I did a post yesterday touting a podcast by Jing Ulrich on China’s economy.  In that post, I referred to Ms. Ulrich as belonging “on the very short list of those discussing China’s economy who actually know whereof they speak.”  In response to that, I received the following comment from “Michael RightSite”:

Hi Dan,

Since the list is short, can you name some others who are worth listening to? (Granted that we all have our biases).



To which, I responded as followings:

I know I will be leaving people off this list, but generally, it is those who actually have advanced degrees in economics and/or those who actually study/report on China’s economy who know the most.  That should not be a surprise.  And I want to stress that I do not necessarily agree with any of these people, but I do respect their analysis.  Having said all this, here goes:  Michael Pettis, Patrick Chovanac, Tom Orlick (who writes for the WSJ), Elias C. Grivoyannis.  I am sure there are a lot more out there working at universities or investment banks, but these are the ones who write a fair amount and with whom I am familiar.  Would love to hear about more though.

I really would, as I know that I am leaving out a number of very good economists who often write about China (in fact, there is one who I frequently read, but whose name escapes me right now).  So it would be great if you, loyal readers, would in the comments list out the economists that frequently write about China’s economy, in English, and do so from a position of knowledge, not mere uninformed speculation.  Thanks.

UPDATE:  The person I read, but whose name escaped me — but has since returned, thanks to a comment below — is Andy Xie.  I definitely also should have mentioned Nicholas Lardy, especially since my daughter is reading his excellent book, Sustaining China’s Economic Growth after the Global Financial Crisis for her emerging economies course and I read large swaths of it when she left it at my house for a few days.

A manufacturing client of ours for whom we are in the process of setting up a WFOE in China sent me this article and asked me what I thought of it. You regular readers just need to read the article to know.

The article comes from the AFP wire and is appropriately entitled China warns foreign polluters. The thrust of the article is that China issued a warning to foreign companies in China that “it will impose equally harsh penalties on domestic and foreign” polluters. This warning came after inspections “earlier this year found “Unilever China and the China branch of Hitachi Construction Machinery Co. were discharging wastewater with higher chemical content than permitted.” An official with China’s State Environmental Protection Administration expressed his surprise at finding “both companies had environmental pollution problems since they were the only two foreign companies selected at random for the inspection” and he vowed to “strengthen our supervision.”

The article quotes “analysts” as saying “such a warning was likely to be driven by rising domestic concerns that foreign polluting industries were finding their way to China, thanks to lower costs and the country’s pressing need to create jobs.” Andy Xie, a well known economist out of Shanghai, is then quoted as saying, “There is a widespread concern that international polluting industries are moving to China.” Xie goes on to say “it is no longer an urgent priority to attract foreign funds, just as the need to create jobs is felt less keenly, and therefore China now is able to say no to this type of industry if the cost is deemed too high.” Xie sees these recent actions as a “signal that China no longer welcomes foreign industries which provide only limited job opportunity or low technology.”

I completely agree with Mr. Xie.

China has always and will always (at least for the foreseeable future) enforce its laws more strictly against foreign companies than against domestic companies. I am constantly writing about this not to complain about it, but simply to point out the reality. Just because your Chinese domestic competitors are getting away with something does not in any way mean you as a foreign company will be allowed to do so.

Beijing is also now at the stage where it is pretty much neutral about all but the largest foreign companies remaining in China. I am not saying it is neutral about foreign direct investment (FDI) in general, but I am saying that it really could not care less about whether your individual business stays in China or goes. And if your business is a polluter, it actually would probably rather see you leave.
Lastly, going after foreign companies is politically popular.

A year and a half ago, I did a post, entitled Is China Going Green? in which I noted the following:

We are aware of a large Fortune 500 retail company that is opening units in China that meet or exceed the toughest United States environmental laws. I estimate this company’s environmental sensitivity will cost them at least an additional $25,000 per unit, yet I am firmly convinced this company is doing the right thing. This company’s actions make sense because the odds are good that China’s environmental laws and enforcement will get tougher over time, and building environmentally sound units now will almost certainly cost less than having to retrofit existing units a few years from now. On top of this, people often get very emotional about the environment and I can see Chinese citizens getting very angry at a foreign company whose units in China are less environmentally sound than their units in the United States or elsewhere. This is obviously even more likely to be the case if there were to be some sort of environmental disaster.

Bottom Line: If you are doing business in China, you should obey China’s laws, its environmental laws.

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 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 (SOE) 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 sector and how the private sector is growing at a much faster pace because of this.  I am often asked why China is not moving faster in privatizing its large state owned enterprises. 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 toward entrepreneurs as “not encouraging, not openly promoting, and not being quick to ban.