Doing Business in China

McGregor, a journalist and businessman, has spent over 15 years in China. He lived in China during the transformation of its economy. In One Billion Customers, he outlines his insights and commonsense lessons about Chinese Business Practices. It is an entertaining and an easy read book that can be used as a handbook by the foreign businessmen seeking to harvest in this new economy. (more…)

Wild Swans is a multi-generational romp through 20’th century Chinese history through the lives of 3 generations of women. For me, it helped solidify the effects of the tribulations that China experienced after the end of the emperor’s rule, giving theme human scope and context.
The book underscores how different the lives of these past 3 generations of women had been – going from an era of foot-binding and concubinage, to revolutionary ideals, and a sojourn to the west. However no matter how different the lives — the uniting thread is the women’s ability to deal with adversity: labor camps, secret tribunals, long marches under gunfire, forceful breakup of the family, re-education in the hinterlands.

A great deal of what this book instilled in me is the ability of the policies of one strongman to slowly submerge a nation into darkness. I can draw many parallels between the life and times of Mao to that of Stalin, Russia’s strongman. The rise from obscurity, the policies leading to famine, the personality cult, the purges and push into collectivization, and the thaw associated with each strongman’s demise. Unfortunately the experience of the generations of the Chang family are not unique within the context of China’s upheavals – and taking this idea further are similar to what was experienced under Stalin. Its no wonder the Sino-Soviet split was primarily a result of Mao being against the Soviet Union moving away from Stalin’s policies – the two had an affinity for one another. Just within my family the result of Stalinism was going from millionaire to gulag pauper after nationalization of assets, death from starvation in what is considered the bread basket of the Ukraine, the black car taking whisking loved ones away under cover of night. In a smiliar way the victims still held out an isolated hope that the great spider drawing them into the web perhaps was not responsible, translating in the belief in the power of the personal letter to “him”. But I digress …
When such experiences are common it changes the face of a nation, how generations perceive the world around them. The book does outline that on a positive note repression while bottling productivity, creativity and free thought cannot keep the genie in the bottle forever, as evidenced by the current rise of both nations.

The rich tapestry of the Chang family’s history is presented in a truly engrossing and realistic fashion. As you can see it made me relive some of the events in my own family’s history. The women are portrayed as sources of strength – a grandmother that treks through half of China with bound feet to see her daughter, the mother who while in a labor camp loses none of her spirit and resourcefulness, the daughter who deprived of a true education rises to a vocation of a doctor. Each is limited by what society lets them do, but rise above it. In fact the women seem stronger and more realistic than the men – faced with forced labor the father goes mad. The ordeal takes his mental and physical strength. “His old energy and sharpness had disappeared. Watching him shuffling along, stopping to rest every now and then, battling with his mind as well as his legs”(P 456) He is punished for “being a moral man living in a land that was a moral void”(p 457).

The frank descriptions of the family trials can be hard to stomach. “When he arrived at the office, he was immediately yanked into a small room, where half a dozen of large strangers set upon him. They punched and kicked the lower part of his body, especially his genitals. They forced water down his mouth and nose and then stamped on his stomach. Water, blood, and excreta were pressed out” (p 356). Not all travails are put upon them forcibly — you see the influence of society and the fact that the desire to conform, can be as strong as any strongman. Pre-communist China was not exactly a great place either. The first few pages talk about the practice of foot binding, which on description is the worst torture inflicted upon daughter by mother with the best intentions. “[Her mother] first wound a piece of white cloth about twenty feet long around her feet, bending all the toes except the big toe inward and under the sole. Then she placed a large stone on top to crush the arch. My grandmother screamed in agony and begged her to stop. My grandmother passed out repeatedly from the pain…Not only was the sight of women hobbling on tiny feet considered erotic; men would also get excited playing with bound feet… The binding could only be temporarily loosened at night in bed … Men rarely saw naked bound feet, which were usually covered in rotting flesh and stank when the bindings were removed.” (p 25)

Not to dwell on the foot binding, but it does underscore the one positive influence of communism – the equalization of women. While the grandmother is forced to become a warlord’s concubine and is held prisoner while her daughter is taken away, the Communist daughter marries for love, although she must put Mao before husband and family she enjoys significantly more freedom until she is put in a labor camp, the daughter fares better — she remains unmarried at 25 of her own choice and leaves to study abroad. In times of great change the difference in the lives between two generations are like night and day.

