Who’s Making Money In China?

These are the key points of his address
on opportunities in China, seminar held by Asia 2000 in Auckland recently.
In the first 10 years of its economic reform, most Chinese authorities were too focused on short-term profit and gaining technology from the West, rather than forming long-term international partnerships. Even Deng Xiaoping hoped that the transfer of foreign technology would help China catch up. He seemed not to understand that only China’s integration into global economy would sustain long term growth and degree of industrial competitiveness.

China as colony
Too many foreign businesses held the same attitudes as the colonists in the first quarter of the 20th century. They saw China as market to be colonised with superior management systems and superior products. Few saw it as an emerging market driven by its own internal dynamics, participation within which would bring benefits.

Living in China without being there
For many foreign businesses, their exposure is often limited to one or two English speaking secretaries, few close colleagues, perhaps some highly westernised local Chinese acquaintances and fellow expatriates. Little effort is made to either learn the language or understand the background of those with whom they do business.

Corrupt influences
It’s often those dislocated foreign managers who are vulnerable to the influences of corrupt local officials and consultants from Chinese communities elsewhere in Asia, of whom there are plenty in all Chinese cities. These characters make bold promises, offer short cuts and easy solutions. They take their commissions from all parties to the deal and leave the foreign business tangled in commercial webs in which they are drained of money, resources and any faith they might have had in the market.
Yet China is surprisingly open society. In Beijing and in the interior cities, in older urban districts, one is frequently invited inside to drink tea or share meal. Anyone who wants to get sense of the country has only to stop on provincial main road and walk through one of the villages that braid the central plains of China. There are many open doors and open people, ready to discuss anything from their children’s schooling to the corruption of local officials, or the government’s position on Taiwan. The smallest effort to make local friends is usually reciprocated. The most flawed efforts to speak Chinese are usually applauded and encouraged.

Winners and losers
There have been and still are, many winners among foreigners in the Chinese economy. In competitive global environment and out of caution towards international and Chinese corporate tax issues, the voices of the winners are heard less frequently than the voices of the losers.
The major cities of China have plentiful supply of frustrated, disoriented foreign managers willing to share their woes with foreign journalists.
China can’t deny the imbalances that have hurt foreign investments. However, the majority of commercial failures are partly due to foreign companies themselves, and the faults have much in common.

Losers
Most companies that fail in China depend too much on the weakening command economy system, and don’t take advantage of the burgeoning free market and the real pillars of growth in the economy.
Foreign investors in Chinese State-owned companies have often invested with the expectation that the State-owned nature of their partners would ensure sovereign guarantees for their endeavours.
The Chinese government encouraged this perception, as they wanted to attract investment into their own businesses rather than the growing private economy beyond their direct influence.
It’s ironic that until the end of the 1990s, many foreign investors, while having developed in the competitive free markets of the West, put such faith in the devolving command economy of China.
This reliance on government connections resulted in the foreign companies not doing the due diligence they would have done in their own markets.
These foreign companies also tended to leave too many important commercial tasks such as domestic distribution and exports, to their State-owned partners, who knew only the old, inefficient and sometimes corrupt ways.

Peak investing
If foreign companies have invested in the growing non-State economy, they have often done so at the peaks, rather than at the beginning of growth cycles.

What matters
Negotiations require careful combination of diplomacy and singleness of purpose in China, as they do in the West. Contracts matter to everyone, despite the myth that the Chinese will not abide by them. As in the West, as long as pains are taken to ensure that all parties understand the contracts and where the benefits and obligations lie, they are powerful instruments to resolve disputes and to enforce rights. Too often, foreign investors either take the view that the law is weak and so any commercial endeavour must be undertaken outside the law, or they rely naively on the semantics of the contracts alone to get them out of trouble.

Foreign direct investment
Very little FDI is from financial firms investing funds in China. The cumulative foreign investment has come largely from industrial companies and is now US$240 billion. Of this, US$130 billion has come in the last three years. In 1999 alone, this reached US$36.9 billion, or US$100 per day. Even with 12 percent reduction between 1998/99, after the US, China remains the second largest recipient of FDI in the world.
It has been so for the last six years.
This year, it’s expected to drop by 20-25 percent compared to 1999, but the sectors into which money is going, and the foreign sources of the money, present strong case for multinational confidence in China.
In the 1980s and the first half of the ’90s, 60 percent of FDI was from regional overseas Chinese investors. Much of this was invested in processing businesses along China’s eastern and southern coasts.
Western multinationals now have enlarged their investment in China. Aimed at growing market share in China itself, the impact on economic growth and competition in the domestic market is, in real terms, three times greater than those investments made to support short-term foreign owned exports.
In Shenzhen last year 40 percent of foreign invested companies declared they were loss making. Yet, 80 percent of foreign companies that had claimed they were losing money during each of the past five years also reinvested each year. The real ratio between profitable and loss making foreign enterprises in Shenzhen is actually the reverse of the declared figure, with 60 percent of foreign invested enterprises clearly in the black.
In China’s competitive market place there will be many casualties of the pace of development and the problems of doing business. Foreign investors are, however, here in force and with the application of WTO to the market over the coming year their influence will grow. Chinese GDP has grown by an average of eight percent over the last three years. The state sector has grown only 5-7 percent, while joint ventures and other foreign invested enterprises have grown 13 percent, during the same period. Now is not the time to back out of this market.

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