Book Review: China’s Superbank: Debt, Oil and Influence – How CDB is Rewriting the Rules of Finance

China's Superbank: Debt, Oil and Influence - How China Development Bank is Rewriting the Rules of Finance (Bloomberg)

Most of the prevailing wisdom about China declares that its economic success is due to a combination of government policy and foreign direct investment. This book, China’s Superbank:Debt Oil and Influence – How China Development Bank is Rewriting the Rules of Finance, goes quite a bit further in lifting the fog behind China’s success first domestically, and now, internationally.

The authors, who are journalists working with Bloomberg, make it very clear from the beginning that there is no bank in the world which is quite like CDB (China Development Bank). It is a policy bank wholly-owned by the Finance Ministry of the People’s Republic, which is controlled by the Chinese Communist Party, China’s sole ruling political party. It stands where policy, finance and commercial lending. It does not have a public relations department, and it doesn’t hire non-Chinese. New hires must not be only well-educated and smart, but they also need political criteria set by the Chinese Communist Party.

China Development Bank has an impeccable pedigree. Its founding chairman, Chen Yuan, is the son of China’s economic policy head under Mao Zedong, Chen Yun. Chen Yuan has set China’s expansionist policy overseas by:

  • Setting up the China-Africa Development Fund under CDB to direct Chinese investments into developing African economies, and to insure that Chinese companies get ground-floor opportunities in Africa;
  • In South America, it has set up “loans for oil” deals with the governments of Venezuela, Brazil and Ecuador;
  • Directed loans to new industries such as photovoltaic cell manufacturing by offering favorable loan terms;
  • Offered loans on favorable terms to favored companies such as Huawei and Chery;

These are just a few examples mentioned in the book.

Because of its largely secretive nature, it is seldom mentioned outside of the financial community; there is no desire on CDB’s part to make itself known outside Chinese government and the financial community. In Africa and South America, the authors had to get much of their information from interviewing local government officials and business partners.

While many western analysts like to divide Chinese companies into public (Chinese state-owned) and private companies, in practice, CDB does not make this kind of differentiation. But the financing funds it provides are very much from the state. As a policy bank, it looks very much not only at the company’s commercial ties and health, but also how support will help to further China’s strategic interests.

In this key respect, CDB is very different from western investment and commercial lenders. The US, with its huge financial industry, does not have a single policy or investment bank which is so tightly aligned with government policy the way CDB is. It also makes it clear why opposition to having a US industrial policy would make it impossible for the US to have such a bank.

After reading this book, the reader will have a good idea of why western competition against the expansion of Chinese commercial interests are so futile.

China has an extra tool in its toolbox which the west simply doesn’t have: China Development Bank.

You can order the book by clicking the image above; it is available in Kindle and print editions. Ordering and shipping are handled by Amazon US.

Book Review: China Fast Forward

China Fast Forward: The Technologies, Green Industries and Innovations Driving the Mainland's Future

When Tom Friedman is urging the Americans to follow China’s economic example, and the US mainstream media is all about how powerful China’s economy is, you know that it’s a good idea to take a closer look. Bill Dodson does just that with his latest book China Fast Forward.

China’s current model of economic development is largely based on transplanting the industries which made the US great in the 1950s, 60s and 70s, and then adding a very generous splash of top-down central government planning, all managed under the hawklike gaze of the Chinese Communist Party, which controls finance, land, key resources and personnel. The result: a huge and so far, flourishing, 20th century economy in the 21st century.

Since the author is a consultant, he has had the opportunity to look at several industries up close, including auto manufacturing, mining, solar energy manufacturing, wind energy, and railways, just to name a few. This exposure to a wide variety of industries gives him the opportunity to identify industry quirks, and then extrapolate social commonalities.

