A China That Can Say "Whatever."
China Economic Review is just out with an article by co-blogger Steve Dickinson entitled,"Calling their bluff." The subtitled explains the article: "Foreign investors are queuing up to criticize China, but Beijing knows they aren't about to leave, says Steven M. Dickinson."
Steve starts out by citing to the recent rash of foreign companies criticizing China government policy towards foreign investment and asks whether this suggests "foreign investors, tiring of China, will turn their attentions elsewhere?"
Steve notes how the "current unease" by foreign companies stems from Beijing's having become "more willing to intervene in the economy." China justifies its intervention by "citing the success of China in weathering the storm of the world economic crisis." Steve sees this intervention, which is usually to the detriment of large foreign companies, as the "real China," which is going to keep foreign companies in line:
To put it more simply, foreign MNCs are being forced to confront the "real China." The China that many of them first encountered, before the WTO-mandated opening of the doors to foreign direct investment, was a sanitized version of commerce. Foreign investment in the country was limited to a handful of special economic zones where local officials welcomed overseas companies as a source of employment, funding and technical information. These investors operated under special regulatory regime, carefully isolated from what was going on outside.
Moreover, during that period central control over foreign investment projects was weak. Investors were often able to ignore national law as irrelevant to their activities in China.
The cozy arrangement began to slip away in 2006. In return for wider market access, Beijing now demands that foreign investors operate by its rules. The days of operating outside the Chinese legal and regulatory system are over - the dream that China had become "more capitalist than the capitalists" and was a paradise free of intrusive government regulation has been exposed as hollow.
What foreign MNCs now encounter is the same business and investment environment faced by all private firms operating in China, characterized by: a centrally planned economy; general hostility to private enterprise; SOEs benefiting at the expense of private business; extensive government intervention and regulation; complex regulations that constantly change direction in unpredictable ways; and political objectives taking precedence over economic objectives.
These conditions are difficult for Western companies to accept, but their complaints to Beijing are and will continue to be ignored. Beijing is acting according to its master plan and it is not going to be swayed:
None of this occurs by accident in China - it is all part of a carefully devised government policy. The Chinese believe that the economic growth and stability that attracted foreign investors to the country in the first place is a direct result of the centrally planned and highly regulated system. They find it illogical that foreigners would criticize the very policies that have created an investor-friendly environment.
Therefore, when confronted by these expressions of discontent, officials have made it very clear that they do not intend to make any changes. Their position is that foreign investors must come to China on China's terms. If these terms are unacceptable, the foreigners can stay home or go home.
Beijing does not take seriously the leaders of large foreign companies that have started criticizing China and threatening to invest elsewhere. "Beijing sees this threat as a bluff" as it "believes foreign companies need China far more than China needs them, and so the country's attractiveness as an investment target far outweighs its disadvantages."
Steve goes on to point out that though China "maintains significant barriers to foreign investment, it is nevertheless by far the most open investment environment in Asia and among the most stable." It also offers large numbers of workers, a well developed factory and retail construction market, and a reliable and cheap energy supply and modern transportation infrastructure that "allow for production and retail projects in China on a scale far larger than any alternative in the world." It is also "home to a rapidly growing yet relatively underserviced consumer market for the increasing number of foreign firms that want to sell their goods domestically."
Steve concludes his article by noting how China's leaders have called the MNC's bluff:
China's leaders are confident the country will remain a primary investment target and foreign threats to move their operations elsewhere are simply a bluff. And so, with no small degree of nonchalance, they have called it.
I tend to agree. Companies have and will continue to complain about China and there will be some companies that move some operations elsewhere, but unless China tightens the screws against foreign companies considerably more than it has to date, I do not see foreign investment into China slowing down much, if at all.
What do you think?
Comments (13)
Read through and enter the discussion by using the form at the endoutcast - September 10, 2010 2:40 AM
The hostility towards private enterprise will change when China's domestic companies become developed enough to clamor for more recognition.
G.E. Anderson - September 10, 2010 8:58 AM
I agree there isn't much the MNCs are willing or able to do at this point. They need to be in China, and as long as China doesn't start nationalizing foreign businesses, it will still be an essential market for the foreseeable future.
That said, I don't think China's leaders believe their own hype as much as the foreigners do. Anyone can look back 30 years and see nothing but upward sloping lines, but I believe China's leaders still aren't as ready to extend those trendlines into the future as foreigners are. They understand the nature of the powderkeg on which they sit. At some point, China's inverted demographic pyramid will exert a cost, and China's leaders know this. What they don't want, however, is for foreigners to fully grasp this reality.
So, yes, China's leaders can act indifferently toward foreign business now, but it is only because they understand the kind of short-term thinking that motivates foreign managers.
G.E. Anderson - September 10, 2010 9:04 AM
I would like to add to my previous comment that, while China's impending demographic problems are very real, they will only cause major social upheaval if China doesn't change policies. If the CCP becomes less paranoid in the interim and decides to liberalize, then crisis is still very avoidable. What this means is that MNCs who take the risk to invest in China now, will continue to enjoy a payoff -- IF China adopts the right policies in the future.
greg - September 10, 2010 9:27 AM
The recent chorus from the foreign MNCs about China's business environment is really just a tactics to exert pressure on Chinese government to continue the decades-old policy of treating foreign investments more favorably than the domestic companies (I'm generalizing, I know).