The book also gives one appreciation for the resilience of Chinese culture. The cultural revolution, was a concerted effort to wipe away the four olds, such things as family bonds, and even love. “Father is close, Mother is close, but Mao is closer”. Books are burnt, antiques smashed, families sent to remote parts of the country, yet you can see in the end the family bond survives. The tie to the homeland while painful to the author, is still one that binds.

Mme. Mao on love. “When a Vietnamese army song and dance troupe came to China, those few who were lucky enough to see it were told by the announcer that a song which mentioned love “is about the comradely affection between two comrades” “(p 488).
One result of repression of free speech is the immergence of irony. Russian culture is tinged in this, when what you thought could not be said it produced this jaded form of humor to cope with the grimness of reality. “Deep fry the persecutors of premier Zhou…Your monthly ration of cooking oil is only 3.2 ounces. What would you use to fry these persecutors with?”(p 491)

The book ends on a positive yet not entirely upbeat note with a bright yet ominously uncertain future. The author describes how the China of today is vastly distant from its shadowy red past. Yet the red sparks are still bound to ignite events like Tiannamen Square. Wherein lies the dichotomy that is China. “the course of liberalization is irreversible. Yet Mao’s face still stares down on Tiannamen square” ( 508)

Understanding the modern day China cannot be done without understanding the importance of Deng Xiaoping. Although Joe Studwell’s book: The China Dream contains great detail regarding the development of china as the world’s largest market, I would like to concentrate in what I thought was the most valuable part of the book; Deng Xiaoping, the reformer. (more…)

A book review by Jorge A. Maceyras

The enormous potential of China’s stock market is well publicized. According to some estimates, China’s GDP is expected to approach $5 trillion by 2020, assuming 8-10% annual growth, which would bring the stock market to $2.5 trillion. China’s stock market, though booming, still has several hurdles to overcome to effectively compete with the established stock markets of today.

In “China’s Stock Market: A Guide to its Progress, Players and Prospects”, Stephen Green provides an insightful overview of the issues affecting the stock market and other capital markets in China as of the year 2002. (more…)

CHINA: The Balance Sheet
What the World Needs to Know Now About the Emerging Superpower
By C. Fred Bergsten, Bates Gill, Nicholas R. Lardy and Derek Mitchell

CHINA: The Balance Sheet is a collaborative effort by both the Center for Strategic and International Studies and the Institute for International Economics, both American, nonpartisan organizations providing strategic insight and practical policy solutions primarily for American decision makers. This book represents the first phase of the China Balance Sheet project, (www.chinabalancesheet.com) a three-year endeavor to bring thorough and objective information about China to light and guide a national discussion. The project plans follow-up activities including conferences both in DC and elsewhere in the United Stats to discuss the findings of the book and further develop policy implications of their analyses. (more…)

Book Review:

China INC.

How the rise of the next superpower challenges America and the World.

Ted C. Fishman

Edward Raymond

The author, Ted C. Fishman, describes how China is intertwined with the world and how China is applying economic pressure to countries around the world, especially America. Fishman provides a candid, provocative perspective accounting China’s rise to dominance and how it affects every American at all levels.

In the Introduction: The World Shrinks as China Grows, the author provides extraordinary statistics not readily available in the media in the United States. China’s enormous population is allowing the natives amass an arsenal of high skilled, superior work ethic and low cost labor pool has made China the world’s largest maker of consumer electronics. China is also poised to be leaders of the biotech and computer manufacturing industries.

Fishman describes some interesting facts about China that includes a relative analysis of the shear size of China. The population of China is consolidated in the 100 to 160 cities with more than one million or more people. In a stark contrast, America has nine cites with populations greater than one million, while Eastern Europe combined has 36 such cities.

