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PAX, LUX ET VERITAS SINCE 1965
Post Doing Business in China: Frustrating
Created by John Eipper on 10/28/17 7:55 AM

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Doing Business in China: Frustrating (Istvan Simon, USA, 10/28/17 7:55 am)

I have done business in China, and given that I have lived in China and that my wife is Chinese, I could probably say that I am fairly well informed about the country. Though I am sure that Cameron Sawyer is well informed about China as well, I'd have to say that I disagree with Cameron (October 26th) that China is a freer market than the United States. That is not even close to the truth in my opinion.

The Chinese economy is a mixture of statism and free enterprise. The government reserves to itself large sectors of the economy which it considers strategic assets. Thus all communications in China are under government control, including telephones, the generation and distribution of energy, roads, the famous disgraceful attempt to censor the Internet, and all banking.  Together that must be more than 50% of the economy I'd say, though I do not have exact statistics at the moment. This is a subjective but well-informed personal assessment.

The fact that all banking is in the government's control is particularly disastrous to the Chinese economy. That is because small businesses do not have access to capital, which is dispensed by political influence, and is essentially a corrupt system. Those who have access to the Communist Party bigwigs, have everything. Those that do not, are up the famous Sh*t Creek.

As WAISers who have followed my activities know, I have researched renewable energy for the past 15 years or so. I had a supplier in China that made the prototypes of my Solar Collecting Panels, which was a very high technology contraption, that followed the sun, and had 1 cm square "panels" which worked with highly concentrated solar radiation at 1000 suns. A 1 cm square "panel" would produce 25 watts of energy all day long, from sunrise to sunset, as long as it received direct sunlight. The company that made my prototypes was a small company that made Chinese telescope parts. The technology for telescopes is the same as what I needed for my panels, because to watch a star one needs to compensate also for the rotation and movement of the Earth in its orbit.

This company is everything that proves how wrong Cameron Sawyer is in his assessment. Because there is no venture capital in China, and because the banking system is corrupt, as I explained above, this small company struggled against incredible odds. They succeeded, but their survival is hardly an advertisement for the Chinese economic model and system.  Much to the contrary.

I'd like to add a few more observations about China. After Deng Xiaoping started the ground-shaking capitalist reform that ended the disastrous reign of Mao Zedong, Chinese universities recovered from the terrible depredations of Mao's criminal cultural revolution which destroyed a whole generation. Chinese universities are very good at some things, but not so good at other things. The Chinese are practical people. So they educate fabulous engineers, but not-so-fabulous scientists. Considering that China has 1/5 of the world's population, one could expect about 1/5 of the World's Nobel Prizes to go to Chinese scientists. Yet that is not at all the case, almost all Chinese Nobel Prize winning scientists live in the West. I think that this is due to the cultural character of the Chinese. The Chinese are not curious, and they do not routinely ask why something works the way it does. They are happy that it works and do not usually ask the question why. This leads to great engineers but lousy scientists.

Russia is almost the exact opposite of the Chinese. Russian scientists are great, but Russian engineers are usually lousy.

Finally, I enclose the following reference that has some interesting commentary on what has been happening with China's economy in recent years, and sheds further light on my qualitative comments above. It includes some statistical data relevant to our discussions. In particular it points out falling growth, problems of the banking sector with bad loans, and an excess in real estate inventory.

https://www.americanfunds.com/individual/insights/investment-insights/spg-andd-china-slow-growth.html?cid=ps_ggl_32589384942

Cumulatively these problems are very significant, because China's economy since Deng Xiaoping has used a model of economic growth primarily fueled by taking land away from peasants and building real estate on it, apartments, offices, etc., coupled with enormous investments in infrastructure. This model has reached its limits which points to the need for a major change in China's economic model of development. At this point this is not yet happening. Xi Jinping has used an anti-corruption crackdown within the Communist party as an excuse to consolidate his powers. There is a danger that China will revert to an even more authoritarian government than in recent years. Xi Jinping might change the healthy major reform first introduced by Deng Xiaoping that limited the term in office of the top leader, and established procedures on how the next leader was to be chosen.

JE comments:  Istvan Simon raises a point for further discussion:  is the Chinese development model at its limits?  Even more fundamentally, is Istvan's description of this model (confiscate land, build stuff) accurate?

(Istvan, one of my best friends is a Russian engineer.  And he's really good at it!  He probably designed the seating in your car.  Maybe it's because of his 20 years in the US?)


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  • Attempting to Do Business in China; from Ric Mauricio (John Eipper, USA 10/29/17 8:17 AM)

    Ric Mauricio writes:



    I too have attempted to do business in China. My clients have done or attempted to do business in China. However, not being a good little Communist, I found it to be extremely challenging. Like Istvan, my wife is Chinese, but that did not help at all, since she is as American as one can be (San Francisco-born). I guess since I am also as American as one can be, it would in itself be challenging.


    My client shared with me the nuances of owning property in the PRC. Unlike the US (which is why many PRC citizens love to buy US real estate), you cannot own the land. You just own the property on the land. The land belongs to the "people." She told me that the escrow process is fraught with danger, with escrow officers taking the funds and investing elsewhere while waiting for the sale to close.


    By the way, in a previous post, someone stated that China has no venture capitalists. Ah, but there are. You see, China's VCs are based in Taiwan. So the saber-rattling that you see is just that--all show, no substance.


    The PRC, although Communist in government, is one of the most capitalistic societies today. When I was last in Beijing, in 2012, my tour group was approached by a gentleman selling doodads, and I blurted out, "Good ole capitalism." Oops.


    It is possible to do business in China, but you must have a trustworthy Chinese partner. Hmm.  It is easier to just buy Alibaba.


    BTW, 67% of China's GDP is attributed to the SOEs (State Owned Enterprises).


    JE comments:  Cameron Sawyer recently wrote that the SOEs employ just 16% of China's population.  Are both numbers correct--meaning, do 16% of the Chinese produce 67% of the GDP?  This doesn't make sense, especially given the assumption that the SOEs are less productive than their private-sector counterparts.

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