China Law Blog

The Wall Street Journal just did an interesting story on growing private entrepreneurship in China, entitled, "China's Entrepreneurs Offer a New Path: Best Hope for Country's Economy May Lie With Private Enterprise, But Inexperience Could Hurt Effort." The article focuses on Broad Ltd., a Changsha (Hunan province) company that manufactures giant cooling systems that do not rely on electricity.  The company sells its coolers worldwide.  Changsha is perhaps best known as Mao ZeDong's hometown.

Zhang Yue founded Broad in 1988 and he has done so well with it that he owns a helicopter and a jet plane.  The WSJ describes Mr. Zhang as "the new face of China:"

Mr. Zhang is the new face of China, where private enterprise was only officially recognized a few years ago. Today, China's entrepreneurs offer a third path between the ailing state enterprises that account for a mere 30% of China's output and the foreign enterprises that account for over half of the country's exports and are increasingly making inroads in the domestic market as well.

If China is to flourish, its best hope lies not in state-owned enterprises, which still rely on government support and subsidized credit, but with a group of entrepreneurs such as Mr. Zhang. This group, which barely existed a decade ago, has had great successes, but they often lack the discipline and experience to build lasting business empires.

The article goes on to distinguish Mr. Zhang from most Chinese private entrepreneurs because his company produces a product, rather than brokers product sales or develops real property:

Unlike Mr. Zhang, 70% of the richest private entrepreneurs in China are property developers, says Morgan Stanley's Mr. [Andy] Xie. Most of those who aren't developers are essentially traders, buying and selling goods and companies. By contrast, Mr. Zhang makes things for which there is demonstrable demand. At the same time, he is an indirect beneficiary of the real-estate boom, because many of his customers are developers.

Most interestingly, Broad's cooling systems cost more than those from Korea and Japan and Broad does not seek to compete on price:

Moreover, while most manufacturing in China is all about economies of scale that result in the lowest price, Mr. Zhang says he doesn't compete by undercutting competitors. He says his products are more expensive than those of competitors in Japan and Korea. The equipment used is world class and imported to his Broad factory from all over the world. Mr. Zhang is also unusual in that he is focused on the long term. By contrast, "most entrepreneurs see investment as detracting from profits," says X.D. Yang, co-head of buyout firm Carlyle Group's investments in Asia. "They only draw up one-year budgets. They don't build their companies to last for years and years."

With energy conservation one of China's top priorities the orders for Broad's "environmentally correct cooling systems" are rolling in. 

Mr. Zhang also handles his finances very differently from the typical Chinese entrepreneur:

In a world where capital has never been priced realistically, and, until recently, loans were considered government disbursements rather than debt that had to be repaid, Mr. Zhang is careful about how he seeks financing. "He is the only one I have ever met in China who has not asked me to get him money through Goldman," Mr. [Fred] Hu adds.

Mr. Zhang pays his taxes and refuses to pay bribes, even though that refusal has cost his company certain contracts.  The article is not clear whether the contracts Broad missed out on by refusing to pay bribes were domestic or foreign.

I found the statistic that China's state owned entities contribute only 30% to China's GDP interesting.  It is always unclear what is meant by a state owned enterprise in China, but the generally accepted definition does not include city owned companies. I recently read an article noting how much more efficient China's private sector is than its state owned sector and how because of this the private sector is growing at a much faster pace.  I am often asked why China is not moving faster in privatizing its large state owned enterprises and my stock answer is that it does not need to do so as so many of its state owned enterprises are eminently capable of self destructing.  Unless Beijing interferes with private enterprise to slow it down, I see the role and influence of state owned enterprises continuing to shrink under its own weight. 

My own law firm's experience bears out what the Wall Street Journal says regarding the general unwillingness of most Chinese companies to think long term.  Certainly, we have found this to be true with respect to legal services.  All of the Chinese lawyers with whom I have discussed this topic agree that, with very few exceptions, Chinese companies will avoid using lawyers until a crisis necessitates it.  This contrasts with the prevalent western view that using lawyers is like changing the oil in your car; one pays for both to avoid the far worse alternative -- having to buy a new engine or facing litigation.  As Chinese entrepreneurs gain business experience and as their confidence in the staying power of Chinese capitalism increases, I believe their thinking will become more long term as well. 

For more on the rise of capitalism/entrepreneurship in China, check out  "China Rising" at Samizdata Blog, which sees Chinese capitalism growing by small steps and "Top Predators," at Blood & Treasure Blog, which summarizes Chinese government policy towards entrepreneurs as not encouraging, not openly promoting, and not being quick to ban. 

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The Shanghai Daily just ran a story on how "China has 23 firms in this year's top 500 companies on the latest Fortune magazine's Global 500, an annual ranking list of companies worldwide according to their revenue from the year before."  China had six new companies in the Global 500 this year, more than any other country.

According to the Shanghai Daily, most of the Chinese companies in the Global 500 are "big state-owned enterprises from petroleum, electrical power, banking, IT, trading, insurance, metallurgy, automobile, and construction industries."  Energy and chemical conglomerate, Sinopec, was first among Chinese companies, with $99 billion in revenue, which was an eight position rise for it and put it into 23rd place overall.  The article also noted that "among the six new companies, four are from China's mainland, namely, China Railway Engineering, Shanghai Automotive Industry Corporation, China Railway Construction (HK), and China State Construction.  Two are from Taiwan - Quanta Computer and Cathay Financial Holdings." 