The problem of course, is that while this economy can deliver very impressive early results (as it is doing now), it is not equipped to deliver sustained growth over time. Here are just some of the problems pointed out in the book:

  1. Huge waste of resources, especially water (the author argues that water will eventually need to be rationed);
  2. Environmental damage on an epic scale, with very high cleanup costs
  3. Short-term thinking, which encourages corrupt officials to make as much as possible as soon as possible, and then leave China with their families;
  4. The complete domination of society by the party, with little tolerance shown for civic institutions;
  5. The widespread belief among many Chinese that they still are not masters of their own destiny;
  6. A society and education system which continues to value rote learning over creativity;
  7. A society and culture which while old, has not yet developed civic values.
  8. These are views which only someone who has spent considerable time in China could make, not someone who makes a few passing visits to China, gazing in awe at the Shanghai skyline, or the immensity of Tiananmen. After all, those are exactly the reactions a Chinese official would want a visitor to have.

    This book makes it very clear that the easy stage of China’s growth has come and gone, and the next stage requires some thoughtful and balanced thinking. With the new Chinese leadership coming into power in March 2013, it gives a good idea of the challenges they will face as they deal with a China which, while continuing to grow faster than the other major economies, will grow at a slower rate than the official 8% of the past decade. Moreover, China no longer has a cost advantage compared to many other developing economies. At the same time, the party has to deal with a growing rich/poor gap, and the growing aspirations of many Chinese. Not an easy challenge, any way you look at it.

    Most importantly, China Fast Forward makes it clear that all these issues cannot only be dismissed as China’s problems. Since China has one-fifth of the world’s population, and since we are interconnected in a globalized world, China’s problems are the world’s problems.

    One way or another, we will have to deal with these challenges together.

    The book is available from Amazon in Kindle and print formats; you can order it by clicking on the image above.

Hong Kong’s Startup Scene: Interview with Casey Lau

Casey Lau, involved with

In May 2010, following Google’s dramatic decision to move its China search engine to Hong Kong, I wrote an article for Forbes titled “Why Hong Kong is China’s New Tech Hub”.

In this interview, Casey Lau, who is heavily involved with the Hong Kong startup community, updates us on developments in the Hong Kong startup scene in 2012.

What startups have you been involved with in Hong Kong? At what times, and how did you exit?

I started off with back in the dotcom era and sold to one of our investors. I also started a multimedia company called Velocity9 that was acquired by a VC firm.

Your most recent venture has involved publishing comics to the iOS platform; what have you learned from that experience?

That was mainly an experiment in comic publishing. Super Kaiju Hero Force was one of the first comics purely created for the iPhone and was sized accordingly. With over 100K downloads of the 5 part series, I can say it was amazingly successful compared to my print comics that I published in the late 90’s that sold a maximum of 10,000 copies sold with much bigger advertising and marketing costs.

How have you become involved in the funding and support side for startups?

A group of startups formed an association called StartupsHK that began to build the startup community in HK by holding events and conferences. It grew from 6 to 2000 members today and is growing every day through our social media channels.

How has the startup scene in Hong Kong changed over the past three years?

Definitely a bigger interest level not only by entrepreneurs but by the media and investors. We like to think that having a place for people to meet and create the ecosystem for it to exist and thrive has helped define it over the past 3 years.

The Hong Kong government has tried very hard to support startups in Hong Kong, especially since both China and Singapore have vibrant startup environments. What has the HK government done?

They help in the ways they know how – by giving their co-op bodies funds to spread out to the local startup community – this includes the Creative MicroFund at Cyberport and one at PolyU. It will take the private sector to mentor and train new startups to go big.

What does HK offer to differentiate itself from its neighbors?

A better ecosystem and a better reach to China and the US while staying in one of the most transparent and easy to set up a company cities in the world.

Are most startups targeted at China, the west, or the domestic HK market?

Its a mix of the three but definitely I see more targeted at HK and the West. Targeting China from HK is like targeting Japan – you have to be there to do it, but going wide to North America seems slightly easier from HK.

What makes HK unique in your opinion compared to other markets?

HK is a very entrepreneurial city and that is something that people understand. It has a strong financial community as well and many students studying abroad and coming back with new ideas.

What does HK really need to become more competitive?

More support from the government and corporations. More insight from Silicon Valley and more co-operation with other countries, especially in Asia.

Do you have any specific goals in the coming year?

