China Law Blog

They are soon to be building MGs in Oklahoma, too. Better than building Migs... see my blog for details.

Mr. Greenwood --

Thanks for checking in. I will bet you a pound of Washington smoked salmon against an Oklahoma food product objectively deemed comparable that no Chinese MG will ever roll off an assembly line in Oklahoma. I just don't see it.

mao wasn't born in changsha! he was born in shaoshan, Hunan province...

It's a fun story that leaves out one important amusing detail.

Who owns Broad Ltd.?

According to the website, Broad Ltd. is a collectively owned enterprise which means that it is effectively owned by a local government. So strictly speaking Zhang Yue isn't a "private entrepreneur" he is a "public entrepreneur."

This tends to be true for most of the entrepreneurs that I've seen is that they are working off capital that is provided by part of the Chinese government. Now the Chinese government *wants* the managers of the companies it owns to act entrepreneurly, and in the case of the collective enterprises the incentive structure is set up so that a collective enterprise acts like a private company would in the West (i.e. no subsidies, status based on profit, etc. etc.) Local governments tend to be cash-strapped so that they are going to act like private shareholders in trying to get the company to maximize profits.

Also by having a local government as a shareholder, you get a lot of useful political connections that allow you to bypass non-sense. At the same time you can't use those connections to make a profit, since your connections are local government and won't help you bend the market rules in another part of the country.

But articles like this give the impression that "socialism is dying" in China, when in fact another way of looking at the article is that it is an example of how socialism is thriving. Both the Chinese central and local governments have figured out that the way to have state ownership work is to act like a private shareholder, give some capital to someone that knows how to make money, give him orders to maximize profits, and then stay out of his way.

Ugh. Never mind. I was looking at the wrong web page. Broad Ltd. may be funded by private capital. I need to do some more digging to see who really owns Broad.

Replace "Broad Ltd." with "Haier" and my point stands.

Dezza --

You are absolutely right and I have changed it in the post. Mao was indeed born in Shaoshan, in Hunan Province. He is, however, linked to Changsha as that is where he grew up and attended school. I therefore am able to keep the title of this post, but have changed the sentence describing Changsha as his birthplace to his hometown.

Thanks for catching the error.

Mr. Wang --

I ain't buying it. Replace Broad with Haier and you are dead wrong.

I agree with you that the locally owned companies (like Haier) tend to be more entrepreneurial than those that are nationally owned, but I do not believe they indicate socialism is thriving.

Haier is a great example of this. Haier is regionally owned, but it has been anything but a successful company of late. Its profits were down 35% in 2005, while its two chief Chinese rivals' profits were up. I have heard that the governments initially installed dynamic corporate leadership into Haier and for the most part let those leaders turn Haier into a success. But then, as Haier began to really thrive, the government starting wanting more "of a piece of it" and wanted to be able to claim credit for it. I view this as the natural tendency of governments everywhere. Problems have ensued. Would you invest in Haier right now? I sure would not.

So either a government is nothing more than a passive shareholder in a company, in which case we are talking about capitalism, or the government is actively involved in company operations, in which case it smells more like socialism. Governments are more interested in the overall well being of their constituents than of the company and that will always pose problems for the company. Now I fully realize that even the best run completely private corporations are always interested in more than just maximizing profits, but I do believe that is nearly always their main focus.

sorry, didn't mean to sound rude, Dan..but I know how you like to be accurate with your info:)

Dezza --

I don't think you were AT ALL rude nor do I think you sounded rude. I truly did greatly appreciate the correction of the error as I do indeed strive to be as accurate as possible.

Good post and some interesting comments here as well. When I clicked over the the "Blood and Treasure" post there was a great point made there that (I think) deserves more attention then it received. He cited Chinese business analyst Wu Xiaobo as writing that "During the several decades of reform and opening up, the establishment of national law seems to have always lagged behind the pace of change. At many times, there is even the sense that it is intentionally delayed and obscure."

I find this quite interesting and would be very interested to know if you and Steve, or others here, would agree or disagree with Wu's statement. And if so, does that mean that LOCAL law moves more quickly then the national law?

Don't bet on Chinese enterprises maturing into dependable consumers of legal services as they get more experience with private enterprise. Korea has had a market economy for 50 years -- it's arguable how free the market has been, but nonetheless Korea has been market-based -- and Korean businesses assiduously avoid lawyers. As you describe for China, there are only two circumstances a Korean business will consult lawyers: (i) when the summons arrives and they are in litigation, and (ii) when the Korean business is in a joint venture or other commercial negotiation with a foreign party, and the foreign party persists in using lawyers. But for day-to-day advice? Forget it.

Still trying to figure out who owns Broad Ltd. The trouble is that the website describes Broad Ltd. as a "min ying qiye" (civilly-managed enterprise) and that term means different things in different places. I'm trying to figure out if Broad is a "collective enterprise", "private enterprise" or "listed company."

Speaking of different laws in different places.

National law always is behind local law and this is a good thing. The typical pattern since 1978 has been to let localities experiment with different systems, and then only pass a national law after there is a lot of trial and error to see what works and what doesn't. In every economic initiative I can think of, there is a lot of local experimentation before it "goes national."

Mr. Carr --

Thanks for checking in.

Interesting you would say that about Korea because I view Korean companies as much better at using lawyers than Chinese companies. I obviously must defer to you on this, particularly with respect to Korean companies within Korea, but we have done a decent amount of work for Korean companies going into the United States and Russia and we view them as being much more like U.S. or European clients than like a Chinese company. Then again, all of those companies are very international and one of them is a chaebol.

But, it is my impression that Taiwanese companies generally do not retain lawyers until sued either.