Taiwan-based Hon Hai Precision Industry (Foxconn) came in at number 206 on the list, "an astonishing jump of 165 positions compared with last year."  Hong Kong-based Hutchison Whampoa, climbed from No. 347 last year to this year's No. 259.  Haier, the world's 4th-largest white goods manufacturer, and Lenovo, which acquired IBM's Personal Computing Division last year, were not on the list.

Exxon Mobil took first place, with Wal-Mart at second.  Royal Dutch Shell, BP, General Motors, Chevron, DaimlerChrysler, Toyota Motor, Ford Motor and ConocoPhillips rounded out the top ten.

In its story, China Daily states that twenty Chinese firms made the list, leading me to believe that it did not count the Taiwan companies in its China list, unlike the Shanghai Daily.  It is also not clear how many of the twenty are based in Hong Kong.   

China Daily noted that China's three largest state-owned construction firms made the list for the first time, with China Railway Engineering debuting at 441, China Railway Construction at 485, and China State Construction at 486.  Shanghai Automotive also debuted at 475, while China First Automotive kept its place in the pantheon, but fell from 448 last year to 470.  State Grid (electric utility), up from 40 to 32, and China National Petroleum, up from 46 to 39, retain second and third Chinese placings respectively.  China's four state-owned commercial banks all moved up substantially on the list, with The Industrial and Commercial Bank of China going from 299 to 199, the Bank of China moving from 399 to 255, China Construction Bank jumping from 315 to 277, and the Agricultural Bank of China going from 397 to 377.

The full list will appear in Fortune's July 24 issue. 

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According to today's online China Economic Review, China and Hong Kong will today (China time) be signing off on an agreement making commercial judgments from each other's courts enforceable on both sides of the "border."  China and Hong Kong have agreed Hong Kong will enforce the judgments of 469 mainland courts, "including the Supreme People's Court, 32 higher people's courts, 389 intermediate courts and 47 basic-level courts." 

There are some exceptions, as the pact provides that enforcement is not required for judgments obtained by fraud or where the losing party was given insufficient time to prepare a defense, but I see this agreement as likely to have a huge impact.  "The two governments have been negotiating the pact since 2002 but concerns over the quality of mainland courts have been a stumbling block."  Hong Kong is still able to avoid having to enforce the judgments of certain mainland courts.

For those wishing to learn more about this agreement and its likely impact, I urge you to read this excellent Legal Week article by Jim James and Patrick Bourke of London-based mega law firm, Norton Rose. 

And, in the "it's a small world" department, this is the first I have heard of Jim James since we worked together on a huge case many years ago in Hong Kong.  Jim was in Norton Rose's Hong Kong office at the time and I see he now heads up Norton Rose's Shanghai office.  Jim is a great lawyer and I heartily recommend him to those with a "bet your company" China arbitration matter. 

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China Rises: Notes from the Middle Kingdom Blog, a new blog written by McClatchy Newspapers (which purchased Knight Ridder) China correspondent, Tim Johnson, did a post on China's ten most charming towns, per the China Daily.

Mr. Johnson notes that he has "lived in China for almost three years, and traveled to more than a dozen provinces, some of them with charming places," but he has "not been to a single one of these towns."  Neither have I, but judging solely from their pictures and descriptions, they certainly do seem to be bursting with charm.  And, as much as I love places like Shanghai and Qingdao, which I most often frequent, I have never described either as "charming."

So, without further ado, the ten most charming towns, with China Rises' synopsis of their charms:

1.  Tongli, Jiangsu province -- Sometimes called the "Little Venice of the Orient," Tongli is surrounded by lakes and has many bridges and gardens from the Ming and Qing dynasties.

2.  Nanxun, Zhejiang province -- More quaint bridges and gardens, site of first silk exporters.

3.  Xingan, Guanxi -- Site of the world's first man-made canal.

4.  Shiwan, Guangdong -- The porcelain capital of southern China.

5.  Shiwei, Inner Mongolia -- A Russian ethnic minority town along the border.

6.  Heshun, Yunnan -- Beautiful scenery at China's first border trade town with Burma.

7.  Wuzhen, Zhejiang -- Picturesque canal town known for "clear waters, fragrant wines, legendary lanes, and handmade calico.

8.  Taining, Fujian -- Best maintained hometown homes of leading scholars in the Ming Dynasty (1368-1644).  Also famous grottoes.

9.  Hongcun, Anhui -- UNESCO-listed village near Mt. Huangshan, one of China's five famous mountains, and backdrop in the film "Crouching Tiger, Hidden Dragon."

10.  Zhangbi, Shanxi -- Site of ancient castle.

Bon voyage.      

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A few weeks ago, I posted about Nokia's patent design lawsuit against Shenzhen Telsda Mobile Communication Industry Developing Company, Ltd., among others, accusing Telsda of copying Nokia designed phones.  I just came across a picture of the offending Telsda phone on the relatively new Engaging China Blog, which bills itself as still operating in "stealth" mode. 

Engaging China got its picture from The Mobile Gazette which has done a great job of lining up six of Telsda's cell phones right above the Nokia, Sony, Motorola, and Samsung phones the Telsda phones look very much like.  Go here for the pictures; they really are something. 

The Mobile Gazette has this to say about Telsda's phones and Nokia's lawsuit against Telsda:

Although not all Telsda handsets are such blatant copies, the Telsda A317 is clearly designed to be almost identical to the Nokia 7260. There's no way that Telsda could have come up with a design like that by accident.

To be fair, Telsda are not the only company who are involved in this type of activity, and Telsda are at least not trying to pass the handsets off as the genuine article, unlike some other Far Eastern manufacturers who actually make even more convincing big brand handsets complete with a fake "Nokia", "Samsung", "Sony Ericsson" or "Motorola" label.