More events and conferences with founders from overseas. These will center around entrepreneurship, UX, mobile, hackathons – you name it, this is on our schedule for 2013.

You are well-known as an Apple fan; why is the Apple brand so popular in HK?

I think its the way they promote and market themselves as a premium brand. Anyone can buy a computer or mobile phone but to get an Apple device is on bar with something like Louis Vuitton or Mercedes Benz.

Sina Weibo Makes Basketball Grannie Famous

Sina Weibo Logo

Sina Weibo Logo

One of the big differences between Sina Weibo and Twitter in the west is that in China, many people who have nothing to do with the internet have become well-known because of Sina Weibo. Even if that person has absolutely no desire to become famous or well-known, or pursue fame.

This would be almost inconceivable in the west.

In many developing markets, this is how social media is really used. This was how the Arab Spring movement spread in 2011.

You can read about her story here on Huffington Post or listen to another version of the story on BBC’s Outlook.

Tombstone: The Great Chinese Famine, 1958-1962

Tombstone: The Great Chinese Famine, 1958-1962

The book Tombstone, about the famine of 1958-1962 which occurred under the rule of Mao Zedong, has recently garnished considerable media attention. Here are some resources:

  • BBC Radio Four has selected Tombstone as Book of the Week, and you can listen to 15-minute audio excerpts from the book online beginning here.
  • The Wall Street Journal has written a review, A Most Secret Tragedy.
  • The Economist has written a review, Millenial Madness.

While the death through starvation of 36-45 million Chinese is indeed a terrible tragedy, it might make sense to ask “Why should someone living in 2012 care?”

There are several reasons:

  • The current rulers of China were children when this tragedy happened, and even though it was not widely discussed, it was part of their formative experience.
  • While the political and tragic economic policies under Mao are a thing of the past and belong to history, the party has adapted many of its policies to create a new reality.
  • While today’s China is vastly different and richer than the China of fifty years ago, it continues to be ruled by the Chinese Communist Party, the same party which presided over the famine. This party operates to serve the interests of its leaders first, its members second, and the Chinese people third.

China’s opening up was the result of the party’s desperation in 1979; it was basically bankrupt after Mao’s endless political movements. This is very different from the party’s current narrative, that it had worked hard to make China a wealthy and strong nation, and all of the Chinese people should be grateful for their wise policies. Basically the first 30 years of the People’s Republic, from 1949 to 1979, was about endless political movements and tragic economic policies.

With continuing heavy-handed policies and its incessant paranoia about social stability, especially in the run-up to the new Chinese leadership succession, the party reminds the Chinese people that although its political and economic policies have changed, at its core, it is the same party which presided over the famine and its coverup.

The author, Yang Jisheng, was a journalist for Xinhua New Agency (the party’s official news agency), which made it possible for him to gain access to secret party archives and records. While his book was banned, he continues to be a party member, and serves as an editor for a pro-reform party magazine based in Beijing Yanhuang Chunqiu.

You can order the book by clicking the image above. Delivery by Amazon.

China Says No To Most Westerners Working In China

Stop sign in Chinese

Stop sign in Chinese

In my previous article, I mentioned why the next wave of internet startups would be outside China.

The flip side is how difficult Chinese government policy has made it for westerners to work in China. While Beijing editorials targeting westerners talk about the virtues of globalization, its employment policies actively discriminate against westerners working in China.

This makes for a very interesting contrast with the US, which has an H-1B visa policy, often called the “genius visa” which is aimed at luring international talent to the US.

At the same time, there has been some hostility to westerners in China, which was highlighted earlier this year by Yang Rui’s famous remarks. Yang Rui seemed to reveal certain feelings which don’t lie far beneath the surface in China, and can come out in a very unmanaged fashion.

In contrast, while there are occasional calls to restrict immigration policy in the US, there is very limited personal anger to immigrants among better-educated Americans. (The exceptions can be deadly, such as the attacks on Sikhs.) There is almost no support for calls to repeal the H-1B visa which come around election time.

So why don’t the US and China talk to each other about how their citizens are treated and employed in each others’ country? Shouldn’t that be part of the globalization conversation?

