The China Vortex » government

How US Investment Banking Excesses Helped China’s State Sector

admin — Sun, 25 Apr 2010 03:23:01 +0000

When the banking crisis broke in September 2008, the global economy went into shock and nearly collapsed. The Chinese government was widely seen as being the most proactive in reacting to the crisis, injecting more than US$570 billion into the Chinese economy.

Because China’s four leading banks are all state-owned, all of this money quickly reached Chinese state-owned companies. This stood in stark contrast to the US, where the banks were bailed out, but the money did not make it to companies and individuals, largely because the banks sat on the cash received, mainly to cover their own capital losses, and in many cases, to pay out bonuses to management.

Only recently have the Obama administration and congress started tentative investigations into the investment banking practices which brought the world economy so close to the brink. Since the US economy is now largely based on FIRe (finance, insurance and real estate), and because the financial lobby is the most powerful and well-funded lobby in Washington DC, changes and reforms have been slow in coming. In spite of this, even in the early days of the investigation, there are signs that there was more to it than just investment bankers flogging poorly understood derivatives to unknowing corporate clients, there was deliberate fraud at the heart of it.

Today, the Chinese government and economy have come out of the crisis smelling like a rose. Certain indicators, such as auto sales in China, show China overtaking the US as global leader, and unlikely to relinquish it back to the US. Compared to the US and EU, China seems positively great, and the government has made all the right moves, investing in infrastructure and keeping Chinese consumers happy and spending. Optimists believe that now Chinese consumers and its middle class have stepped in and filled the gap left by the weakening of the US consumer.

Looking a little deeper though, while the Chinese government has succeeded in the short-term, their moves raise long-term questions. Here are some of the problems:

Most of the money found its way to Chinese state-owned enterprises (SOEs), many of which are in commodity imports and heavy manufacturing such as autos.
China’s economic development is following the US economic development of the 1950s; which is oil-based transport. Imports of coal and oil have dramatically increased in the past year in spite of government efforts to diversify to nuclear, wind and solar.
As the Chinese government funnels more money through its state-owned banks into SOEs, the party and the government ironically have less control over them. Recently, the Chinese government has used administrative measures, such as ordering 73 companies out of the real estate sector and, in some cases, dismissing executives on corruption charges, but these are not a long-term solution to a systemic problem.
More Chinese university graduates look for jobs in SOEs instead of the private sector, seeking job stability instead of looking for better job opportunities, or a chance to start their own business as in previous years.
For the most part, Chinese SOEs are over-staffed and inefficient. But because of the crisis, and the overall makeup of China’s economy, they seemed destined to take up a bigger part of China’s GDP.
China’s seemingly unquenchable demand for commodities and raw materials, is in large part, driven by a lack of faith in derivatives. This is directly related to Wall St. investment banking practices which ran wild and unchecked under the Bush administration.

The flip side is that China’s private sector is in its most precarious position since China’s reforms began in 1979. While it has always been difficult for small businesses without strong government connections to raise capital, the situation has become worse recently. Yasheng Huang, in his book Capitalism with Chinese Characteristics: Entrepreneurship and the State touched on many of these issues.

In the internet field, I have noticed, for example, that many of the entrepreneurs and innovators in the field are choosing to emigrate from China instead of starting their businesses in China. China has a thriving Internet sector, but the successes are those which already have venture capital funding, or have successfully gone public. For practical purposes, the early stage innovation part of the pipeline has gone dry.

It is hard to say if this is true for many sectors in China at this stage, but if there is one truth now, it’s that innovation and entrepreneurship are a vital part of every economy. In today’s China, innovation and entrepreneurship are too dependent on government connections for success. For this reason, these relationships are open to exploitation, corruption and abuse.

The Chinese government for its part has been very ambivalent about the private sector. Both the president and premier have made occasional statements about the importance of helping and protecting private enterprise businesses, but disappointingly, few of these statements have turned into tangible policies and measures. Since the Chinese government has been pressing other governments to recognize China’s market as a market economy, why don’t other governments press the Chinese government for clearer policies for China’s own private sector? Some of these questions may be:

Do Chinese private companies have equal and open access to raising capital as SOEs?
Are their products and services distributed and marketed equally in the domestic market?
If they are subject to any kind of unfair competition, then what channels do they have to appeal to?
If the answer to any of the above questions is no, then what policy commitments is the Chinese government prepared to make to remedy the situation?

While the Chinese government and SOEs are powerful and cash-rich now, the real heroes of China’s reforms are China’s entrepreneurs and innovators, and the hard-working and industrious people. It’s time they got some recognition and fair treatment both inside and outside China.