In many ways, this is not unlike the visa situation that CLB had discussed extensively in the last few years when China started to tighten and enforce the regulations. Many foreigners were previously operating a business in China without the appropriate legal status and could get away with now found them increasingly scrutinized. Where the foreigners and foreign businesses were welcomed with open-arms, now China has become more selective.
Does this mean China is less friendly and become more hostile to the foreigners and foreign investments?
There are more foreigners living, working and studying in China these days than ten years ago; foreign investments are in more sectors of the economy and in more corners of the country.
Whereas a decade ago, working for a foreign MNC was considered as the most prestigious job in China, today these same MNCs have to compete with China's SOEs and best private companies for talents and it's the Chinese companies that top the rank of "most-coveted companies to work for" list.
10-15 years ago, most cities would roll out red-carpet for and give huge tax-breaks and subsidies to just about any foreign investments that came their way. Today, at least in the coastal region, they are more selective. The CEO of Hon Hai, Terry Gou, complained about the little to no support he got from Shenzhen government earlier this year when a spate of employee suicides had roiled the company. It is believed this is part of the reason that Hon Hai accelerates the move to inland cities where he can still more huge subsidies and royal treatment.
Over 20 years ago, fresh college graduates from the US teaching English in China were treated as "foreign experts." But then again, much of the country were closed to foreigners and it was a torture to travel from BJ or SH to other parts of the country.
The world is fast changing, China especially. What was considered "normal" is actually not normal, and we're getting normal these days.
And this happens not just at the personal level and business level, but indeed, at country level. China has not become more "assertive" in the international arena, it just starts to behave like a country that it is, albeit still awkwardly sometimes.
Twofish - September 10, 2010 6:49 PM
Also you have to look at things from an international context.
China has gotten a lot more skeptical about free enterprise and laissez-faire capitalism because *EVERYONE* has gotten a lot more skeptical about free enterprise. If you go to China and talk about how the government should relax regulations and let businesses alone to just make money, you'll get a chilly reception, but that's better than what you will get if you say the same thing in the US or Europe.
In some ways, the Chinese government can demand more from foreign businesses because with all of the screaming about the actions of the Chinese government, China still is a better place to do business than a lot of other places. China is one of the few places in the world that you can say that you are a corporate executive or investment banker without having to apologize. It's that way because in general the economy is in decent shape, and people are just not in the same sort of bad mood that they are in the US or Europe.
Also, if you look at what the Chinese government is doing, they don't seem really unreasonable. It basically boils down to the idea that foreign companies should follow the same rules as local companies, that government has a major role in the running of an economy, and that foreign companies need to be prepared to make a long term investment in China rather than just taking the money and running away the second something cheaper appears. And the Chinese government is still pretty friendly to foreign companies. Yes the government may shrug, they won't do exactly what you want, but the government will at least politely listen, and they won't be ashamed or embarrassed to be seen shaking your hand.
If you go to any sort of public gathering in the US or Europe, say that you are a senior executive and you start talking to a crowd about the wonders of free enterprise, you'll be lucky if you don't get spit at before they slam the door in your face.
I found a funny joke
1949 - Only communism can save China
1979 - Only capitalism can save China
1989 - Only China can save communism
2009 - Only China can save capitalism
Twofish - September 10, 2010 7:03 PM
One reason that China has done so well in the last year is that the Chinese economy is set up to create massive stimulus. The US government can only influence the economy indirectly. Either through monetary policy (cutting interest rates) or fiscal policy (increasing government spending). All of the bullets have been spent, the US can't lower interest rates any more, and there is no public support for increased government spending. China has a third lever, which is administrative policy. The government calls the banks up and orders them to lend, and calls up the major state-owned enterprises and orders them to hire people. Because of this, the Chinese government has basically policy options to deal with the recession that are unavailable to US/European government.
There is a school of economic thought that argues that what the Chinese government is doing is going to lead to long run economic disaster. The idea is that governments are incapable of efficient allocation of resources, and that the actions of the Chinese government are going to lead to long term problems that will lead to economic stagnation. This is reasonable viewpoint that might be right. However, the Chinese government's response to this economic viewpoint has been:
1) why should we believe you? The people that tend to subscribe to neo-liberal viewpoints are people that just didn't predict the massive economic mess that happened in 2008,
2) even if you are right in the long term, it doesn't matter in the short term. The problem with neo-liberal viewpoints is that the only economic solution that they've offered is to do nothing in the short run and have the economy collapse, with the view that it's going to rebuild itself in a better way in the future. This is just not politically viable. The crowds want jobs now, and if you don't give them jobs, then they are just going to push you aside and find someone that will at least promise them something different.
