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Are Chinese Corporate Earnings Inflated?

In an article for the Oct. 29 issue of Caijing, writer Xu Shanda (许善达) claims that Chinese corporate earnings are inflated. In the Chinese language article, Xu claims that there is an earnings bubble. The article summary says this (my translation):

The government should no longer listen to Chinese enterprises’ requests to turn their costs to social costs. It can no longer listen to their efforts to infringe on the rights of all citizens to suit only their own unreasonable and illegal corporate earnings requirements. In real terms, this means that the government must step up its own efforts to build a social welfare system, an environmental welfare system, strengthen legal enforcement, and at the same time, create a new market system for the trading of resources so that a pricing system which more realistically reflects market realities can take root.

In the article, Xu claims that corporate earnings for many Chinese companies have continued to go up because they have not had to pay for social security and environmental costs. With such low operating costs, of course they would have high corporate earnings.

Now here is where it gets interesting. Xu Shanda is not an outsider; he serves as an independent director of ICBC, one of China’s state-owned banks, and was the former vice director of the National Tax Bureau.

In effect, Xu is arguing for a social security system to protect the poor, and for increased taxes to clean up the environment during China’s high-growth phase. High-growth was a top priority during the last years of Deng Xiaoping and during the Jiang Zemin years. In contrast, the administration of Hu Jintao is recognizing the high costs of the environmental damage created by reckless growth. The person now leading the charge re environmental affairs is Wen Jiabao, who is reviewing many major engineering projects.

For many Europeans, Xu sounds like a social democrat, or what is called in US politics, a liberal.As a an American, it is very ironic to see a Chinese government official argue for the kinds of things which the Bush administration is so keen on dismantling in the US, even though US public opinion largely believes that there are serious environmental issues which need to be addressed.

For the Chinese government, the current situation is about finding the right balancing point for China. If China adopts a social welfare system like western Europe’s, they are afraid that costs will go up and so will unemployment. Chinese goods will be less competitive on the global market. However, if they do not raise them, the destruction of the environment in China will continue, and many businesses will not be held accountable. It would become like the US, where the system favors large corporations while offering lip service to the little guy. (It was not always this way in the US, but it has markedly changed because of recent US changes to the US Supreme Court and recent court rulings.)

There are early signs that the Hu administration is taking steps to bring market realities to resource pricing; yesterday the Chinese government raised oil prices by nearly 10%.

So, there is strong internal pressure in China to make corporations more accountable, just while the US is privatizing more public sector services and is making them less accountable.

For those in the US who believe that privatization is the answer to all of the country’s problems, they would do well to come to China and look at some of the effects. A lot of this damage is done by a combination of corruption, cronyism and privatization.

Ironic, isn’t it?

UPDATEIf you are interested in how the Bush administration’s proposed tort reform would largely take away from US citizens the right to sue corporations for environmental and product violations, please visit the Wikipedia entry on tort reforms. This is the kind of legislation China needs to curb corporate excesses, although the Chinese are very conscious that they want to limit misuses and abuses of the system as have occurred in the US. What the Bush administration is proposing though, is not a reform, but more or less turning the clock back and making consumers rely on the “goodwill” of large corporations to protect them. Since I am not an attorney, this may be an area Dan Harris, publisher of China Law Blog, may want to shed some light.

Richard Spencer also has an article which suggests that the western interest in China’s conditions and policies may be more tied to China’s rise as an economic power than to a true interest in those issues.

Hmmm…That’s good food for thought.

4 Responses to “Are Chinese Corporate Earnings Inflated?”

  1. [...] here for full story Der Beitrag wurde am Thursday, den 1. November 2007 um 20:11 Uhr [...]

  2. Tort reform can encompass so much, it is nearly impossible to comment on it as a whole. What I will say though is that I believe the US tort system is actully quite effective at improving safety and, for the most part, works much better than credited. Definitely it could use some reform at the margins (what couldn’t?) but I do noth think it is broken.

  3. Brad Luo says:

    The days of high corporate earnings without internalizing the externalities related to such income appear, at least in theory, to be nearing their end, at least to the exporters. As you might be aware of already, China has introduced tougher environmental regulations, specifically targeting exporters. Basically, the rules spell out this message–if you pollute, you don’t export for as long as it takes you to clearn up.

    For concerned people, like Mr. Xu Shanda, this means an advancement of their cause for corporate responsibility, at least in the export industries as of now.

    The following is an excerpt of the above-mentioned article by Jane Spencer of Nov. 1, 2007:

    “China is introducing new antipollution regulations for its booming export industry, in an unusual collaboration between the government’s environmental-enforcement arm and the Ministry of Commerce.

    The rules could affect thousands of Chinese suppliers that make goods for multinational companies.

    Earlier this week, Zhang Lijun, vice director of China’s State Environmental Protection Administration, said export manufacturers that violate China’s pollution laws would be forced to close for one to three years. The policy will be enforced jointly by SEPA and the Ministry of Commerce.

    The ministry said the prices of Chinese exports are artificially low because factories aren’t …”

    This is a good move, and it would be better to expand the rules to cover non-export companies too. After all, a polluter is a polluter, regardless of the nature of the underlying operations. Internalizing externalities should be party of every company’s cost of operations.

  4. Some of you have suggested that it may be 6 weeks or so before I don’t feel these symptoms and, let me tell you, from this angle, 6 weeks seems like an interminably long time!! I don’t have the luxury of taking time off from work so I find this is definitely impacting my performance, it’s so distracting!! and so hard to motivate myself to do my job when all I can focus on is how horrible I feel. ,