China’s rapid rate of industrialization can be credited to the leapfrogs in infrastructure development and advances in technology. China is an laying fiber optic a rapid rate. The leaders of China are buying oil fields internationally and negotiating exclusive deals with Saudi and Russian companies.

The author describes several real world stories depicting the direct affects China is having on the average American. One example that was interesting was the expatriate of the US who now teaches English in Shanghai and was able to receive laser eye surgery for $600 US performed at an ultramodern Chinese clinic for a tenth of the price the procedure would cost at home.

China is able to leverage its enormous labor population due to the relative stability of the region. The Chinese workforce is described as a reliable, docile, and capable industrial workforce, groomed by government-enforced discipline. China’s workforce is dubbed the greatest natural resource on the planet by the author. The numbers tell us that China’s population is 1.3 billion people and China’s GDP was $1.4 trillion in 2003. The author describes how these figures could be unduly low, since some provinces in China’s central planning awards funding to provinces designated as poverty zones and this leads to misreporting. Another reason these numbers may be inaccurate is the existence of an underground economy, which is not included in the official numbers. Lastly, the author believes that the China pegs its currency to the US Dollar. A country like China should be able to see its currency value appreciate against the dollar as the dollar moves up and down. Accounting for these disparities, the U.S. Central Intelligence Agency speculates that the size of China’s economy is in fact closer to $1.4 trillion with a GDP more close to $6.6 trillion.

In subsequent chapters, the author describes the history of China to provide insight into how China has attained its ranking and unprecedented economic growth. These timeline of change is most visible in the city of Shanghai, China. In the twentieth century-until China and the world unraveled in the 1930’s-Shanghai was considered one of the world’s most important commercial centers along side with London, New York, Paris and Tokyo. Shanghai has also historically been the world’s second busiest port. The city’s history of foreign domination is one of China’s enduring national wounds. The government uses the darker history of the colonial history and humiliation of Shanghai, once painted “The Whore of Asia,” as the fuel that drives the Chinese people to strive to be the best.

The author accounts the revolution of the farmer Chinese and their migration into more suburban areas to seek a better life for their families. With the government giving land to its people and then immediately turning around and reclaiming these plots for government collective control, this has led to the great rural migration. The author describes the hukou system was described to prevent rural-to-urban migration. Families were required to at request show an internal passport describing the family’s origin, class affiliation, personal identity, birth date and occupation. Those found to be out of their rural areas would be detained and/or returned home. The revolutions and uprising and eventual liberation of China’s farmers set the stage for China’s emerging market economy.

Economic opportunity in China, largely driven by geography, has grown so lopsided that China now ranks among the most unequal of nations. On average, rural incomes are only a third of those seen the sprawling cities. An interesting fact the author offers is that farmers make a fraction of their urban counterparts, but the government requires them to shoulder disproportionately higher taxes than urban dwellers. Also interesting is the fact that those farmers making the most income receive it by family members who have left the home and sends money to support them. The author describes how Zhejiang Province and the Wenzhou district has grown at astonishing rate because those that left to attain educations outside of the rural nations return to make even more money.

The author transitions from stories in China to parallel stories in the US. Merrill Weingrod, the principle of China Strategies in Providence, Rhode Island, closed his leather belt manufacturing plant and partnered with Chinese manufacturer its product to lower their costs. He closed his plants to become an intermediary to American businesses wanting to do business in China. Zhenjiang is an extraordinary example of a phenomenon that is repeated in varying degrees elsewhere in China.