Added Note: Nicholas MacDonald, an American living and working in Shanghai, gives his personal take on the job situation for westerners in China.

Why The Next Wave of China Startups Will Be Based Outside China

Apple’s newest store in Beijing
Source: AppleInsider

Ever since the Internet wave took off in the early 90s, the prevailing wisdom has been that to be successful in China, a company has to have a strong China presence.

This meant:

  • The founders and investors must have a strong relationship with the Chinese government.
  • The company must be willing to come under Chinese government regulation when it comes to content, and must have editors in place who would quickly remove sensitive content.
  • The founders must deal with all kinds of murky stuff, and because it’s in China, may not be in conformity with international standards for regulation.

As a result, founders, especially as they got closer to an overseas listing, found themselves in a difficult balancing act, between what their Chinese investors wanted (so that they could cash out successfully in the west), and what overseas regulatory authorities wanted.

For most Internet companies, the market of choice for listing was the US. Lately though, this has changed. Hong Kong, Singapore, London have all actively marketed themselves as attractive choices for going public. Part of their attraction, compared to the US, is that they demand less transparency than the US.

For Chinese investors who have the government and party connections, an overseas listing is an important way for them to translate their China political clout into real money sitting in overseas bank accounts. But for overseas startups which operate in China, the costs and management headaches associated with operating in China are a constant burden. Moreover, many of these factors are political issues which are outside their control, such as an upcoming succession in China.

For many Chinese, China is a fast-growing market, but the west and the rest of the world continue to have strong attraction. Some of the reasons for this are:

  • Education opportunities
  • Business opportunities
  • For many, it is the opportunity to operate outside a system which has a huge amount of inherent corruption, and which has failed at reforming itself to suit the needs of a modern public

For this reason, even though China has a growing and dynamic market, many Chinese still jump at the first opportunity to leave China.
These numbers keep growing. For many Chinese, the first chance to see the outside world is as a tourist; over the past decade, this has jumped four times to 70.3M in 2011. After some initial foreign contact, the next goal is to get a western education for their child; this is especially popular with the children of Chinese Communist party members; even the daughter of incoming Chinese president Xi Jinping sends his daughter to Harvard. The demand for western education has become so strong that a whole industry has formed around getting them into the right schools. For many western universities, the temptation to accept cash-paying students in a time of increased competition and higher costs is too much to resist, and the number of Chinese students going to the US keeps breaking new records.

In the past three decades, huge amounts of capital have been secretly moved overseas by Chinese officials and their families.

Up till now, most Chinese websites based in the US focused on political and literary issues which were barred from public discussion in China, such as Boxun. Now though, with a very large wave of recent Chinese immigrants, there is a significant opportunity for an overseas-based Chinese language service which is based on advertising, and delivers its content on mobile.

Since it is based overseas, it would not have the need for a very expensive content-filtering mechanism, and it would also operate outside the political controls deemed necessary from Beijing. At the same time, it would have access to an excellent demographic group from China, which would make it very attractive to luxury and brand advertisers from overseas who want to reach a young and growing overseas-based Chinese demographic. Many among this group may return to China, and would carry these brand affinities with them when they return.

Up till now, most western investors have thought that investing in China required a company registered in China. Now though, since there are so many Chinese all over the world, and because they have so much buying power, it really isn’t necessary to have a company in China in many industries. This is especially true for retail businesses which rely on marketing and advertising to get the word out.

For years, Chinese government officials and China-based consultants have told western companies how important it is to have a China-based company. While the western investment money was coming into China, many of the same Chinese officials were moving their own private money to Hong Kong and the west.

What do the Chinese officials know which the western investors don’t know?

China Patents: When Top Down Doesn’t Work Anymore

Officials in the Chinese government are well aware of the importance of IP (intellectual property), and they have reacted to this need in a typical top down fashion which marks the management style of the Chinese Communist Party: they have given quotas to Chinese companies of how many patent filings they must make each year. Chinese officials use these as KPIs (key performance indicators) which go into their files, making it easier for them to be promoted to more senior positions with the ranks of the party for successful performance.