We believe that Nokia's case against Telsda on the A317 is straightforward. It remains to be seen just how good the Chinese legal system is at protecting intellectual property and industrial design.

Gizmodo (French version) calls Telsda the king (roi) of copy.  The Mobile Whack blog says "it's obvious they [Telsda] are not being inventive in designs" and the Gizmo Watch blog simply proposes Telsda try its hand at human cloning as well.

The unfortunate reality is that far too many Chinese companies see it as both easier and cheaper to copy the product that is already selling than to develop their own.  Until China strengthens its IPR enforcement, they are, in most instances, probably right. 

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I have never so enjoyed writing a blog post title as this one.

Just about everybody in the United States thinks we have too many lawyers. For proof of this, go here, here, here, here, and here. 

But China is different.  Way different.  In China, lawyers are greatly respected and official policy says there are too few.  You heard me: too few lawyers!

Today's People's Daily has an article discussing how China has only 121,889 lawyers and parts of the country have no legal services: 

However, the proportion of lawyers to the total population was just 0.9 per 100,000, far lower than most Western countries, according to a report on Lawyer Law implementation inspection last October.

Most lawyers worked in the metropolitan areas of east China, leaving underdeveloped western areas with a shortage of professional legal services, including 206 counties with no lawyers.

By way of comparison, there are approximately 190,00 lawyers licensed to practice in the State of California alone.  I wonder how many of them are studying Mandarin?

Unfortunately the message from the top is not always clear.  China,  (perhaps like the United States) does not seem to want American lawyers. 

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To quote Bob Dylan, there's a slow train coming.  It's called the Beijing-Lhasa "express" and it seems just about everybody has an opinion on it. 

Newsweek's Melinda Liu is doing a video blog of her trip on the newly completed Beijing-Lhasa express.  The (first?) segment is a bit short, but certainly worth watching.  It comes with an article. I think (but am not sure) that more posts will follow from Ms. Liu and I will post again on this when and if they do.  Another good trip account can be found on the Moderate Voice Blog. 

For those wanting additional information and perspectives on this groundbreaking run, check out the Washington Post, the Popagandhi, Ultima Thule, China Snippets, Mask of China, and Thomas Barnett.  To greatly summarize, the widely divergent views on it range from viewing it as bad for the locals and the environment, to good for China and the economy.  Nobody disputes that its pressurized rail-cars and permafrost stabilization qualify it as an amazing engineering feat. 

UPDATE:  There is also a first hand account of the trip at the Times U.K. blog here and this article from the Globe and Mail (Toronto) touches on the issue of smoking in a pressurized train compartment....no minor matter in a nation of 350 million smokers! The always informative EastSouthWestNorth blog also has an interesting English translation of a report from Chinese blogger Fu Jianfeng.

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The Australian (along with the Wall Street Journal, the Financial Times, the Washington Post, and the New York Times) is one of the few English language newspapers with consistently excellent reporting on China. Today's Australian has a insightful article on how Beijing wants environmental, economic, and legal reform (I agree), but how difficult it will be to achieve in a one party state (I also agree).   

The article is entitled "China's classic reform conundrum:  Beijing is earnest about cleaning up their act, but there are internal contradictions that business must get used to."  It makes for good reading. 

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Does anyone know what the following nine cities have in common with Nanchang, China?

Las Vegas, United States

Fukuoka, Japan

Munich, Germany

London, England

Toulouse, France

Moscow, Russia

Gaziabad, India

Goyang, Korea

Florianopolis, Brazil

Well, I really cannot either, beyond the fact that Newsweek International just named Nanchang and these other nine cites as the "ten most dynamic cities" in the world."  Problem is that I could not find how Newsweek made its determinations on dynamism.  Oh well, it nonetheless gives me an excuse to post on one of my favorite themes:  China's second tier cities rising.  For some of my previous posts on China's second tier city phenomena, see "China is Expensive -- NOT. Go Second Tier and Life Will Be Good," "China is Expensive -- NOT. Go Second Tier and Life Will Be Good, Part II," "Chinese Cheeseheads Accurately Reflect China's Consumer Spending," and "Tianjin, China -- Second Tier City With A Bright Future."  The All Roads Lead to China Blog also has a good post on this, entitled, "Chengdu: If you built it they will come."

I am surprised Nanchang is the Chinese city on this list.  I have never been there, but I have heard it is somewhat gloomy.  Our clients almost never mention it as a potential location for their China businesses.  It is nowhere on this list of the 100 cities in the world expected to have the greatest population growth between now and 2020, which lists Beihai, China, at number one and Wenzhou at number 56, Wuhan at 58, Changsha at 65, Heze at 68, Shantou at 70, Zhanjiang at 82, and Shenzhen at 91.  Nanchang is number 198, making it only the 26th fastest growing city (predicted) in China.  Now I realize these are only predictions and I that there is no direct correlation between a cities "dynamism" and population growth, but come on.  Why Nanchang?

It must be the Ferris wheel:

A star marks the unlikely epicenter of china's second-city explosion.

The Star of Nanchang is, unofficially, the world's highest Ferris wheel at almost 162 meters. At night the wheel lights up blue and red with giant neon characters that read, "Nanchang WELCOMES YOU!"