When Bureaucracy Gets Politicized

admin — Thu, 25 Sep 2008 05:58:40 +0000

There has been a lot of concern about the tainted milk scandal in China, and with each passing day, the scope of the scandal gets bigger. How did this happen, why was it covered up, and what needs to be done about it?

My answer is simple: this is the kind of thing which happens when the bureaucracy becomes politicized, and government appointments are made for political instead of professional reasons.

For more than 2,000 years, when China was ruled by an imperial bureaucracy, China had a complex system of imperial exams to insure that anyone who passed could enter the government bureaucracy. This bureaucracy was largely apolitical, except for the most senior appointments in the imperial court or on the provincial level. Most were just professional officials, and would serve their masters, whoever they were.

With the overthrow of the Qing dynasty, and with the foundation of new China in 1949, the party organization affected all levels of the bureaucracy. Endless political movements until 1978 politicized the whole society, not just the bureaucracy. Appointments were made for political reasons instead of professional capabilities. Sometimes, professional qualifications were completely ignored.

The tainted milk scandal is an example of what happens when political considerations override business, health and even ethical concerns. This is what happens when government officials are judged by how much investment they attract and how many jobs they create. Then there is a natural tendency to cover up any information which draws a conflicting picture. What should be a health and ethical issue instead becomes a political issue.

The problem now in China is that there is a severe shortage of people who are apolitical professionals, not politicians. How do they fit in, even survive, in a completely politicized bureaucracy? Does the government have the energy and will to depoliticize the bureaucracy, and create a professional bureaucracy which will fulfill the needs of modern Chinese society?

That is the question for the next stage of Chinese reforms.

News Galore!

admin — Fri, 19 Sep 2008 12:31:10 +0000

Just in case you had any doubts that the world was going to hell in a handbasket, and that the inmates were running the asylum, you just might have had some of those doubts removed in the past week. And those doubts were removed in a very dramatic fashion, as in frontal lobotomy fashion.

“George Carlin, why did you have to die so soon, just before all the fireworks started? Did you actually think that the world was becoming so ludicrous that you couldn’t take it anymore, or think that you would run out of material?”

Let’s look at some of the fun things which happened this week:

Sanlu’s dairy products were found to have killed three babies, and caused injury to several thousand others (at least)
Baidu was accused of offering to help cover up the scandal by not showing the scope of the scandal in its search results. I wonder what genius came up with the idea that they could cover up a scandal of such immense proportions for a miserable 3M yuan? And who was the genius on the management side who approved such a deal? This would have taken at least two people who had frontal lobotomies. Most of the time, people who come up with dumb ideas like this are only employed in government (Most notably the US government, where they usually run smear campaigns for politicians during elections.) As for Baidu/Alibaba, now Baidu is threatening to sue Alibaba for spreading the Sanlu story. (Isn’t China becoming more like the US every day? At this rate China will be run by lawyers in five years. A sure sign of national dementia.) Are these initial signs that the Americans’ efforts to package and sell stupidity to the Chinese are showing signs of success?
Lehman Bros., a US investment bank, declared bankruptcy, and Merrill Lynch sold itself to Bank of America for $50B. I have the utmost admiration for John Thain: Imagine taking a company which was rapidly going down the tubes, whose assets were unclear, and whose non-performing CDOs were increasing by the hour, and he SOLD it for $50B, finding a buyer in BA? Wow, that’s neat! How’d he do that? These bankers are amazing. None of that piddly million here, million there kindergarten dotcom stuff for these guys, we’re talking real money here (even though it’s US dollars).
Is it just me, or am I thinking that Imagethief‘s time has come in China? I keep on fantasizing what his first lessons for new official clients might be like. How about this:

“First of all, let’s get it clear that lies, coverups and people getting poisoned are a necessary part of any nation’s path to greatness. There is no need to deny or cover it up; we must celebrate each event as achieving yet another milestone to greatness! Let’s celebrate it! Let’s roll in it! And let’s become more and more like America with each passing moment! Look at how the Americans don’t discriminate against the mentally handicapped anymore; instead they make them their leaders! If America can do that, then why can’t China! Our goal must be to pollute the global financial system on an even greater scale than the Americans have: this will show the world China’s power!”

Hmmm, on second thought…
UPDATE: Once upon a time, jokes were about comical situations which had a tenuous relationship with reality. Now, the jokes ARE reality.
DISCLAIMERThe above story is pure satire. Don’t take it as anything else.

How To Discuss User Privacy In China?

admin — Tue, 16 Sep 2008 11:28:14 +0000

One of the fun things about China, and the Chinese Internet, is that new issues can pop up very quickly, and become major issues.