Russian clients, who used to be this way 15 years ago, are very much less so now.

So is this a cultural thing? Is it economics? Or is it more a reflection of each country's own legal history that the companies take with them even when they go overseas?

James --

Thanks for checking in and thanks for bringing this great quote to my attention: "During the several decades of reform and opening up, the establishment of national law seems to have always lagged behind the pace of change. At many times, there is even the sense that it is intentionally delayed and obscure."

I completely agree with Wu Xiaobo's statement, including the fact that it is oftentimes intentional. As an example, certain powers that be in Beijing may wish to see liberalization of business formation but they know they do not have enough support to pass a law to that effect. So they do nothing, but they tell their allies in Guangdong to allow these registrations to go through. Then, a few years later, they tout the success of the registrations to support their push for the laws allowing it. This sort of thing is very common.

So yes, local laws do oftentimes move more quickly than national laws, but the local laws are oftentimes something less than "laws" as they may not even be codified. Also, there are definitely some regions where the local laws do NOT lead the national laws and, in fact, if anything lag them.

Even before the founding of the PRC in 1949, most private Chinese companies, if you dig deep enough, have some shares which are government-owned, simply because the government has control over capital allocation.

At times, especially when the company becomes profitable, these companies become candidates for shakedowns by government officials. This is what happened to Kelon in Guangdong province in a completely extra-legal fashion.

If Chinese entrepreneurs are able to secure funding from western banks or other non-government sources, then the private sector will be able to blossom, especially now that China has its own class of entrepreneurs. These companies will depend on bringing in boards which share the founders' values, and can take a more long-term view in defining success and allocation of capital.

Great! I have a similar point:

http://uvgarden.blogspot.com

Enjoy!

Paul --

Thanks for checking in.

You raise some good points, with which I completely concur. I too see Western lending and equity financing as a key path to freeing up Chinese entrepreneurship.

Ms. Copeland --

I do not think the points you make on your blog are even remotely similar to what we are doing here. I see your blog as fanatical, hateful rubbish and beyond my allowing you to respond to this comment, I will be blocking you from commenting on my blog. I am a huge believer in free speech (which is not being implicated by my cutting you off), but my goal here is dialogue, and your comments, both here and previously are so far off of the topic at hand that they are irrelevant. Thus I am treating them accordingly.

The current problem is that corrupt officials do their major shakedowns (company/board structure and share allocation/ownership) on Chinese private companies, not on foreign companies. This places the Chinese private companies at a competitive disadvantage with western companies which never have to deal with interference in high-level issues like this.

The great irony is that corrupt officials end up helping foreign companies to expand market share in China at the expense of Chinese private companies! As if Chinese private companies didn't have enough challenges to face already in a highly competitive environment!

The problem with corruption is that it forces everyone to think in terms of short-term immediate benefits, and not in the medium- and long-term (investment), and is why it is so important that corruption be cleaned up in order for Chinese companies to make their way up the global value chain.

Paul --

I again agree with you that these shakedowns are less likely to occur with foreign companies, which also tend to be taxed at more favorable rates than domestic companies.

Paul:
You have described my exact experience working in a small Chinese business (in my case, a restaurant). Vendors would try to short orders without thinking that if they delivered as per our agreement then we could have a long-term and profitable relationship. There seemed to be no thought of long term, only of making some quick kuai.

Problems arose on the other end as well, with government officials stopping by with seemingly made-up rules which could be "overlooked if we give her nephew a job."

I don't see how small Chinese companies of any type could compete in this hostile environment.

Are measures being taken in the law to protect or encourage small business growth?

Ms. Slices --

Thanks for checking in. You raise some good points. I do see a lot of short term thinking in China business. Indeed, one only need go to today's Talk Talk China's post to see one such example:
I think the reason for this is that people do not see themselves in the same business five years from now and I think the reason for that is that they don't really believe the government will allow it. Russian businesses were typically much the same way after the fall of Communism there, but every year they are getting better.

I am not aware of anything much being done in China for small business. The reality is that small business just is not all that respected in China. I see this too as communistic thinking; why be profitable if you can employ 10,000 people? I also sometimes think that Biejing prefers foreign enterprises to domestic enterprises becuase those who profit from foreign enterprises are far less likely to cause problems for the government than those who profit from domestic companies.

About small business in China
A friend of mine has this theory after few years in a real estate builder: to do business in China, you need 1) financial capital, 2) political capital (basically connections with government officials). Acquiring financial capital is very difficult for small business; I am hoping that allowing foreign banks to enter China will solve this problem. But to get political capital is very expensive; no small business can afford to do it. In 1997, I met a guy coming back to China from US, excited by the internet boom, he was trying to build an ISP company, but apparently lack of political capital. The local telephone company, afraid of his competition, would only allow max of 16 users to dial into his system at the same time.

There are some people saying that Beijing may intentionally try to jeopardize domestic enterprises, because when people have more economic power they will ask for more political power. But I don�t think so. If you were a corrupted local official, it is lot easier to bully a domestic enterprise than a foreign, especially multinational one. If you were a not-so-bad local official, it is lot easier to ignore a domestic enterprise. I suspect this is a feature for all authoritarian government, saving face in front of outsiders, and take as much as you can from being ruled.

Even though the article says that 70% of Chinese GDP is contributed by private sector, I dont see any Chinese private sector company in the Forbes Global top 2000 list. Almost all of the dozen odd Chinese companies in the list were in Banking/Financial sector or in Oil, both of which are state monopolies. Whereas, competing countries like India have atleast 5 of its homegrown private players in the list.

Should the private sector have more consolidation or is there inherent problem in the government allowing only SMEs to grow while stunting the growth of bigger companies?