It welcomes a lot of people. Nanchang is one of the hottest cities in China, which boasts more fast-growing cities than any other nation by far. Thus the gawdy star marks the epicenter of the global rise of second cities, none more surprising than Nanchang. Though rich in history—a towering seventh-century imperial pavilion rises not far from the Ferris wheel—Nanchang had all but fallen off the economic map before China's investment boom began to move inland from the coast a decade ago. Today it is still the gritty capital of Jiangxi, China's poorest central province, but that's changing as foreign dollars and migrant workers pour in. Cows graze near five-star hotels on the Gan River, and there are almost as many construction sites as buildings.

More likely, it is Nanchang's auto industry, which industry is rapidly becoming hugely important to China, both economically and culturally:

The turning point dates to 1995, when Ford bought a stake in local Jiangling Motors, which recently posted a 173 percent rise in quarterly profit. Soon after Ford announced plans to add 2,000 new workers in China this year. Its success in Nanchang has rippled across the city, to suppliers like the Nanchang Gear Co. The maker of steering columns and transmissions is growing at double-digit rates, says company regional manager Gui Qunhua Gui. "It's not just the automotive industry," adds Gui, gesturing to a jet plane and a pyramid of beer bottles at a recent local trade show. "Every industry in Nanchang is prospering."

He predicts that because small Chinese cities like Nanchang can grow faster than large rivals, they will begin attracting more speculators and investment. Albert Hawk, founder and chairman of Corstone Capital, couldn't agree more. The U.S. firm has been buying distressed loans and real estate in Nanchang for two years, and Hawk sees huge potential in "these second-tier cities that are only now beginning to take off."

I am skeptical of Nanchang as the "epicenter" of China's second city explosion, but I will now put it on my radar. 

I would love to hear from anyone who has been to Nanchang, particularly if you rode on the Ferris Wheel.

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As just about everyone knows, China is proposing new laws requiring governmental consent to report on an "emergency" or "sudden incident."  Seems at least some in the Chinese press have already taken these proposed laws to heart. 

I mention all this because I just came across a China Daily article (h/t to the Hacking Netflix Blog) headlined, "Crackdown Closes Production Lines," and dealing with the Chinese government shutting down a whole slew of DVD and CD production facilities.  My pulse quickened.  Wow, I thought, we were all wrong to laugh off the Chinese government's well publicized plan to crack down on this very thing.  (See our previous post predicting failure in China's efforts to crackdown on optical disk piracy, entitled, "China (Beijing) Is Moving Hard To Protect IP -- Is Anybody In Guangdong Listening?")

Boy was I wrong.

This July 5, 2006, article does not describe anything more recent than March 15, 2006.  This is no "sudden incident."  It is not even news.  It is just the Chinese government -- in its own way -- trying to convince us that it actually controls China piracy. 

My reaction to this article, however, is exactly the opposite of its apparent intent.  I see the government pushing this story as its protesting too much.  If the Chinese press has nothing to brag about in July other than a raid that occurred back in March, obviously very little is happening so far with its plans to crack down on DVD/CD piracy. 

I am going to China in a few weeks so place your orders now for $1 DVDs of "Pirates of the Caribbean: Dead Man's Chest" and "The Heart of the Game" now. 

Just kidding. 

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The Financial Times did a story the other day, entitled, "After the abacus: China's accounting switch holds perils as well as promise," on the massive changes expected from China's new accounting laws set to go into effect on January 1, 2007.  According to the article, the new rules "promise to deliver unprecedented transparency to Chinese accounts, reassuring foreign fund managers and business executives who have invested billions of dollars in the red-hot economy." 

I am highly skeptical.

The Chinese government deemed these new rules, based on International Financial Reporting Standards (IFRS), as necessary to shore up investor confidence:

That is because the government has given up on years of tinkering and decided to make a radical switch to a system based on International Financial Reporting Standards. Beijing knows foreign investors view Chinese accounts as opaque, if not willfully misleading. By embracing recognized norms, it has signaled its determination to address that credibility gap. The 1,200-odd mainland-listed companies must adopt the standards by January.

China's government is right to believe China must clean up its accounting practices and that doing so will boost and stabilize China's economy, as things are not good now:

"The level of disclosure is not good," says Neil Juggins,Shanghai-based head of research at Evolution Securities China, a UK broker. "The information you get is not very helpful when you need to do a proper job as an analyst. Since disclosure is poor, you have to ask the company and base your investment decision on what they say. You are effectively playing it on trust."

Whether accounts deliver a useful picture of a company's financial position is one issue. The more vexing question is whether they are being manipulated to dress up performance - in order to raise capital or preserve a listing - or to cover up fraud. Fund managers and FDI experts say outsiders need to be wary of hidden liabilities, receivables that never materialize, spurious claims on assets and minimal provisions for litigation and bad loans.

The uncertainty surrounding Chinese accounting practices has caused some who invest in companies listed on Chinese stock exchanges to treat those investments just as they would private-equity investments:

One more intrepid A-share investor is Chris Ruffle, a Shanghai-based director at Martin Currie, a UK fund manager that has invested a total of $900m on the mainland. "You need to treat each investment like a private-equity investment and do a bit more work than you would elsewhere," he says. "You visit the office, you meet the people. It's more difficult for them to lie than the numbers."

China's changeover to IFRS is a massive undertaking.  Its switch to IFRS "does not just impose new technical requirements on the country's accountants. It demands a wholesale change in the way they think and work:"

To most European listed companies, IFRS did not represent so revolutionary a shift. Yet, even after four years of preparation, confusion and errors were still common when the standards came into force last year. China has drafted in overseas bodies such as the Association of Chartered Certified Accountants to help with retraining. But a lack of local accountants with any training at all will hamper them.

