General Motors:

Our last day in Shanghai began with a factory tour of General Motors (GM) in Shanghai.
GM, the world’s largest automaker and one of the best known American brands, formed a 50-50 joint venture with Shanghai Automotive Industry Corporation Group to create Shanghai General Motors Co. Ltd (Shanghai GM) in 1997. Today, Shanghai GM has an annual production capacity of 200,000 vehicles and employs 6,000 of 13,000 GM employees in China. As noted here, Smith students enjoyed looking at the newest models.

While there were similarities among the GM plants in the US and China, there were some notable differences. One example is that Shanghai GM produces brands unique to the Chinese market that are not produced in the United States. In addition, the Shanghai plant has capabilities to produce multiple vehicle models on the same production line, while the US plants typically only produce one model per line. One of the primary reasons for this difference in production styles is because GM has a comparatively smaller niche target market and producing multiple models on the same line is more efficient for their needs there.

Shanghai Stock Exchange:

Founded on Nov. 26, 1990, the Shanghai Stock Exchange was the first stock exchange in China and remains one of the most topical institutions in the world today. The group met with Situ Danian, an economist at the Exchange, and received a briefing on many of the current events at the exchange.

The Shanghai Stock Exchange has 153 members, currently all domestic, and the majority primarily from securities firms. The Exchange estimates 39 million investors, and institutional investors hold approximately 22 percent of the equity in the Shanghai market. The market has seen significant gain since 2001 and is getting ready to list one of the most anticipated IPO’s of 2006 – the $10 billion Bank of China deal. The past 10 years have brought about historical highs and represent the emergence of China as a market economy. Most of the companies on the exchange are state-owned-entities, where generally over 2/3 of the shares are not tradeable. A major initiative of the Exchange is its effort to attract more blue-chip listings for the Shanghai Stock Exchange. The Exchange has had a moratorium on IPO’s. Hong Kong has taken advantage of this vulnerability and worked diligently to attract more Chinese companies to list in Hong Kong. Reforms are said to have “gone well” and the IPO’s just resumed yesterday. People are optimistic that these changes will bring Chinese IPO’s back to the Chinese stock exchange.

Situ Danian provided a candid assessment of the Shanghai Stock Exchange’s reform efforts and acknowledged that the Exchange has a long way to go to gain the confidence and respect necessary to be among the world’s leading capital markets. One initial step towards improvement is a recently created “corporate governance board,” which provides companies the opportunity to voluntarily adhere to better corporate governance practices. While this effort is a first step, the board is purely voluntary and will not have the authority or the political grit to create or enforce regulation.

GRACE

Smith students also met with Jim Healy from W.R. Grace and Co. (Grace)
www.grace.com

Grace is a US based specialty chemicals a materials company with a significant presence in China. The company has been in the PRC since 1965 and was among the first Wholly Foreign Owned Enterprises (WFOE) allowed in China – a significant achievement for a company based in Columbia, MD. Despite W.R. Grace and Co. being in Chapter 11 since 2001 as a result of the company’s previous involvement with asbestos, Grace’s operations in China boasts a healthy $70 million in sales turnover per year and growth in China remains a high priority in 2006 and beyond.

Stephen Green – China’s Financial Structure

The last session of our course in China did not disappoint. The class heard from Stephen Green, an economist at Standard Chartered Bank and the author of “China’s Stockmarkets – A Guide to its Progress, Players and Prospects,” a book reviewed by three students on this blog. Mr. Green’s education and professional experience make him one of the premier experts on the Chinese economy, thus hearing his perspective on China’s current financial structure was a great way to conclude our time in China.

Mr. Green spoke at length about China’s banking reform efforts, capital markets and issues related to the exchange rate and currency and offered his own insight about the successes and struggles to date. Green concluded that the general direction is right and the reforms are meaningful, but many obstacles still remain. After a week of various meetings with business leaders in China, Mr. Green’s conclusion seems to be consistent with what we are seeing. It will be interesting to see what the next few years will hold for China’s economy and its impact on the world.

This evening, the class will be celebrating the conclusion of our time together in Shanghai by dining with out Smith counterparts at Barbarosa. As we bloggers plan to be an active part of these festivities, we will have to post the pictures from that event in the near future.