This has just happened with the issue of user privacy on the Internet. With more social network sites, and more users posting real information about themselves, along with contact information, etc. this has become a real issue.

I’m not going to offer a solution to this very complex issue. Instead, I’d like to bring up another issue: “How do you have a productive discussion, where all get a chance to contribute to the debate, get heard, and then come to some kind of agreement about a solution?”

Here is the problem. This issue flared up when many SNS sites started blocking Baidu’s spiders from crawling their sites. The official reason: to protect users’ privacy.

The problem is that there has been no discussion about what user privacy is. The definition of privacy is very different for a 12 year-old girl and her 40 year-old mother and, in turn, is very different for a 22 year-old gay man.

Each of them, or their parent/s, may have very different ideas of what constitutes user privacy. The gay man may not want to reveal his sexual orientation except for his closest male partner/s, and may not want anyone else, including family, to know. The same goes for religious affiliation, etc.

These are very real issues which need to be discussed and thrashed out in the open, and people need to be able to put forth their views for discussion. This is a vital and natural part of what constitutes a civil society, which is what the Chinese government supports and advocates.

Unfortunately, there is no clear mechanism for discussing a very complex issue like user privacy in China today.

Instead, we have companies coming out with thinly-disguised excuses about privacy, when in reality it looks more like a pissing match between companies over whose spiders can crawl over whose sites. Are the two groups going to come up with different, even opposing, ideas and definitions about what constitutes user privacy, and force people to choose one or the other? If that is the case, then it’s not really about user privacy, it’s about choosing between one camp or the other, with every user forced to make a choice.

But that isn’t what the Internet is all about. The Internet is all about empowering people so that they can make their own choices. The Internet is about pushing decisions to the edge, where people make their choices, and if they don’t like them, they can change them later on.

This is what is missing in China. Without this system or mechanism, there is just endless bickering and noise, and what should be a serious discussion with a well-thought conclusion, usually ends up in a lot of noise with the loudest shouters winning.

What is an important issue, usually ends inconclusively.

Or as the Chinese say 不了了之。

Chinese Internet users deserve something better.

China’s Public Sector On The Defensive

admin — Thu, 04 Sep 2008 04:53:11 +0000

One of the recurring themes of China’s reforms and opening up over the past thirty years has been the expansion of China’s private sector, usually at the expense of the public sector, or government-invested industries. This is a theme which has been often overlooked in the west, even by westerners in China, as they are more focused on the relationship with western companies, specifically Western Foreign-Owned Enterprises (WFOEs). There are three important components in the Chinese economy: state-owned enterprises, private companies and WFOEs. For the most part, the WFOEs are only allowed to play a peripheral role with all kinds of restrictions placed on them from time to time. It is highly unlikely that the Chinese government will allow them to play major roles in any sector.

The most important and vibrant part of the economy are the Chinese private sector. In spite of being out of power politically, occasionally suppressed, lack of capital and resources, it has managed to the point where it now employs more people than the public sector.

Let’s take a closer look at the media industry, just to cite an example. All official media, including newspapers, magazines, books, television and radio are owned, in one way or another, by the government. These might be the central government, provincial government or municipal governments. The performance and careers of these government officials are often measured by how these media perform: if they perform, the careers of these officials go up, if they perform less than well, then it goes into their performance evaluation, and has an effect on their careers.

The challenge for the official media in China now is that they are, generally speaking, losing audience to smarter and more creative challengers from the private sector in fields like online gaming. When this happens, and audience and circulation go down, these officials have to think of ways to address the situation. If that doesn’t work, they cover up the bad numbers.

Virtually all of the challengers in the Internet media field are private companies which are venture capital funded. In short, they are all private sector. When the audience moves to the private sector companies, public sector media companies tend to lose first audience, then revenue.

Many westerners look at the media ownership issue in China too much from a political and social oppression angle.

Actually, there is a lot more to it than that. It’s about what industries will still stay in Chinese state ownership, and how they will remain competitive in the hyper-challenging Chinese market. The official media has tried to counter-balance this trend by showing women in bikinis and other devices, but the trend to the private sector media (or user-generated media) is continuing. This is what Chinese ministries are thinking about all the time.

After all, if there are no longer competitive industries in the state’s company portfolio, how will it get revenue?

China Telecom Shapes Up As Leading China Mobile Competitor

admin — Sat, 30 Aug 2008 23:32:41 +0000

In an earlier article, I talked about my take on the telecom shakeup in China in May. Three months after, it looks more like China Mobile is being slapped down by the State Council for growing too big too fast and being overly aggressive and dominant in the growing Chinese mobile market, which is now the single largest national mobile market in the world.