I do not believe China will be able to pull off a wholesale adoption of IFRS standards six months from now.  Those of us who do business in China know that finding a competent accountant is either very difficult or nearly impossible, depending on the city.  My firm is on a constant lookout for good accountants in China because our clients are always asking us for their names.  Many times, the people whose names we are given are simply too busy to take on new clients.  This shortage is particularly acute for smaller companies.  The hard numbers on China's accountants bear this out:

The Chinese Institute of Certified Public Accountants, established in 1988, has just 140,000 members, half of whom are practicing. Jiang Zemin, the country's former president, has said China needs 300,000 CPAs. If it had the same number per head of population as the UK there would be 5.3 million.

There are also integrity issues:

Of the 70-odd firms authorized to audit public companies, some appear susceptible to pressure from important clients: the government has begun issuing blanket warnings on the need for greater integrity. Ms Xu at Ginger Capital says: "I don't think I'm comfortable with local firms. It's the professionalism of the people. It seems they like to twist the rules."

The big four international firms -- Price Waterhouse, KPMG, Deloitte, and Ernst & Young -- employ around 20,000 people on the mainland and in Hong Kong and are they always talking about plans to hire many more. 

Due to the lack of accountants, the lack of accountants capable of understanding the new laws, and the short time frame the accountants have been given, I do not see these laws coming online early next year. I predict the laws will either be postponed or simply not enforced.  The Financial Times article speaks to the enforcement issue:

Like most regulations in China, the ultimate impact of IFRS is likely to be determined by the level of enforcement. That task falls mainly to the China Securities Regulatory Commission, the stock market watchdog.

Mr Liu at the finance ministry stresses that the state agencies with a stake in accounting have formed a powerful coalition to police the standards. But Mr Juggins at Evolution adds a caveat. "When the party decides to do something it happens very quickly and all the national bodies fall in behind it. The problem is more implementation at the provincial and local level. People ask: who's pushing this? How much power does he have? What will happen if I don't comply?"

This is all true.  However, I see these new accounting laws as too important for non-enforcement.  I also think that their technical nature will make any non-enforcement so obvious that non-enforcement will only increase suspicions regarding Chinese accountancy, which is exactly what the new laws are designed to reduce.   For these reasons, I predict the government will postpone these laws for another year or so.  Some of our Chinese sources are saying the same thing. 

Stay tuned. 

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Earlier today, I did a post on an article postulating why China had failed to keep up with Europe through the Industrial Revolution.  One of the reasons given was that China viewed its culture as so superior to other cultures that it felt it had nothing to learn from others. 

The Made in China Blog, a very new blog, written, I believe, by a Chinese lawyer or law student, did a very thoughtful post, entitled, "Too Proud Of Our Culture?" responding to mine:

Fresh and new article ''Why China Stagnated" from China Law Blog, quoted David Landes, who is an economic historian teaching at Harvard University, that one of the reasons why there was no industrial revolution in China, was because the "ignorant" and "fatal" belief that Chinese state and people bear in mind at any time and at any place that their culture was so superior to others that there was not much to learn from others.

This quickly reminded me of things happened between me and my friends: I have, not only once, "offended" my friends from other countries by saying "oh you know your [certain culture] is from China". That's why one of my close friends once admitted, in a mocking tone, that ''everything is from China''.

I blushed at his response, and realized how rude and ''ignorant'' I was - a small example for Prof. Landes' point. But, besides the enlightening part, I can't help wondering, why? Why this kind of thinking is deeply rooted in my and my peer's mind?

Textbooks.

Education.

I can't tell you how many times I have been told, in classrooms, that my state's culture is so superior to others that others are mostly originated from ours.  History was one of my favorite subjects back then at school, but as I recall, there were only few parts about the modern history, where included the industrial revolutions, that had been covered by the textbooks, or it was because I didn't like that part of history and tended to be ''ignorant'' about it? whatever.

The modern history of China is so humiliating that me and my textbooks both might have tried to avoid it. I would think of the great culture we have had and the great prosperity we once had in Tang dynasty, rather than those happened in recent centuries.

Escaped from reality? Maybe. Ignorant about others' culture? Maybe not.   

There is a quote by a 19th century Chinese political writer, supposedly known to everyone who have attended school, saying that the Chinese should learn the good technology (or technics) from oversea countries to surpass them. The Chinese, realized although they had an impressive coulture, they couldn't turn the table (after being defeated by the British in the Opium War) until they learnt from others.   

At least, for the 19th and 20th century, ignorance might not be the rationale of no existence of industrial revolution. I think it was the inferiority complex resulted from the realistic conditions that had refrained us from learning from others. And plus, the bad luck we had. Very bad luck.

China was so poor that it had to keep in mind how prosperous and powerful it was. And forgot how bad the situation was at the moment.  So isolated that it blamed everyone but itself, and boosted its culture so ardently that people could forget, among other things, the weak military force and the disheartening per capita.

I would love to hear from more people on this issue. 