The problem with this approach is that it leads to really crappy patent filings, because it is all about meeting target numbers. Yes, China is now a leader in patent filings, but a lot of them are quite frankly, junk.

The Chinese government, knowing that it could not rely only on Chinese indigenous innovation for patents, needed a solution to help Chinese companies get a hold of foreign IP. At the same time, it wanted to inject itself into the business process, so that party members could get monetary and business benefits from this process.

It has done this by setting up state-ownedd intellectual property clearing houses to act as brokers between Chinese companies and western IP owners. These IP clearing houses would fulfill several roles:

  • They would act as a single point of contact for Chinese companies in all their IP procurement needs;
  • They would act as a single point of contact for western IP brokers seeking to sell their IP to Chinese companies.

In practice though, there are some problems:

  • Many of the patents taken to these clearing houses are not the best, and are second- and third-tier patents. They won’t help Chinese companies to become more competitive;
  • While some of the individuals have domain expertise about technology and patents, many do not, which means that they don’t provide a clear value-added to the service;
  • Most patent brokers want to have a direct relationship with their buyers, since this will give them a good idea of what technologies and patents it will want in the near future. A state-owned IP clearing house gets in the way.
  • Most importantly, it turns into a commodity service a service which needs a high degree of customization. This is very typical of the Chinese Communist Party, which is good at mobilizing resources for large projects, but which is largely useless for smaller projects which require a high level of customization and technical expertise for consumers.

In my previous article, I mentioned about how Apple benefited from having an extremely simple product line. This is in contrast to Android phone makers, who up until 2010, built and sold a huge number of models to feed into the growing smartphone market. After 2010, the number of smartphone makers fell out of the race because few could afford the costs of design, development, tooling, marketing and sales in order to compete. One of the leading smartphone industry analysts, Horace Dediu, went so far as to say that if a company missed one quarter of profits, it would likely be unable to compete on a sustained basis. This is why on the Android side, Samsung is the only handset maker which is profitable. As for Apple’s iPhone, the company’s tight control over design and its supply chain means that it can capture a much larger share of the profits.

This huge scale underscores why it’s so difficult for smaller outside players, including Chinese companies, to enter this market and build their brand presence. China and the Chinese are very innovative in their use of mobile software, but this needs much less in terms of capitalization and intellectual property than the major players which include Apple, Samsung, Google and Microsoft.

A Chinese entrant into this market could take a approach like Amazon’s, which has avoided the smartphone market completely, focusing only on selling Kindle tablets. But Amazon has publicly said that it doesn’t want to make money on Kindle hardware sales alone; it only makes money on sales of digital products for Amazon Kindle owners.

So this avenue is closed.

What should western IP sellers to China do?

If Chinese companies will become major IP buyers, but there are major issues with the state-owned IP clearing houses, what is a good strategy for western companies?

Like most things in China, nothing is simple, but there always is a way.

First of all, they should deal with the state-owned IP clearing houses, but they should not rely exclusively on them. The Chinese government, and the party, do have very useful resources which can be helpful. But they should not be counted on to deliver.

This means that, at the same time, they should have an agent in China, who understands their industry well, and is able to connect with designers and product engineers, not just management, marketing and legal departments in a Chinese company. The designers and product engineers are most likely to understand what the product roadmap is going to be, and although they won’t freely share this information, they will share what their needs are.

In choosing an agent, they should not select an IP attorney. IP attorneys really don’t understand the product roadmap. The only exception to this rule is to make sure that you have applied for patent registration and protection in China before you shop your patents, because if you don’t, you are inviting IP piracy. After they are registered, you should then approach the IP clearing houses, then find an agent.

When selecting an agent, be sure to select someone based on your own research, and not someone based on a recommendation from someone at the IP clearing house.

Things to check for include:

  • What industries do they work in?
  • What buying companies did they sell into?
  • Did the IP sold go into any finished products?
  • What markets were they sold in?
  • If they operate on a retainer plus costs basis, how much do they charge?
  • How are they accountable for success or failure?
  • How do they know if a client is the right fit?