Competition within China is fierce and most closely touted as a blood sport. China’s free market is unique in size and characteristics. For example, the Chinese citizens have the highest rate of savings in the world, saving on average forty percent of their income. This allows the better-off of them to take advantage of the growing housing market, despite the 20% down payment requirement to obtain a government back and issued mortgage. To gain the dollars of Chinese requires understanding the culture of the people. In the red-hot Shanghai housing market of 2004, the most aggressively built properties were high-end high-rise apartment buildings that were sold off as condominiums. Apartments could be $120,000 and in the same year rise to $300,000 for the same space. This growth accounts for the risk of speculators. The author refers to these Shaghainese as the Wenzhou mafia, not because they are criminals, but for the characteristic Zhenjiang bravado and a penchant for touring Shanghai’s construction sites inseparably attached to their mobile phones and roller bags full of cash.
Most of China’s factory jobs are made up of women. They can have pay of 17 Yuan per month and a dormitory that provides room and board. The capitalistic nature of the Chinese people are finding these jobs are not as profitable as other more personal and private ventures. Many young women are leaving the factory for high paying prostitution jobs. Their worksite is the karaoke bars and can have 1,000 women on premises. They can earn up to three times that of a factory worker.

The book goes on to describe the great energy debacle, environmental concerns/pollution, Beijing’s race to out-skyline Shanghai in the near future, Wal-Mart’s success, global consumer market wars, the China Price, the automotive industry, the pirate nation and the interdependency of the economies of China and the US. The author closes with a story of Aaron Shershow, an American living in Shanghai.

By Amy Best

Stephen Green’s book, entitled “China’s Stockmarket – A Guide to its Progress, Players and Prospects,” is an excellent soup-to-nuts overview of the past, present and future of China’s stockmarkets. Whether you are looking for a holistic understanding of how China’s markets evolved and where they are heading in the 21st Century, or if you simply desire a better understanding of certain aspects of one of the world’s most watched markets, this book is a staple and a credible resource for students and those simply interested in the global markets alike. In addition, the class is meeting with Mr. Green on Friday, May 26, so the book is particularly topical this week.

As my classmate, David Rowland, already posted a great review and summary of the book as a whole, I will attempt to drill down a bit on some of the most topical aspects on the book, specifically the regulatory framework and the effect (or lack thereof) on corruption. It is worth noting that while the book is a comprehensive overview of China’s stock markets, each chapter of the book breaks down the analysis into different subject matters (i.e. the history of the market, foreign investment and Chinese equity, the investors, listed companies, the regulatory framework, the future of the market, and the prospects for foreign investors), that can be read independently by those looking to gain insight into specific aspects of the markets in China. For more on this subject, please click below.

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Previous reviewers have provided a great overview of the book and for fear of being repetitive, the only topics covered below will be the process by which state-owned enterprises (SOEs) list on a Chinese exchange and the regulatory environment as described by the authors.
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by Carl E. Walter & Fraser J.T. Howie

Privatizing China, provides excellent insight into the history, struggles and on-going development of the stock market in China. Written in 2003 by Carl E. Walter and Fraser J.T. Howie, it is a follow-on to the 1999 book by the same authors, To Get Rich is Glorious! The authors provide historical information with a sense of hope and incredible opportunity for both Chinese national and foreign investors, all-the-while keeping the reader aware of a critical need for reform and further regulation of the system.

Following is a review of two very important themes of the book: (1) an analysis of the separate kinds of shares available on the Chinese stock markets; and, (2) the preparation necessary for a Chinese State Owned Entity (SOE) to go public.
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Privatizing China: The Stock Markets and Their Role in Corporate Reform.
Carl E. Walter & Frasser J.T. Howie

The book provided a historic view of the establishment of equity markets in China. Since the history of equity markets in China begins around 1984 (the first listing of a company is debated, but the main point is the event was low key), it is one of the few areas of Chinese history that is not mind boggling to comprehend in its entirety.

The authors choose to address most of the subjects chronologically and it flows fairly well since the market structure is constantly evolving. At the front of the book, they give a full chronology of major events in the markets and a list of abbreviations. If the topic is brand new to you, it would be helpful to bookmark the abbreviations and skip the timeline until the events are described in detail. Unfortunately, the best summary of the whole market is Chapter 10, the last. I would recommend Chapter 1 followed by 10 then through the specific areas in 2 through 9. Appendices include good references to relevant laws, listing procedures for companies and market data on individual companies up to 2002.