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The secret is out.  I am pro-capitalist.  I say this straight out so it will be obvious why I love economic historian David S. Landes' explanation for why the industrial revolution did not begin in China.  David Landes, is an emeritus professor of both History and Economics at Harvard University.  He is also the author of the widely acclaimed book, The Wealth and Poverty of Nations: Why Some Are So Rich and Some Are So Poor, which book has been on my "must read someday" list for nearly ten years.  The Western Standard Independent Blog summarizes Landes' views on how governments can create ideal conditions for growth and development:

1. secure rights of personal property, the better to encourage saving and investment;
2. secure rights of personal liberty …against both the abuses of tyranny and … crime and corruption;
3. enforce rights of contract ….
4. provide stable government … governed by publicly known rules …
5. provide responsive government …
6. provide honest government … (with) no rents to favor and position
7. provide moderate, efficient, ungreedy government … to hold taxes down (and) reduce the government’s claim on the social surplus …

The Spring issue of the Journal of Economic Perspectives magazine contains an article by Professor Landes, entitled, "Why Europe and the West?  Why Not China?" [abstract only, $7.50 for full article], asking why China missed much of the industrial revolution:

In the history of technological development, why didn't other regions keep up with Europe? This is an important question, as one learns almost as much from failure as from success. The one civilization that was in a position to match and even anticipate the European achievement was China. China had two chances: first, to generate a continuing, self-sustaining process of scientific and technological advance on the basis of its indigenous traditions and achievements; and second, to learn from European science and technology once the foreign “barbarians” entered the Chinese domain in the sixteenth century. China failed both times. What explains the first failure? I stress the role of the market: the fact that enterprise was free in Europe while China lacked a free market and institutionalized property rights; that in Europe innovation worked and paid, while the Chinese state was always stepping in to interfere with private enterprise. As for the second failure, China's cultural triumphalism combined with petty downward tyranny made it a singularly bad learner.

The always insightful Cafe Hayek Blog, written by two Professors of Economics (Donald J. Boudreaux and Russell Roberts) at George Mason University's, has this to say about Landes' China article:

In his compelling lead article in the Spring 2006 issue of the Journal of Economic Perspectives, economic historian David Landes wonders why the industrial revolution didn't happen first in China.  His answer is unequivocal: although it had lots of genius, China had neither the institutions nor the culture to transform this genius into widespread prosperity.

Almost every element usually regarded by historians as a major contributory cause to the Industrial Revolution in north-western Europe was also present in China [some 500 years before the wealth explosion that began in Europe in the 18th century].

So why, specifically, was there no industrial revolution in China?

Why indeed?  Sinologists have put forward several partial explanations.  Those that I find most persuasive are the following:

First, China lacked a free market and institutionalized property rights.  The Chinese state was always stepping in to interfere with private enterprise -- to take over certain activities, to prohibit and inhibit others, to manipulate prices, to exact bribes [p. 6].

And as Landes points out on page 7, the Ming dynasty's attempt to prohibit all trade overseas certainly didn't help matters.

Cafe Hayek then notes how Landes "goes on to criticize severely the Chinese state's -- and people's -- ignorant belief that their culture was so superior to others that they had nothing much to learn from others" and remarks "that such a belief is truly ignorant and fatal -- not just of and for the Chinese centuries ago, but of and for any people at any time and at any place."  Or as Fareed Zakaria recently put it in this Newsweek article on what the United States must do to continue "leading" the world, "[c]oncerns about American decline ended up preventing it." 

Obviously, a multitude of factors influence the wealth of nations (natural resources, culture, history, to name just a few), but certainly governmental stability and non-interference with private enterprise are important.  China's recent economic growth has come largely from its recent willingness to free up private enterprise and, to the extent China continues to allow this burgeoning economic freedom, it will continue making a new history.

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The Street.com just ran an interesting interview with Cadol Cheung, managing director of Asia Pacific for Intel Capital.  The article is entitled "All The Tech in China" and it is definitely worth a read for those interested in Chinese technology companies or Chinese venture capital investments.  I found the following from the interview to be the most interesting: 

1.  Cheung is seeing increased innovation from Chinese companies.

2.   Valuation of Chinese technology companies is high.

3.   Intel invests only $1 to $5 million in each company.

4.  Korea's technology strength is in mobile communication.  Taiwan's strength is in supply chains.  "In China, consumption is the theme of the day, so you have companies that provide products to the consumer -- like [wireless services provider] Tom.com or [online and mobile instant-message provider] Tencent -- that are especially interesting."

5.   India is strong on the service side; China is strong on the product side.

6.   The typical profile of a manager of a company in which Intel invests is an entrepreneur who "studied overseas [and returned], and also local entrepreneurs. They're typically in their 30s or 40s with some working experience."

7.  Most of the companies in which Intel has invested are in Beijing or Shanghai. 

8.   Intel has already invested in ten Chinese companies that have gone public, including PCCW, Asiainfo Holdings, and Sohu.com. 

9.   China's regulatory environment for VC firms "is getting more and more friendly." 

Just a few days earlier, however, Cheung was quoted in a Reuters News article, as becoming increasingly "cautious" on China technology investment:

"I'm more cautious now than a year ago," he said. "But we are long-term investors."

A three-year run-up on technology companies, a continuous flow of new money into China, and a rash of initial public offerings indicated the end of the current cycle was near.

"I've seen these cycles before and we won't be affected by short-term changes in the economy, but when everyone is so bullish I tend to be more cautious," he said.

Cheung nonetheless says "China is still one of the growth engines of the world economy."

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Josh Hallet came to Seattle the other day for what he calls a giant "geekfest" and what most call Gnomedex.  Josh started and runs Hyku, a "Blog and Social Media Consulting" firm.  I know Josh because when we needed help with this blog, "everyone" told me to "call Josh."  Josh ended up designing our blog and teaching me more than I could ever have hoped to know about blogging, which probably equals about 1/100 of what he knows.  Josh does not charge the so-called "China Price" for his blog consulting, but considering the quality of his work,the big name clients for whom he consults, and the many high profile events at which he speaks, his rates are emmintently fair.