It also makes sense to understand what your agents’ geographic strengths are. An agent in Beijing may have good government contacts in Beijing, but may have very few contacts in Chengdu or Shenzhen. If this is the case, you may want to consider having different agents in those two cities (assuming that they are important to you), and visiting them from time to time.

It is not just enough to sign up an agent and then leave China, expecting quick sales. It’s very important that you make calls with your agent, be sure to attend dinners and go drinking as well. One aspect of the Chinese understanding of face is that your presence shows that you and your company take this IP sales effort and China seriously. Be sure that your Chinese counterparts get this message by giving them face-time.

This will help you down the road.

Chinese Companies Going Out, And The New Patent Wars

Patent filings by country in 2011 Source: The Economist

For the past five years, the Chinese government has been encouraging Chinese companies to set up a foreign presence. In Chinese, this policy is known as 走出去 or “going out”. There are several reasons for this:

  • Chinese companies are predominantly low on the value chain, and are mainly in manufacturing. There is comparatively little value added, and the aim is to move them up the value chain, into design, sales, marketing and distribution where there are larger, more sustainable margins. This closely follows on what other Asian countries and companies have done.
  • The Chinese domestic market is brutally competitive, sales and distribution are complicated, and relationships (guanxi) are complicated. Provincial governments tend to favor their own manufacturers and brands, making it very difficult to go national in China, even for local Chinese companies.
  • Some consumer brands, influenced by the outstanding success of Apple, dream of making their own brand successful in overseas markets. The Chinese government has a love-hate relationship with Apple: they love the products and the Chinese manufacturing jobs it creates, but wouldn’t it be much better if a Chinese company could be like Apple?

If we look closer though, we find that Apple has several advantages which its competitors, including Samsung, just don’t have. These are:

  • A culture which revolves around product design. Under Steve Jobs and continuing under Tim Cook, one could argue that Apple is a design studio, which has hardware and software engineering and marketing, sales and distribution bolted onto it. All other companies are engineering-driven. Some, such as Microsoft, are trying to change to the Apple model. So far, Chinese companies don’t come close.
  • Since Apple is design-driven, its designers decree what features go into each iteration of its products. There is endless chatter between the design team and engineering about what component spec goes in and when it goes in, but the designers have the final say. This explains why there was such a short timespan between the third version of the iPad, launched in March 2012, and the fourth version, launched in October 2012.
  • If we take a closer look at the patent war being fought between Apple and Samsung, many of the patents which Apple is fighting over are design patents, which are notoriously difficult to defend. So far though, Apple has been faring well, and Samsung has been taking a beating.
  • Apple has a very simple product line. This means that Apple’s design, sales, marketing and distribution power are all focused behind just a few products. This is in contrast to its competitors, who take a shotgun approach, which gives their products less time to gain market traction and leave a lasting impression among consumers.
  • Apple’s design head is Jonathan Ive. Can you name Samsung’s? Or anybody else’s for that matter?
  • Chinese companies understand the importance of innovation and patents. The Chinese government appreciates this, but frequently takes a top-down heavy-handed approach, going so far as giving out quotas of how many patents every company must register each year. Chinese government ministries love quantitative measurements, but have no way to measure quality. Nevertheless, China became the top patent filer in the world in 2011.

    So far, Chinese companies don’t have a clear patent strategy; for the most part they just focus on quantity and on leading-edge technologies such as telecom. If they are to build leading consumer brands, they will need to focus on patent acquisition, not just patent filings.

    In the smartphone innovation wars, this is where Apple, Samsung, Google and Microsoft have focused their efforts. None of these leading players can innovate everything in-house, so they need to buy outside patent portfolios from Nortel and Kodak.

    So far, no Chinese companies have participated in the smartphone patent wars; they aren’t high enough on the value chain. If Chinese companies are going to move up the value chain, they are going to have to acquire patents not just in China with their own engineering teams, but will also have to acquire them from overseas. In order to move up the chain effectively, they will need to have a smart strategy. Patent innovation number targets set by a Chinese government ministry just won’t work.