Our second day in Hang Zhou started with a site visit to the global headquarters of Hundson Electronics Co., Ltd. Hundson is a publicly-owned (Shanghai Stock Exchange GSE: 600570.SH) software development firm that specializes in providing customized software solutions for the securities industry. We were received by Yaron Zohar, Marketing & Sales Manager for Hundson Global Services, Inc. Hundson , who gave us an overview of his firm. Originally privately-owned and funded (Mr. Zohar mentioned that some of its initial funding came from Hang Zhou farmers) prior to its public offering in 2003, the firm represents a fast-growing domestic company pursuing growth on a global level, including a presence in the greater Washington, DC area (they have recently opened a sales office in Annapolis.) They have a CMMI Level 3 outsourcing license that allows them to be a qualified player in the software development and IT services markets.

We found it interesting that their pursuit of a global strategy was due to an increase in local competition and a decrease in demand in their traditional market as a result of the Chinese stock market downturn.
We also discussed the challenges associated with intellectual property rights fraud and logistical issues associated with globalizing a company headquartered in China. Our visit concluded with a tour of the Hundson software development offices and overview of their employee benefits programs. We discovered their employee break room contained ping pong tables and this reminded us of the sports equipment special place in American-Chinese relations.

UTStarCom

UT Starcom#3 Best Employer in Asia by Fortune magazineis a global leader in IP-based, end-to-end networking solutions and international service and support. Ju Wei, the senior director of UT Starcom University gave a presentation on the history, growth, and the strategy of the company and guided a tour of the facility. UT Starcom was formed when UniTech and Starcom merged in 1995. The company is headquartered in California and has more than 6,000 employees out of which 5,000 work in China in 30 branch offices and 5 R&D centers. The company has experienced enormous growth for the last 6 years, from $100 million in 1998 to $2.75b in 2004. UT Starcom was rated the #3 Best Employer

After the UT Starcom visit, we were honored to be invited to have lunch with Chinese officials from the Hang Zhou Municipal Foreign Trade and Economic Corporation bureau (FTEC). The banquet was hosted in the Great Hall of People, the location of the provincial legislative representatives of Zhejiang province. Mr. Wang, the director of FTEC, introduced the investment environment of the Hang Zhou Development Zones for Investment. Chinese offices shared the wonderful experience of their recent visit in US, especially in Maryland. The Smith MBA students expressed our delightful impression of the beautiful city of Hang Zhou.

The formal lunch banquet had many courses, both delicious and exotic. Smith students had a rare and unique opportunity to be exposed to the “official Chinese banquet culture” and diplomatic dining etiquette.
Some of the students audaciously tried the “Duck Tongue”

Lifeng Pagoda

We toured a reconstructed pagoda from the Song Dynasty. The structure, although boasting a glass enclosed elevator, still maintained the character of the original landmark. We were told a wonderful story related to its origin. It is said that a snake spirit dwelling in the hills, became infatuated with a local doctor. A monk foreseeing trouble for the doctor, contrived to imprison the spirit in the Lifeng pagoda. It was said that when the West Lake runs dry, and the pagoda collapses the spirit shall be released. When the pagoda actually did collapse in 1924, (from fire damage from earlier centuries as well as a lack of care) people believed the legend had come true. The serenity and lurking mystery of the place inspired this haiku.

Green hills caress her body into mist
But who will drain the bitter cup of longing?
Will thirst be quenched draining a lake dry
And passions lasting flame ignite a gilded prison?

Our guide through the tour of Hangzhou was Angela Lee from the Hangzhou Foreign Trade Bureau.

The famous Chinese Green Tea: Long Jing Tea

Tea drinking is an integral part of Chinese culture. In China, tea is considered the national drink and to have medicinal qualities. There are many different species of teas varied by region and climate. Zhejiang province is famous for its Long Jing tea – a type of green tea consumed by the locals. In general, this type of tea is consumed in loose-leaf form and served with a certain amount of ceremony. Smith class was accompanied by Angela Lee to a local tea shop – Zhejiang Camel Transworld Co. Ltd in order to witness and sample the Long Jing tea. As it turns out, there are different grades or quality of tea. The quality of the leaf depends on the timing of the harvest, which has a narrow window around April. The most expensive tea they had was around $100 a kilo! Overall, the experience was educational in that tea drinking is an important aspect of healthy living among Chinese. Click here to find out more about the Chinese perspectiveon teas. Not surprisingly, tea is also a very popular as gift in China. We took away a sense of appreciation for the tea culture (as well as many cans of tea!)