Buzz Bruggeman, once of Florida, but now Seattle, was also at my meeting with Josh.  Buzz (Does everyone call him "Buzz" because he is incapable of NOT generating a "buzz" wherever he goes or is it a haircut thing?) was also attending Gnomedex.  If everyone talks about Josh, everyone talks with Buzz.  Buzz is a former lawyer, now the CEO of Activewords Systems, Inc., which produces Activewords software, which I can personally attest is absolutely incredible.  In Naked Conversations, probably the seminal book on blogging and also itself a blog, Robert Scoble and Shel Israel aptly refer to Buzz as "the Connection King."   Shel Israel did this great post about Buzz and ActiveWords and I wholeheartedly concur.

You want help with your blog, call Josh.   You want to learn about what passion can do for your business (or about ActiveWords!), call (or just watch or wait for) Buzz.

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Last week we posted on how the challanges facing China's banking system are creating opportunities for foreign services firms, such as Captaris and Apollo Technology.

The Asia Biz Law blog did its own post, with a different angle on the same article from the Washington Post we cited regarding China's banking problems that provides additional information regarding China's bank fraud problems. 

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Newsweek International just ran a story, entitled, "China's Golden Cities," on the preliminary results of a World Bank study indicating China's cities are doing much better than widely believed, and not just those cities on the coast.  The study is based on a survey of 12,400 Chinese companies in 120 Chinese cities, and though the data is just beginning to be analyzed, "a number of patterns quickly emerge."  I see this study as at least partially vindicating my posts on how Western analysts assessing China's economy and future fail to account for the growth and dynamism of China's private sector. 

The study found "no link between fast growth and the breeding of corruption or pollution" and it also found "China's transition to a market economy appears to be both more advanced and somewhat less damaging than we thought."  Though only 8 percent of the randomly sampled firms are "majority state-owned," those firms "control one third of the assets in the sample," suggesting a "larger private sector than previous estimates."

The study also surprised those who undertook it by revealing a positive correlation between a strong private sector and decreased corruption:

Not only was the extent of the private sector a surprise to those conducting the study, but the benefits from this were also: 

But in the cities where the private sector flourishes, firms reported far less red tape—from faster times through Customs to fewer days dealing with bureaucracy and less frequent demands for bribes.

While corruption is inherently hard to measure, we get pretty good response rates on the question of whether firms have to pay bribes to get loans from commercial banks, which are still largely state-owned. In southeast cities such as Hangzhou or Xiamen, 1 to 2 percent of firms report paying bribes to gain loans; the figure is above 10 percent in more than 20 cities of the center and west.

What explains these differences? Being near the coast is a help in China, because of access to external ideas and because coastal areas were permitted to experiment with reform first. An intriguing pattern is that governance is best in coastal cities that had very little industry when reform began in 1978. Shenzhen now has the highest per capita GDP in China. The same holds in Jiangmen, Dongguan, Suzhou—all were industrial backwaters in 1978, and responded to China's opening by creating good environments for private investment and learning from outsiders. Cities that already had industry tended to protect what they had and reform less aggressively.

In addition to the correlation between a strong private sector and reduced corruption, the study indicates a "good investment climate for firms also goes hand in hand with a good environment for people:"

As expected, cities with better investment climates tend to have higher wages (averaging $3,000 to $4,000 a year in coastal cities, versus $1,000 in the interior), less unemployment, lower infant mortality and higher education spending. But surprisingly, they also score higher on environmental measures such as green space per capita, clean-air days per year and percent of water discharge that is treated. For example, cities like Weihai, Qingdao, Suzhou, Hangzhou and Fuzhou all score very highly in terms of business climate, and all treat 97 percent or more of their industrial waste water, with Weihai treating a perfect 100 percent.

The opposite is also true. The average waste water treatment rate for cities with poor investment environments was about 78 percent. Why is this so? Cities with poor investment climates tend to have industry dominated by state firms, which often are the worst polluters.

As my eight year old would say, "duh." 

As I put it in a recent post,"private enterprise is thriving and it is China's private companies (not its state owned entities) that drive what the show [China Rising] kept calling the "greatest transformation in history."  Yes, China's government is indeed a relatively agile one, and yes, there are still many state owned entities (SOEs) in China, but as is the case in just about every thriving country in the world, the private sector fuels the growth. 

It is also can be no accident that corruption will tend to be lower where the private sector is relatively strong as compared to the public sector.  After all, the public sector is the sine qua non for corruption.  The correlation between wealth and a clean environment should also not surprise.  Put simply,Copenhagen can afford a state of the art sewage system; Freetown, Sierra Leone, cannot.

The bottom line here should hardly need to be stated:  as China's private sector continues to increase and as China continues to become wealthier, its livability will improve.

For those interested in how such improvements might eventually affect China's politics, go here, here, here, here, and here. 

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I guess this sort of thing was bound to happen, but I still found it somewhat disquieting (beyond just the atrocious grammar and spelling, a/k/a Chinglish) to see the following Xinhua headline:  "Patients seeked [sic] for lawesuit [sic] against Bausch & Lomb."  Seems American lawyers are rounding up Chinese class action plaintiffs for a lawsuit against Bausch & Lamb involving recalled contact lenses.   

Personal injury lawsuits worth $75,000 in the United States would likely fetch less than $7,500 in China.  This difference creates an obvious incentive to sue in the United States, rather than in China, whenever possible.   

Some argue it is unfair for someone injured the United States to get more for their injury than someone injured in China.  There are, however, very good reasons for this.  First and foremost is the huge difference in wages between the two countries.  Second, the cost of living, including medical care, is much higher in the United States than in China.  Arguing against different damage awards is hardly any different than arguing for Chinese factory workers to be subject to California minimum wage laws.  A more sophisticated argument favoring equal damage payments is that American companies will hardly be deterred from producing dangerous products if all they have to do is pay out $7,500 per injury.   