    In the next article, I will take a look at the opportunities and challenges for non-Chinese patent holders who want to sell to the Chinese.

    Book Review: No Ancient Wisdom, No Followers

    NO ANCIENT WISDOM, NO FOLLOWERS: The Challenges of Chinese Authoritarian Capitalism

    This book, by James McGregor, paints an interesting picture of what the failure to reform the Chinese political and economic systems has done to China by 2012. The title sums it up clearly: No Ancient Wisdom, No Followers. In short, the Chinese political leadership and Chinese society are in completely new territory, and judging from the author’s work, are very poorly equipped to handle the challenges they face. This increases the likelihood that strange unpredicted events will occur. 2012 looks like that year, starting with the fall from grace of Bo Xilai, and will reach a climax in November, with the announcing of China’s new leadership. At the same time, Chinese netizens have been very publicly venting their anger and frustration on a range of issues on Sina Weibo.

    Mr. McGregor works at APCO, a western public relations and lobbying firm with an office in Beijing. Previously, he had worked at Dow Jones China and with the US Chamber of Commerce in Beijing. He has spent more than 10 years in China, which means that he knows the ins and outs of business in China, and how the Chinese government works, and most importantly, how the Chinese Communist Party works. Most western businessmen avoid politics and political subjects, but when it comes to China, an understanding of how the party works is essential to understanding what is going on in China, especially in Beijing.

    The author brings this knowledge and experience to this book, and his frustration with the current Chinese system is almost palpable. Just to name a few:

    • Western companies are routinely forced to transfer technology in order to get market access.
    • Technology is frequently stolen from western companies.
    • Chinese government entities and companies don’t renegotiate contracts they don’t like. They just ignore the parts they don’t like, while sticking fastidiously to the parts they think are in their best interests.
    • The problem has become so serious that the EU is considering filing WTO cases even when EU companies don’t file complaints out of fear of being blacklisted by the Chinese government.
    • The US government is increasingly convinced that China is only going through the motions in trade and investment forums.

    Most seriously, McGregor points out how the WTO (World Trade Organization) agreements, and of which China became a member in 2001, no longer work. In order to save the system, he urges a major revision.

    McGregor traces the problem back to the Chinese Communist Party organization, which calls the shots when it comes to setting Chinese government policy. The book makes it clear that while policy is set at the party level, government ministries and local governments have different degrees of latitude when it comes to implementation and interpretation. Unlike in the west, where disputes are settled by an independent judiciary, since there is no independent judiciary in China, many issues are settled behind closed doors where non-party members have no access. While the system has worked up till now, recent events suggest that this closed-door approach is failing to work, not only for westerners, but also for Chinese citizens.

    The book points out that the main impediment to reform of the system is China’s state-owned enterprises (SOEs), which have benefited very much from the system as it is currently set up, and don’t want it to change. Most of these companies are inefficient, and without access to cheap state capital, would not be profitable. In the past decade though, and especially after the Wall Street financial meltdown of 2008, they have had access to huge amounts of almost-free capital, most of which has been invested in urban real estate to generate quick returns, creating financial bubbles in the process. A very significant amount in excess of US$100B has also been sneaked out of the country and is stored in private bank accounts and overseas investments by those who have benefited from the current setup.

    The book is very good at bringing the frustrations of working in China from the western business’s point of view, and anyone with an interest in business in China should read it. The fact that Mr. McGregor is not an academic or journalist with a limited understanding of China is particularly refreshing. Not only does he understand Chinese business; he understands how policy sets the tone for business in China.

    If there is anything missing, it is the Chinese perspective. Westerners can always leave China, but while there are many Chinese who do leave China, there are also those in China who are sticking it out and pressing for internal changes and reform. While outsiders know very little about what is going on internally at the party level, we can be sure that this is going on right now with the new party succession, and will continue after it is announced, when the new leadership builds up its new team and then makes policy changes.

    No Ancient Wisdom, No Followers brings a very realistic view of the challenges of doing business in China in 2012 from a western business perspective. Regardless of whether you are already in China, or are contemplating setting up in China, you should read it.

    You can buy the book by clicking on the image above.