For this transgression, China Mobile is:

Saddled with China’s own 3G mobile standard, TD-SCDMA, which by China Mobile’s own admission is behind the competing western-developed standards;
Facing new marketing rulings which stand to help China Mobile’s competitors, especially the newly resurgent China Telecom;
Even considering partnering with Apple to distribute the iPhone in China. The only way this would make sense for both parties is if Apple agrees to build China iPhone3Gs with the TD-SCDMA chipset, since TD-SCDMA is not currently supported by the iPhone3G.

The greatest beneficiary of the great China Mobile slapdown is China Telecom, which has shrewdly positioned itself as an underdog to the China Mobile bully. With its recent rulings, the State Council is cheering on the underdog.

China Telecom, for a long time, was the odd man out, until the May telecom ruling allowed it to introduce 3G mobile services in direct competition with China Mobile and China Unicom.

Obviously, the Chinese government feels that there is a lot of room for pruning back on China Mobile’s dominant position in the mobile market.

The Value of Independent Statistics for Online Media in China

admin — Fri, 08 Aug 2008 08:18:21 +0000

Victor Koo, CEO of Youku, recently wrote an article, Internet Measurement in China: How to Get Out of the Dark Ages, where he highlighted the major challenge for Internet companies in China: the lack of reliable metrics for performance measurement.

In the article he talks about how even some VCs in China still rely on Alexa for very basic measurement stats, when in fact, Alexa is not considered reliable.

Many American service providers do not measure audiences from Internet cafes, which as I have pointed out, are a major source of traffic from China. Since American software companies are not familiar with the audience profiles of what is now the largest national audience in the world, they do not break out Internet cafes into a separate category, which underlines how American software providers are out of touch with this very important market. (This Internet cafe trend may change as broadband becomes more available in households, but it definitely should be counted as a major separate category in any report which claims to cover the Chinese market.)

The situation is not helped by government-supported “big picture” reports by CNNIC which give too broad numbers on a national basis and support a government agenda, but do not provide any business insights. They are great grist for press releases and the politically-charged Chinese and western media, but that is about the only value they have.

What Victor Koo does not mention is that the lack of reliable independent statistics has a very real debilitating effect on the healthy growth of the Internet as a sector in China, and the revenue outlook for Internet startups. This is because independent metrics, statistics, standards and definitions are requirements for the global media business. In order for media buyers to make good media buys for their advertising clients, they need standard definitions and metrics on the quantitative side so that they can make better overall qualitative recommendations and decisions.

It’s a testament to the robustness and attraction of China’s economy that the Internet has been able to grow as fast and as far as it has without these independent numbers and stats, but it is also a tragedy that many dollars have not made it to China because of the comparative opacity of the market.

If this systemic bottleneck problem can be addressed, the volume of ad money which would go to Chinese online publishers would go up dramatically.

My Wish List For The CNNIC Report

admin — Sat, 26 Jul 2008 14:57:33 +0000

The biannual China Internet Network Information Center (CNNIC) report covering the first half of 2008 has been released (in Chinese) and is now available. The Ogilvy China Digital Watch website has provided an excellent job of capturing the main points in English. The most salient point of the report is that China now has 253 million Internet users, pushing China into first place worldwide, surpassing the US.

The CNNIC is the main official source of information for the state of the Internet in China, and is the most frequently quoted report on China Internet statistics. For more detailed information, especially ecommerce numbers, etc., there are a number of market research firms in China which provide services, including custom reports for paying clients.

I would like see some changes and improvement to the CNNIC report. Here are some of them:

Outline the methodology used. Explain how the data is collected and by what authorities. Also explain how the audience is chosen. Make the whole process transparent as possible.
Show the questionnaire used, and let people provide feedback about what questions are used so that they can be improved in future versions of the report.
Use the same questionnaire nationwide so that there is a level basis for comparison.
Current data is weighed too much towards national and tier one cities in China. This information is too broad and not granular enough. Break out the information by province.
Provide the names of the government officials who collect the data on the national, municipal and provincial levels along with their email contact information so that we know who is responsible for collecting what data on what level.
Provide a forum so that these same people can answer questions about the CNNIC report and reply to suggestions. Engage the audience in a continuous dialogue to improve the CNNIC report.
Keep the primary data in a data warehouse, and consider making it accessible to researchers so that they can write their own queries and generate reports for a one-time fee or on a long-term basis for a subscription fee.

Chinese Economy: Early Signs of Rapid Deceleration

admin — Tue, 22 Jul 2008 18:01:21 +0000

Some signs point to a rapid deceleration of the Chinese economy:

The whole idea of an urgent politburo meeting just three weeks before the Beijing Olympics is a strong indicator of how serious the ruling levels of the Chinese government see this situation and would, in my opinion, be an ominous sign.

