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
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.