It will be interesting to see how United States courts handle Chinese plaintiffs in personal injury class action lawsuits as this issue will no doubt become more common.  Will Chinese plaintiffs in American courts receive awards comparable to those received by domestic American plaintiffs or will they be more in line with those they might be expected  to receive in China?  Will Chinese plaintiffs one day seek to sue American companies in American courts for injuries caused by products manufactured by an American company in China?

I understand this issue of differing damages in an international context comes up fairly often in airplane and vessel injury cases, but I am not aware of how courts typically handle it.  Perhaps an Aviation, Maritime or personal injury lawyer will comment on this. 

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I frequently post (here, here, and here, for example) on the many opportunities for foreign service firms in China.  China's banking and financial services sector is rife with opportunities for foreign service companies. 

Willie Sutton robbed banks because "that's where the money is."  The same holds true in China and that is also a good reason to sell them high end financial technology solutions.  In this recent Seattle Times article, entitled, "Banking on China's potential," Kristi Heim (a Seattle Times business reporter who has spent considerable time in China) does an excellent job explaining how a couple of Seattle technology firms are achieving such sales.  Apollo Technology and Captaris provide Chinese financial institutions with advanced solutions for processing loan requests, measuring credit risk, managing client relationships and analyzing data. 

Apollo is working with Shenzhen Development Bank and Bank of China to improve their loan decisions speed and to reduce their default loan rates.  In providing its software to China banks, Apollo is always mindful of protecting its intellectual property:

Considering the poor climate for intellectual-property protection in China, Apollo has kept its development team in Bellevue and hosts its software on a server managed daily by employees there. Customers in China don't have access to the source code.

Even with the risks of piracy, said [Matthew] Maa [Apollo's Chief Technology Officer], China has few technologists with expertise in financial services, so the opportunity is ripe for companies with creative solutions.

"IT firms in China do not have a financial-technology background," he said. "They are good at copying products, but not good at creating new stuff."

Captaris sells its document-delivery software to both foreign and domestic banks in China, including the Industrial and Commercial Bank of China, China's fourth largest bank, and Shanghai Pudong Development Bank.  Captaris markets its RightFax software to China for rapid transmittal of customer documents like bank statements, credit-card statements and credit-card applications.

Chinese banks have a dire need to get their various monitoring systems under control:

Banks in China now face a variety of pressures: They have to stay afloat without government help, but most haven't done enough to improve management and evaluate risk when making loans during a massive credit expansion.

Banks are eager to list stock on foreign exchanges, but doing so requires modernizing their systems. To conform to international financial practices, they're spending hundreds of millions of dollars to train employees and upgrade technology infrastructures.

The four biggest banks are still in a precarious position with so much debt from bad loans to state-owned enterprises.

Just yesterday, Washington Post China correspondent, Peter S. Goodman, wrote an article on a bank fraud in excess of (cue Dr. Evil voice) $1 Billion dollars at the Agricultural Bank of China that noted shortcomings in Chinese banks' credit and risk-management systems:

On Tuesday, the debt-rating agency Standard & Poor's underscored those concerns, declaring that China's banks face "increasing vulnerability" from the widening volume of lending. The agency credited China's banks with some improvements in their governance but stressed that "their developing credit- and risk-management systems are likely to be severely stretched by rapidly changing economic conditions."

China's banks have considerable money and considerable problems, both of which give rise to many opportunities for foreign service firms. 

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Just came across a troubling article in the Shanghai Daily (h/t to the IP Dragon Blog), entitled, "Police investigate rumor on 'HIV melons."  The article talks about how the watermelon farmers of Linquan county, (a county in Shandong Province known for the high quality of its watermelons, according to this Shanghai Daily article, but a county in Anhui Province, according to everyone else) had earlier this year registered a trademark for their watermelons and established an association to promote them. The Linquan watermelons became "the top sellers, even though their price was much higher than watermelons from other regions." 

Sales of Linquan watermelons recently plunged amid rumors they had been injected with HIV tainted blood. The local government held a news conference to try to quash the rumor.  According to the article, after a "thorough investigation, no HIV carriers were found in Fanji town [please do not ask me to explain this because I cannot], Linquan County, which is well-known for its watermelons crops."  The police are investigating the source of the rumor, which is having a devastating impact on sales:

Li Huadong, a Linquan farmer, also the vice director of the local watermelon association, said he planted more than 6.7 hectares of watermelon this year, which topped the farmers in Linquan. Before the rumor spread, the watermelons that he harvested earlier this year sold out. However, he only sold a very small fraction of the watermelons in recent days. A large amount of watermelons were left to rot in the fields, he said.

"The police said it was possible that someone spread the rumor to reap commercial benefit."  You think? 

Two things should be drawn from this article.  The first is that securing a trademark in China can be an effective tool for distinguishing your product from the competition and for allowing you to charge a premium price for it. That is exactly what happened here. 

Unfortunately, it appears the trademarked watermelon became so successful, that one or more competitors (I presume it was a competitor that started the rumor) felt it necessary to spread a vicious and untrue rumor in order to compete.  This leads to the second lesson, which is that the law is always going to have its limits.  Sure, the Linquan watermelon farmers can sue the rumor monger if they ever find out who it is, but extensive and, probably irreversible, damage has already been done. 

I leave it to the marketing and public relations experts to explain how to businesses can minimize the damage from such rumors both before and after they occur. 

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