LL - September 10, 2010 8:03 PM
I think Steve makes the essential point, which is that as much as everyone complains about China, it is THE place to be and its receptivity to foreign business is probably better than anywhere else in Asia. I know of many companies that used to see Japan as their Asian base, but have moved to China because China is "easier."
M C - September 11, 2010 8:32 AM
This stance by China is entirely consistent with how the govt/CPC reconciles the elements of "socialist" and "market" in describing their economy. Their line is that they are importing concepts and capital from the West/capitalist countries and "making such things serve China. . ." Of course, any country would prefer to say they are doing the exploiting, rather than the other way around. However, it remains to be seen whether a state can successfully pick and choose the parts of a system (ie capitalism and western systems of rule of law) that it likes/are consistent with its party policies and ignore the others.
I can't help but visualize China as a vehicle on very precarious path to longterm social and economic stability - the CPC has thus far managed to navigate this unwieldy vehicle quite well. But this is a very long road and a single misstep could have massive implications for its economy and society. Leaders and their unwise policies - across history - have managed to undo centuries of progress in less than a single decade.
AT - September 11, 2010 6:34 PM
Great discussion, here. Personally, I still can't reconcile, as many seem to be able to do, the fact that
"What foreign MNCs now encounter is the same business and investment environment faced by all private firms operating in China, characterized by: a centrally planned economy; general hostility to private enterprise; SOEs benefiting at the expense of private business; extensive government intervention and regulation; complex regulations that constantly change direction in unpredictable ways; and political objectives taking precedence over economic objectives,"
with the conclusion that Mr. Dickinson reaches, or LL's assertion that China is "THE place to be" for global businesses. This has to be the first time in history that such a business environment has been given such a label. Either (1) the world has been turned upside down (and I'm prepared to accept that), or (2) what we have here is a heady dose of cognitive dissonance. If only we could lengthen all the coattails in China...
My money says that, unless China changes its policies or the global business world changes its approach, twenty years from now, a lot of people are going to be wondering what exactly they were thinking, as they look out upon their gutted companies.
It's especially odd to hear this since, in the US, economists and executives complain that businesses' unwillingness to grow and invest is a result of precisely the characteristics that Mr. Dickinson applies to China, without the worst of the lot. Why, then, are we so willing to pour billions into expansion in China? Is business, in fact, begging for a world where governments compete to see who can offer the strongest regulations? The most centralized planning? The most anticompetitive SOE's? The most unpredictable legal environment? Something is afoot, and, personally, I'm not too optimistic about how it will end. For sure, though, it's fascinating to watch...
tanner boyle - September 12, 2010 8:26 PM
[Quote] If the CCP becomes less paranoid in the interim and decides to liberalize, then crisis is still very avoidable. [/Quote]
What incentive does the CCP have to liberalize? What is the current trend line for CCP liberalization in the last three years?
Tim - September 13, 2010 2:32 AM
My biggest problem with this topic, which became popular on the cusp of the economic downturn, is that it is either execs from Fortune 500's bloviating on how recent restrictions have hurt their business (Immelt would be one of the most public) or the complaints are based upon Chamber white papers or perception surveys with little or no discussion on the specific areas of concern.
So let's at least look at the issues. Here is a quick run down of the EU Chamber's perspective:
1. Lack of regulatory transparency (short or non existent consultation periods on draft laws)
2. Retroactive regulations (new tax adjustments imposed that are retroactive to '08)
3. Implementation and enforcement of laws (often intentionally vague laws that are either not enforced or enforced on a discretionary basis)
4. Specific industry restrictions (including Telecom, Construction, Airline Computer Reservation Systems, Petroleum based products trading and Automotive)
5. Unprecedented licensing and certification processes that are possibly in violation of WTO agreements
6. Indigenous innovation policies that threaten to exclude foreign and foreign invested products or technologies in particular in government procurement bids
7. Exclusionary government procurement process, which, in practice, restrict even foreign-invested enterprises from serious consideration
Retroactive regulations have been an alarming trend that has recently been slapped onto many of the SAT’s circulars, while ‘Buy China’ and innovation initiatives are certainly biased against foreign products and services. But for the vast majority of foreign enterprises here, many of the complaints listed above are not new. 2008 saw the retraction at the State level of cross-the-board incentives for foreign investment in favor of targeted incentive programs (including new incentive programs such as those targeting offshore outsourcing service providers) but many of these incentive programs were reintroduced in 2009 at the local level (however tenuous they may be) and continue today.
If you focus only on the challenges of doing business in China instead of looking at the bigger picture it is rather easy to come to the same conclusions and then convince other foreign investors, politicians running for reelection and the mainstream media that China is closing it doors as it reaffirms their bias towards the country - a manufactured trend that snowballs with each new article written on the subject.
greg - September 14, 2010 10:11 AM
MNCs Talk Nice About China At ‘Summer Davos’
see http://blogs.wsj.com/chinarealtime/2010/09/13/mncs-talk-nice-about-china-at-summer-davos/
China Hand - September 23, 2010 7:53 AM
I think all of this is true and I think we will continue to see China vacillate between opening and closing to foreigners for quite some time. This is what most countries do until they become fully developed.