The opening chapter centers on the birth of the shareholder system in China out of a need to raise capital. It is interesting how a system for shareholders evolves from state owned enterprises (SOEs) in an environment without property rights. Centralized planning was not part of the establishment of markets in China; instead local governments faced with liquidity problems (no state money) sold “shares” to raise much needed capital. Receiving cash for ownership with little obligation seemed like a better deal than a loan. These initial shares more resembled municipal bonds in their structure and payout but the idea had been born. The authors describe the opening and closing of local markets around the country describe in detail how there became two major markets Shenzhen and Shanghai.

In the next section on regulation the authors describe the evolution of the CSRC and their increasing role in the markets. Through trial and error, booms and scandals, we see the People’s Bank of China (PBOC) take a decreasing role in the management of the markets. Their position created conflicts of interests which are explained in detail. After the June, 1989 unrest there was discussion over what was perceived to be capitalist and it set back the process until Deng’s southern trip in 1992 where he laid out the government’s notion of experimentation with markets. Many details concerning which companies can list and the requirements were laid out by the CSRC to replace a quota system which relied on state planning.

The next section covers the types of shares issued over different periods of the experiment. Some have fallen out of favor (B-shares) while others are difficult to interpret (State owned shares). There is good description of the purpose and intent of the different share issues as well as the difficulty in reform. The domestic equity market is still relatively small therefore small changes can cause large market swings. One example, the attempt to sell state owned shares which previously were designated non-tradable shares caused a major sell off.

The decision of how to package a company for listing is unique from the western investment banker point of view. SOEs consisted of not only the plant and factory but also the surrounding infrastructure including schools, hospitals and pensions. They determined that the entire SOE would not be attractive to investors so the money making assets were stripped out leaving the cash generating facilities as part of the listed companies. In some ways it parallels the major car manufacturer or airline entering bankruptcy, handing off pensions and debt to the government and issuing equity during reorganization. Time will tell if the Chinese Government sold the crown jewels too cheap.

The breakdown of market players is a great section full of scandal and manipulation. The rules governing trading and brokerage houses evolved over the years in response to high visibility scandals. Once again, scandal is bad politically because it usually results in riots and social discontent. The author’s data illustrate that most of the Chinese domestic market is run by the big shots through a number of schemes with little small investor retail activity. These are important points because the market becomes more susceptible to manipulation and loses it’s ability to effectively set prices. Lack of public confidence in the market removes a critical source of investment for the public and leads them to save or fuel the real estate bubble. Promoting domestic investment remains difficult while raising capital in international markets has been easier through small improvements in transparency.

Ownership, company structure and valuation all tie in to the discussion of market performance. When placed side by side, A, B and H shares of a company trade at different discounts or premiums. The issue of state owned shares seems like the elephant in the room, the long term solution for state owned shares has not been found. What is to become of the state owned equity going forward and what is their value. Experiments in the past to float state owned shares crashed the market and will probably not be attempted again in the same manner. Through secondary offerings and valuation investors place on the resulting dilution, state shares are not figured in. Over time, the state portion of equity has decreased in almost all cases due to the continue issue of new equity. So far, the state as maintained a controlling interest and maybe that is their only goal.

When discussing ownership and privatization with Chinese characteristics it brings up issues that may hinder growth of markets in China. Corporate governance with a state majority does not lend itself to shareholder advocacy. The non free floating currency or trans border transfer of cash removes arbitrage in the market. While this fact has insulated the Chinese markets during the Asian currency crisis and results in market that does not even correlate with the Hong Kong market, it limits the overall goal of capital inflow.

Overall the book was helpful to understand the mechanics of the Chinese equity markets but the authors did little to provide insight into the decisions made by the Chinese government. What is the end goal of privatization with Chinese characteristics? As certain regulations are handed down by the CSRC, the motivations are left to the reader to interpret. The question is often posed throughout the book whether changes favor Comrade Socialist or Mr. Capitalist. Only in the last chapter do the authors venture an opinion how reform should look in the future for China to prosper.

Charlie Pucciariello