Yingxi took time from her busy schedule to meet with us and discuss her M&A work in China despite traveling to Hong Kong and Beijing on the previous day.

Yingxi discussed the main differences between M&A and doing business in general in China from that of the United States. The three main distinctions she noted included the role of government, the role of government officials, and the laws and regulations around business.

In the US, the role of government is that of a regulator, referee, and facilitator; while in China the government’s role is more that of a parent overseeing its children (notions of national interest), although it is trying to move to a more US-based model.

The role of government officials in the US are that of public servants, while those in China “face south¨. That is, they sit back and listen to the problems brought before them. If they occupy a high enough position, they are referred to as a parent official.

The laws in the US are created to establish the integrity of political institutions (constitution, etc) and to regulate and balance economic and social interests. In China, there are a limited number of laws to establish political institutions. Rather, the system is based on civil law in which the interpretations of judges are not necessarily precedent setting. A judge in one jurisdiction may rule one way, while another jurisdiction may rule another way and there not nbe a tension between the two.

Yingxi also discussed some myths about doing business in China. Such myths include China as a lawless country, connections are everything, and contracts are useless. As a practitioner of M&A Yingxi rebuffed these myths by stating that China has many business laws (cited examples of advertising regulations during dinner time) and that while connections are important, China is now progressing to the point that any deal must have merit to be considered regardless of connections. She further stated that contracts are not useless but must be structured differently than in the US. She suggested that contracts have economic leverage for both parties so that both parties have an incentive to fulfill the obligations of the contract. She also reiterated the obvious that the contracts should be well understood by both parties and should be as fair as possible.

In the afternoon the MBA group visited the office of BearingPoint office in Shanghai, China. Mr. Afzal Tarar, Managing Director & Greater China Financial Services Leader led a discussion on opportunities for Bearing Point in China.

Mr. Tarar, a graduate from Case Western School of Business started his career as a consultant for Deloitte Consulting in New York, NY. After several years he moved to IBM Business Consulting and had his first assignment in China. Few years later he was finally recruited by Bearing Point and moved on a full-time basis to Shanghai, China.

After working with the big names in consulting, Bearing Point presented Mr. Tarar with a unique opportunity to help the revamp of Bearing Point. In China the firm is also known as the first enterprise risk management financial services consulting company, the second largest financial management and transformation company, and the third largest in business process animation. These strong client perceptions and a supportive senior management team gave Mr. Tarar the energy to take this challenge in China.

The first challenge faced by Tarar was the fact that all consulting companies in China produce negative operating income. His first goal objective was to change this situation for Bearing Point. His initiatives to achieve these goals are: 1. Focus on Strategic Clients, selecting engagements with higher potential of being profitable 2. Recruit, develop, and retain talent; and 3. Rationalize costs, from operational costs to higher consultant time utilization

While Mr. Tarar foresaw a 9 to 12 months for the turnaround the senior management only granted him 3 to 6 months for results. For this demanding timeframe Mr. Tarar focused his initiatives with a selected group of clients that included the China Construction Bank (the most important), the China Agricultural Bank, and the China Industrial Bank, among others.

To face this challenge, Mr. Tarar mentioned that having entered the Chinese market before India gave Bearing Point a first mover advantage, to the point that as of today, the firm is the only foreign consulting company allowed to quote major public consulting projects.

As for the future, Mr. Tarar added that the company will avoid areas that have been commoditized, such as integrating systems, and keep focusing on the Financial Services as the one area with higher potential for growth and profitability.

Our day ended with a journey to Hangzhou, where we checked into the Ramada Inn and had dinner at West Lake.

Having some investments in India, I closely monitor some specific sectors of Indian economy. Before reading this book, I was under the impression that both countries are in the same boat and their economies are open to the world due to the compulsions of a similar situation. As I read this book, I realize that there are more dissimilarities than similarities. The dimensions of the market forces and business landscapes are totally different. The mindset of people is entirely different. An encouraging observation is that one economy cannot become a threat to the other. They seem to me as complementary to each other. I will cover this separately somewhere else in the blog.

