The China You'll Never Know...

A Lastest News about Business Practices in China

Last updated: 10 Sep 2011

Navigating China's investment minefield requires a special due diligence map only found in two places...

Are YOU smart enough to know the difference? With all the statistics about China?s booming economy being quoted in recent days, few people consider the source nor put the statistics into proper perspective. The hype is overwhelming and frankly, easy to believe since the rest of the world is gasping for recovery air. The China story gives the world hope of recovery if China shares the wealth and continues to buy foreign debt, that latter of which is commendable and beyond dispute. Without a doubt America?s economy would have collapsed if China did not buy $2 Trillion of U.S. Treasury Bonds in 2008. But the focus today is on the reality and perception of China?s ?phenomenal growth? Those not residing in China like us, cannot see nor appreciate five critical facts about Chinese ?news? and ?announcements?: 1. All the news in China is generated and distributed by government-channels, including Xinhua News & Wire Service, CCTV, and some 59 state-owned newspapers like China Daily, The Global Times, Peoples Daily, etc. 2. All other ?announcements? and statistics are delivered and/or ?leaked? by official government ministries or agencies (Commerce, Agriculture, NDRC, etc.). 3. All foreign blogs (including innocuous ones like Zimbio) are blocked in China as well as You Tube, Facebook, Twitter, etc. so any foreign questioning or doubts of Chinese generated news can be censored out of anyone?s mind. 4. Most any profitable company in China, including the oil giants, technology companies, airline industry, etc. is owned and operated by the Chinese government. They also reap the profits and benefits ? not private enterprise, and this wealth does not filter down to the common people on the street. Thus, very much like in America, China has less than 10% of the population enjoying over 90% of the wealth. 5. China taxes every pubic purchase including food and bottled water. The taxes are built into the price and never disclosed to the consumer as a ?tax?. These taxes affect 1.5 billion Chinese citizens and generate over $50 Billion USD a year in additional revenues for the Chinese government. So in reality, any picture can be painted for the convenience of a self-serving government. Although the economy in China is indeed flourishing, with low jobless rates, 85% of the Chinese people can still not afford to buy a home. Only 7% can afford an automobile. Yet you will not see these basic facts published anywhere. Likewise, inflation is starting to become a genuine consumer menace. 15% of all jobs are what I call ?unnecessary busy work? like hiring the uneducated to pick up litter or be crossing guards at intersections, or one of 60 million ?security guards? in a nation that has the lowest crime rate. (The only visible crime in Beijing is bicycle theft). Think back to the days when President Johnsons & Nixon were feeding BS field reports to the news media convincing Americans that the U.S. was ?Winning the War?. General Westmoreland later confessed it was all an elaborate PR scheme to keep the protest voice down to a minimum. Fortunately back then, the TV media had more investigative integrity and independence. Today, China is still emerging into a world of semi-freedom but only internet surfers savvy enough to ?jump the great firewall? xan really get a true picture of China?s economic picture. It is not all a bed of roses. Consider this excerpt from a B2B Blog I recently came cross which quotes yet another blog from the New York Times? ?An April 7 column in the New York Times Economix blog highlighted the rapid growth of U.S. exports to China, which look impressive in isolation. But this is a biased and one-sided view -- exports have been overwhelmed by the growth of U.S. imports from China and the bilateral trade deficit, as shown in the graph below. When trying to assess the costs and benefits of the U.S./China trade relationship, counting only exports is like judging a baseball game by only counting runs scored by the home team. It might make you feel good, but tells you nothing about who is winning or losing the game. Properly measured, U.S. imports from China were $364 billion in 2010, vs. domestic exports of only $85.8 billion (excluding transshipments of goods from other countries), for a trade deficit of $278.3. Even when goods made in other countries are included with U.S. exports, the deficit in 2010 was $273.1 billion, substantially more than estimates reported by the Times ("$180 to $250 billion"). A sizable share of U.S. exports to China is raw materials used to produce goods that are re-exported back to the United States. Four of the top six industries producing exports are waste and scrap products, semiconductors, resins and synthetic rubber and fibers, and basic chemicals. Sectors such as cash grains (the top export commodity) and waste and scrap support very few U.S. jobs. Such trade may be good for U.S. multinational companies (MNCs), but provides few benefits for the domestic economy. Overall, the large and growing trade deficit with China has displaced millions of U.S. jobs, most in the manufacturing sector which has lost 5.5 million jobs since 2000. The Economix report relies on data published by the U.S. China Business Council, a trade association representing MNCs doing business in China. These firms have profited enormously by outsourcing production to China. China has subsidized these firms through massive currency manipulation, which reduces the costs of their exports by 25 to 40%, and by pouring tens of billions of dollars into subsides of products like steel, glass and paper products. U.S. MNCs should not be allowed to dictate U.S. trade policy. The U.S. needs to get tough and demand that China and other currency manipulators revalue their currencies and end other unfair trade practices. Nibbling around the edges with a WTO case for one sector and import surge protection for another will not get the job done. The U.S. should start by threatening to impose large tariffs on all U.S. imports from currency manipulators?. The perception is easier to propagate than the reality. We should all acknowledge and applaud China?s well-earned emergence and recent prosperity, but not at the cost of imposed tunnel-vision. The big picture must still be factored into the what I call the ?real news equation?. When common people are openly allowed to question and criticize on local blogs, radio talk shows, and letters to the editor, and when open discussion about China?s artificially supported real estate markets and trade imbalance can be scrutinized, the local news media and ministries will acquire more credibility. But for now we have to deal with false imagery mixed in with a great deal of Johnson and Nixon era spin. It is called propaganda and it is a tool of every government. China and America have mastered it down to an art form. Confucius once said ?Man who only look forward do not see hungry tiger behind him?. Too many foreign investors have caught the China flu and have become blinded by greed. They forget what their parents told them many years ago? ?All that glitters is not gold?. China is winning the spin game, primarily because America lost its credibility with the Bush administration?s fabrication of the Iraq War (a fraudulent grab for Iraq?s oil fields) followed shortly thereafter by the economic meltdown, and now the polarization of Congress and Standard & Poor downgrading debacle. It will be years before the world believes, much less admires or respects America again Americans must now count only on themselves, and pull themselves up by their own bootstraps. Only a Roosevelt Reconstruction style CCC-like program will save America?s economy. Until President Obama comes to the conclusion the spin game continues. Yes, 57% of every American dollar is linked to China trade, but those links are not all strong, nor real. We all know that any chain is only as strong as its weakest link. What does this all mean for western investors and small business owners? In two words ?EXTREME CAUTION?. Direct foreign investment in China is a double-edged sword where entrepreneurs can quickly find themselves on a slippery slope, frantically throwing good money after bad ? lured by the image and not the reality. Legal recourse and remedy in China is almost non-existent (Just ask Microsoft, Google, or Yahoo). Only with professional, deal-specific, due diligence can one truly prevail and prosper in China, especially so in the PE markets. Without unbiased eyes and ears on the ground in China that you can trust, you will never get accurate due diligence reports ? only what has been bought and paid for. Like carefully crafted annual reports, you only get to see what others want you to see. Private Investigators and the China Trade Commission are the only reliable independent business intelligence options at this time in China. Be sure ? not sorry. As the CTC?s executive director is fond of saying ?China is like a box of chocolates?. Be VERY carefully which one you choose. It may be your last.
Posted: 31 August 2011, last updated 10 September 2011

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