to the cities, as happened after over 25 years of growth in Korea and Japan, the productivity increases begin to decline. In China, the rural population is still 56%; compared to Japan’s 21%, Korea’s 19% and the United States’ 23%. (see page 61 of this UN report on Urbanization). Once China’s rural population drops to a 30%, then all the easy growth will be gone.

China’s economic weight in the world can be overstated, but it has natural limits to its growth, limits that were reached by the Asian Tiger economies in the 1990s. Remember, everyone thought Japan was going to “own America” in the 1990s; but bad investments, bank failures, a sluggish economy, and the American Internet-tech revolution combined to flummox Japan and help hoist America back into its position as the world’s economic leader.

CONCLUSIONS

America may not always hold the lofty position of the world’s #1 economy, but for the short term its government, its FDI, its companies, and its instruments- the World Bank and the IMF continue to matter more to the world.

10 June, 2008 Posted by | China Business, China Economy, China Future | , , , , , , , | Leave a comment

Isn’t That Odd? Segway Scooters

Isn’t That Odd is an occasional feature that aims to provide insight onto the Chinese psyche by pointing out particularly Chinese ways of thinking.

Segway Scooters, which in America cost about $5,000 on ebay and $4000-$6000 as of 2006 according to USA Today actually cost more in China- to the tune of $10,000!

Why do they cost so much? They have to be imported, and aren’t manufactured in China. In fact, they’re at a plant of a company based in New Hampshire.

******

Still… Couldn’t costs go down? Isn’t it surprising that they cost so very much more in China? According to the International Herald Tribune Article, Segway doesn’t want to move to China since it’s afraid its technology will be stolen by Chinese manufacturers. Well, they may be too late to prevent that. It appears copies have already begun emerging.

And as for the Segway name, which I believe is trademarked. It might have already been appropriated by a Chinese company making a remarkably similar product it calls “Segway scooter” (I suppose “Segway” is used in a similar manner as “Kleenex” is used when referring to tissues)

Compare this picture of a Segway on the Charmbright site Charmbright Segway Scooterto the ones on the real Segway site. Not being a Segway expert I can’t say whether the Chinese version is a copy, whether they are retailing the Segways on license (which I doubt since the Segway site has no mention of a “Charmbright.”). 

Charmbright’s listing says they are a “Manufacturer, Exporter, Agent” of Segway scooters from “Industrial Park, Jinhua,, Zhejiang, , China [CN]” which implies that they are creating them from scratch. Their post is quite recent; it’s from Apr 14, 2008.

So what is Charmbright? from their site: “CharmBright Limited is a professional manufacturer of sports products, marine products, fitness equipment and outdoor products. Our production line currently includes ATV, Dirt bikes Go karts, Scooters, Outboard motors, Inflatable boats, Trampolines, Pro-Jump, Waterbird, Skateboards, Fitness massager, etc.”   

Someone at Segway should probably check this out, for IP reasons.

7 June, 2008 Posted by | China Business, Isn't That Odd? | , , , , , , | 3 Comments