In this book, McGregor creates vivid images of some brutal events in the reader’s minds notwithstanding his humor in few other places. In one section, he mentions, “I looked Chinese justice in the eye at a death rally in Mangshi,…” and continues, “…the prisoners were taken to the edge of the town, forced to kneel next to one another, and shot in the back of the head”.

I should mention how well this book has been laid out. There are 8 chapters in the book. The first briefs the history of China’s integration into the global economy, tracing the efforts that brought China into the World Trade Organization in 2001 all the way back to 1793. In the next seven chapters, through separate case studies, he explains the challenges of getting into Chinese market and suggests some cautions in each step. These seven chapters are independent of each other and can be read in any order. Each chapter begins with an overview and ends with sections – what this means for you and a quick list of some tips in the name of “the little red book of business”, which I felt, is a must read for anyone who wants to do business in China. Initially, he devotes a separate section to introduce main characters in the book – Chinese, US and British government officials, Chinese and US business people, Chinese media and scholars, and some of the historical figures.

Besides being a useful primer on business, the book also sheds light on the bigger questions about China such as – can its corruption be controlled? He says – “At its core, Chinese society is all about self-interest. It is very strong on competition but very weak on cooperation.” In the chapter – Same bed, different dreams, Mr. McGregor tells the story of Morgan Stanley and the Construction Bank of China, who set up a joint venture Chinese investment bank. He explains how both investors had a completely different view of what the venture was supposed to be.

He also explains his struggles with the bureaucracy, especially with the top leaders’ level. In 1996, Xinhua, the official Chinese news agency, tried to muscle in on the hugely profitable Dow Jones and Reuters financial information business in China. He suggests that – You can’t ignore the government, but don’t sit and wait for approvals. Do your politics at the same time you develop your business. He sums up the legal situation in – the most carefully constructed legal contracts will easily die when politics go against them. He also warns not to trust the Chinese feasibility study. It would be normally created to attract foreign interest.

He makes an interesting observation. The Chinese learn quickly by imitating, following role models, and absorbing prescribed solutions for every problem. The trouble is that in modern China, crashing its way onto the world scene as a rapidly growing economic powerhouse, there are no role models, no prescribed solutions, and no one to imitate. This is in line with what Sage (Pacific epoch) said in Tuesday’s meeting. But he quickly asserts that the scene is changing. Higher education institutes such as BiMBA (Beijing) are focusing on innovative business management techniques to build a new future for China. At the same time, he suggests that for foreign companies building an effective Chinese executive corps, the single most effective technique is well-planned mentoring. The mentoring must include real projects in which they learn how to make decisions by doing research, talking to experts and gathering information rather than relying on their gut. He refers to the IBM-Levono deal as the best laboratory to study a blended Chinese and Western management model formed.

Overall, this book helped me to learn a lot about Chinese economy, people, culture and the general managerial issues. I learned the history of China’s economy, thereby understood the challenges and opportunities in front of us as foreign entrepreneurs if and when we enter the Chinese market. Sometimes, I felt, he was too critical of Chinese mindset. For example, he says “Chinese society is all about self-interest. It is very strong on competition but very weak on cooperation”, “China’s rush to get rich is accompanied by a deep distrust of the system and anyone outside one’s immediate family or circle of close friends. This has created a business environment that is steeped in dishonesty and in dire need of transparency and fair dispute resolution systems.” In my opinion, such a generalization was unwarranted. However, the book appears to be a product of a lot of research, hard work and experience. McGregor did this by learning the new language, culture and people. More importantly, for us, it defines the to-do’s and not to-do’s when entering the Chinese market. I would recommend this book to all of you even if you do not pursue doing business in China.

Our first presenter Sage Brennan spoke to us today on a wide range of topics from technology and communications to starting a business in China. Pacific Epoch is a business intelligence firm focusing on media, telecommunications and investment opportunities in China. Filling the void of information in the technology sector with a boots on the ground strategy, Pacific Epoch provides customized information to clients, mainly hedge funds and VCs.