All of the signs point to an economy which is rapidly deflating, following on the falling performance of the Shanghai stock exchange, which has fallen more than 50% in the first half of the year. A lot of money which people thought they had made, and did not think of converting into cash thinking that it would go higher, is no longer there.

In China, this is always a warning sign of potential social instability. It also explains a lot about why the Chinese government has introduced new licensing regulations for online video and other communications means where people can communicate quickly, spreading views contrary to the official line, and events can quickly spin out of control.

If the Chinese economy deteriorates, as signs suggest, then it would be safe to say the government controls would tighten further. This would especially be the case in areas where foreign investment capital has gone into sensitive media sectors, which is always viewed with some degree of suspicion by the Chinese government.

Criticizing “China” Versus Being Critical About China

admin — Wed, 07 May 2008 12:33:10 +0000

One of the great challenges in any relationship is about establishing the right tone of dialogue. Should it be friendly, adversarial, competitive, or something else? Can the two parties be constructively critical, or will they just be critical? Can they listen to each other without becoming overly offensive and/or defensive?

Just about the only thing more difficult than setting the right tone of dialogue, is setting a new tone for a new conversation when the old tone of dialogue no longer works, if only because the underlying dynamics has changed. If there was one thing which came clear through my article criticizing the Economist’s Angry Chinese article, it was that this was something which needed to be examined more closely and discussed more openly, if only because the article attracted a large number of readers and comments (34 at the time of writing).

At the heart of the problem is how to break through outdated stereotypes about China. I, for one, believe that its time to get past criticizing “China” and to start being critical about China. Many western media experts and journalists tend to think that Chinese need to be separated from the Chinese government, and become more outspoken about the shortcomings of the Chinese government, believing that only when this happens, will China become a more open society. If they speak out in support of Chinese government policy over Tibet for example, they are quickly dismissed as government-supported actions, or being not aware of Chinese government-sanctioned policies in Tibet. In fact, it is far more likely that the positions of most of the Chinese population will harden in the face of criticism from the west and the western media. Instead of making it easier to reach a compromise, it actually makes it more difficult.

The fact is that the official Chinese media, even though it is state-controlled and monitored, frequently is very open in its criticisms of some government policies. There is a huge number of magazines and newspapers, and all of them now have to attract readers in order to justify their existence as businesses. If you are not reading it already, you should read Danwei just to get an idea of how much Chinese society has changed. Just keep in mind that what Danwei is able to cover is just a small snapshot of what is happening in modern Chinese society.

This is not to say you can say anything in the Chinese press. There are limits, and the Chinese frequently talk about “stepping on the red line” for violating government ground rules. Part of the role of those working in the media is to know exactly where that red line is, because it sometimes moves.

A very interesting development is the rise of the Chinese Internet, as increasingly large portions of the population depend on it for information, trusting it more than the traditional media. Sometimes this means that some of the wildest rumors spread much faster in China than in the west. It is possible to make the case that there is free speech in China, and that it exists in parts of the Internet. But often this free speech is closer to the analogy of the man who falsely shouts “fire” in a packed movie theater. This kind of free speech is unfortunately, more than unproductive, and is sometimes used to whip people into a frenzy. This happened with recent coverage of western media coverage of the Tibetan situation. When the Chinese became angry, many in the western media were taken aback at the scale of the reaction.

Part of this can be ascribed to the power of the Internet and mobile networks in spreading information and rumors.

Welcome to the power of the Chinese Internet.

The problem many western editors make is that they seem to want Chinese to cross the red line, then when it happens, they can use hold it high as an example of how authoritarian China is. This is an overly simplistic view of Chinese society which tries to reduce everything to black and white terms. In an increasingly complicated world, it’s not enough to reduce important relationships to overly simplistic terms, this will only make things worse and set the stage for future misunderstandings which may have tragic consequences for everyone.

Fortunately, there is some dialogue going on, and there are some very smart people who are devoting themselves to discussing these very real and important issues, and are setting the groundwork for a new and more constructive dialogue.

On the English-language side, some of the more interesting websites are:

EastSouthWestNorth
Danwei(for coverage of the contemporary Chinese media scene, complete with constant updates on moving red lines)
The China Business Network(mainly covers business but also includes cultural issues
James Fallows (I also enjoy his coverage of technology
The Washington Note(This website proves that something intelligent can come from the global capital of spin

If you want to keep on top of developments in China, these sites will keep you informed.

And of course, there is the China Vortex. You are always welcome here.