One of the challenges in providing independent research in China centers on a general suspicion of answering questions. Companies in China are not enthusiastic to provide market data or trends as would a typical US company selling its story. This requires Pacific Epoch to develop its own market research techniques through polling and surveys. Part of Sage’s job is to sort through which projects best add value to the company and can be used in follow on research. One off projects with no follow on application are not the best way to leverage the assets of their small office.

Sage touched on the business strategies for Pacific Epoch as they grow and expand their product offering. Training and hiring is another challenge of operating in China. Most hires are from local universities and have a passion for technology. Innovation and out of the box thinking was the attribute most difficult to find in China and part of the training challenge going forward. As a provider of information it was refreshing to hear that censorship has not had an impact on their operation except for some minor technical difficulties on their server. In a reversal of sorts, Pacific Epoch’s only problems with intellectual property rights violations occur in the US a result of unauthorized distribution of newsletters and reports.

Always a hit with the crowd was the experience as an ex-pat living and working in China. Sage was able to provide insight into the ways to start working in China through his unique experience. His outlook on tech in China was enthusiastic with many opportunities still available.

Meeting with Altcatel’s Kang Wuping, VP of Human Resources

Alcatel is a leading telecom company based in Paris, France with 57,000 employees across 120 countries. Today we met with Kan Wuping, the VP of Alcatel Shanghai Bell, a subsidiary of Alcatel. Alcatel has a 20-year history in Shanghai and has been in a great position to watch China’s recent the economic development and capitalize on it. In 2002 Alcatel China merged with the state-owned company Shanghai Bell to form Alcatel Shanghai Bell. Alcatel’s recent merger with Lucent has transformed the company from a telecom product company into a full telecom solution provider.

Alcatel Shanghai Bell’s shares are 50% +1 owned by ASB and 50% owned by the Chinese government. This means half of the board of directors are government officials, but it would seem as though the relationship with the government is productive and non-confrontational. ASB’s market is mostly in China but they are also a global hub for Alcatel R&D (earning the most patents of any Alcatel location globally in 2005) and also house one of Alcatel’s four manuracturing facilities (consolidated from 100+ just a few years ago).

Alcatel’s core values are 1) Customer Value, 2) Innovation, 3) Teamwork, and 4) Accountability. Fortunately, Shanghai Bell shared three of the four Alcatel core values when the merger took place, and as a result the merger went smoothly and efficiencies were realized quickly.

ASB takes pride in it’s responsibility to the local community. The company has given back large sums of money to the local community for school, SARS research, and to promote a Green Culture.

The key motivator for ASB employees is career management. For this reason, ASB has focused a tremendous amount of resources on developing rigorous career path programs designed to retain employees, accelerate high potential employees, and build broad experience within the relatively young employees of the company (the average age of an ASB employee is 30). Accreditation programs are a key piece of the career management program at ASB and help measure competencies and justify salary and responsibility increases. ASB’s program management system is one-of-a-kind within Alcatel and Alcatel’s Paris headquarters has realized the value and is considering replicating this kind of system across more of it’s regional offices.

After our discussion with Mr. Wuping, the students went on a tour of Alcatel’s Next Generation Network (NGN) showcase center where video conferencing, IP-based phone systems, and data-voice convergence technologies were demonstrated.

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)

Mao Zedong, with his strict socialist rhetoric, brought China’s cultural and economic development to a stand still during his tenure. He closed the doors of China to the rest of the world and promoted an internally focused regime. When Mao died in 1978, Deng Xiaoping took the reins of power of the great Dragon. He was a short man in stature (5ft tall), but one who proved to be the greatest blessing of modern China. According to Joe Studwell, the greatest contribution of Deng wasn’t so much what he did for China, but rather what he did not do. Many consider Deng’s ruling period as the end of the war and the return to normality.

As many other communists, Deng grew up in a middle class family in the south of China. However, what differentiates Deng from Mao is that he was able to see the world. Deng was educated and worked in France between the ages of 16 and 19. Also, at the end the cultural revolution, he was sent to speak at the United Nations in Now York in 1974 were he saw the might of capitalist America. And in 1979 after the death of Mao and soon after the resumption of diplomatic relations with the US, he spent a full week in the US understanding life in a capitalist country.

In 1975 he mandated the development of a ten-year plan for economic development. This plan called for 120 large-scale investment projects and the larger ones were in the energy and petrochemical industries. The total investment of the plan was $12 billion dollars and China expected to pay for the plan with increased oil export. This plan was similar in many was to the Great Leap Forward because its purpose was to catapult China into a new level, but also because it was based on unrealistic assumptions. Fortunately for Deng and for China, Chen Yun, the head of the government’s Economic Leading Group, saw the deficiencies of the Ten-Year-Plan and suggested that instead of heavy industry investment, the plan should concentrate in incentives for agricultural production and light industry and services. Deng did not oppose.

The results were apparent in a very short time. China’s grain harvest grew from 305 million tons in 1978 to 407 million tons in 1984. Additionally, farmers started to plant other crops and raise animals that were prohibited previously such as rape, sesame, sugar can and fruit. The economic impact was even bigger. With higher income, farmers demanded more services such as electricity and increased the efficiency of their crops by adding technology fertilizer. As a result non-farm employment in the countryside increased from 30 million to 93 million, creating a very prosper economic cycle during the 80’s.

In non-rural areas positive results also were exhibited. In the area of Wenzhou a group of family clothing businesses persuaded officials to create a new form of enterprise, a ‘stock-holding cooperative’. This entity, although positioned as a socialist enterprise promoted by Mao was anything but. During Mao’s tenure, such thing would not have happened as family owned companies could not employ more than seven from one extended family. By the end of the 80’s there were more than 20,000 such cooperatives, and in 1990 Wenzhou’s GDP increased six fold from its level in 1978 to 7.8 Billion RMB. Also by 1990, communist China saw its first millionaires from the production of small electrical switches to ball pens, lighters, buttons, footwear, etc. These types of cooperatives became so efficient and well managed, that state owned enterprises could not compete with them.

Deng opened the doors to the world that were closed by Mao. One of the first steps in this endeavor was to devalue the currency which had caused in the past great losses in foreign trade. One dollar in 1980 was worth 2.9 RMB and by 1990 the value went up 5.9. Even though the RMB was still considered overvalued, the gradual devaluation helped China move from being the thirty second exporter in 1978 to being number 13 in 1990 increasing exports by 15% during the eighties.

Deng also created four experimental Special Economic Zones to foreign investors in 1980, three of which were located in the Guangdong province in the south of China closest to Hong Kong. These zones allowed Honk Kong entrepreneurs to open manufacturing facilities in mainland China, creating an explosion of foreign trade. Guangdong exports increased from $2.9 billion in 1985 to $50 billion in 1990, making China the biggest textile exporter in the world and employing over 3 million workers.

In 1991, he promoted to the post of Vice-premier Zhu Rongji, a former Shanghai mayor English speaking intellectual who was foreign trade friendly and was instrumental in the development of Pudong as a financial center. In addition, Deng promoted accelerated reform programs in the costal cities of Tianjin, Shanghai and Fujian where free trade zones were created and foreign investment was expanded. Finally, Shenzhen, a southern city known for its rice paddies, opened without government approval a stock exchange. Prior to Deng’s tenure, none of these actions could have been allowed.

In many ways Deng embraced many capitalist concepts and made them his own or in this case China’s. This was most evident during his own southern tour, during which he claimed Special Economic Zones were socialist and not capitalist. He also used this tour, which had originally been planned as a vacation, for media all over the world to hear his support not only for growth, but for the fastest possible growth, even at the expense of a little spiritual pollution.

The southern tour was the beginning of a larger reform campaign in which he wanted to renew the blood of China’s leadership and do away with the old school political dragons who had ruled since the times of Mao Zedong. In 1992 at the age of 88 he wrote a document entitled ‘The brilliant thesis of a socialist market economy.” This document was revolutionary for the communist party to the point of changing the Party charter to incorporate Deng’s new ideas. In 1993 China’s constitution was amended to integrate Deng’s theory of building socialism with Chinese characteristics.
That was the beginning of a great new period for China. Deng Xiaoping believed that China could not progress in isolation from the rest of the world. His vision opened the gates of the forbidden land; today we can see the results.

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.

Green begins with a brief history of the stock market, giving adequate political and economic perspective to the regulatory decisions which have most recently been affecting the market. Many of these issues are detailed thoroughly throughout the book, with significant data to support the arguments. For example, many of the shares of listed companies are non-tradable, which leads many outside observers to grossly over-estimate the total market capitalization of China’s stock market. In these estimates, China dominates the pack among emerging countries and their capital markets; however, when adjusted for shares that are traded and tradable, China falls short of other emerging countries in terms of total market capitalization and proportion of total GDP. While China’s total market capitalization in 2002 is Rmb 3,832.0 billion and 37.0% of GDP, tradable market capitalization is only approximately 1/3 of this figure at Rmb 1,248.5 billion and 12.0% of GDP. This ranks China fifth among emerging countries’ stock markets and other stock markets in Asia.

Green contends that the growth that China’s stock market has seen in the last 20 years is even more impressive considering the age and significant political and economic transition that has occurred over that period. Additionally, several scandals, poor regulation and weak enforcement have obstructed even further growth of the stock market and are described. As these obstacles are addressed, we can expect the stock market in China to continue its growth at an even greater rate.

China’s bond market, as Green describes, is also in a state of development, partially due to the uncertain nature of the interest payments to potential bond holders. Because a fully developed infrastructure for credit ratings does not yet exist, risk assessment of corporate bond issuers falls in the realm of due diligence of potential bondholders.

Foreign investment vehicles are described as a means for globalization and source of non-domestic capital, although setbacks resulting from policy decisions have prevented even further growth. For example, the B-share market, which allows foreign investors to invest in denominations of $USD and issuing companies to raise hard currency, has largely failed due to low liquidity and other political and economic deterrents.

Green also provides an interesting profiling of the investors in the Chinese stock market, including securities companies, investment management companies, investment funds, insurance and pension funds, and asset management companies. Listed companies are also profiled, from ownership, performance, and corporate governance standpoints.

One of the largest opportunities for improvement in the Chinese stock market is the regulatory infrastructure governing the activity in the primary (IPO) and secondary markets. Green addresses the weaknesses here and provides some explanation from an expert’s perspective, and provides data from a 2001 survey of individual and institutional investors which asks them to rank the activities that they believe hurt them the most.

As an introduction to the stock market in China, Green’s book avoids the sensationalized data which tends to pervade the mainstream media and provides a solid source of consolidated and apparently objective information on the topic. Because of the enormous speed in which changes in the regulatory and economic frameworks are taking place, Green’s book would benefit from an updated revision, given that much of the most recent data provided dates back to 2002. However, as an introduction to the historical context and ongoing issues which have been plaguing the system, “China’s Stockmarket” is a good pick.

The book’s introductory chapter clearly outlines the stakes involved in understanding China and getting the US policies towards China right. “Put simply, the U.S.-China relationship is too big to disregard and too critical to misread.” The authors then devote each of the next four chapers to four important topics, China’s Domestic Economy, China’s Domestic Transformation, China in the World Economy, and China’s Foreign and Security Policy.

Throughout the book, numerous facts are cited, many of which interesting and surprising. For instance, only 1/7 of the population is covered by basic health insurance, so families typically save for future medical expenses. The same can be said for pensions, and those that do have pensions can only expect 20% of their working earnings come retirement. China’s gas prices are roughly 1/3 below U.S. prices, due to government subsidies (Sinopec received a $1.2B subsidy from the government in 2005). China’s rapidly expanding demand for energy stems not only from rapid growth but from inefficient use. China’s energy consumption per unit of output is more than double the world average. And finally, China has roughly 86,000 dams, and still has considerable hydropower left to tap.

The book closes with four fundamental conclusions. First, China clearly represents both an opportunity and a threat in economic and security terms. Second, the extent of the opportunity or challenge is not-predetermined but will be greatly depend on US policy as well as internal dynamics of China. Third, US policy can play a role, both for good or bad, in the decisions China makes about its future. Finally, while it is responsible to develop strategies that deter actions that are against US interests, US strategy efforts should be focused on effectively integrating China into the global economic and security systems to ensure American’s long-term prosperity, security and peace.

This book provides a solid foundation for understanding the complex issues involved with US policy towards China. It is insightful, compelling, and concise (only 150 pages). I highly recommend it.

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.