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Enter the dragon ... at your own
risk
By Gary LaMoshi
HONG
KONG - Hard on the heels of the United Nations
Conference on Trade and Development (UNCTAD) report
showing China receiving nearly half of all foreign
direct investment in Asia comes consultant A T Kearney's
annual FDI Confidence Survey (See China overtakes US in FDI stakes,
September 25) revealing that China has replaced the
United States as the world's favorite destination for
foreign investors.
The lessons of 1997 in Asia
and the current corporate shenanigans in the West seem
to apply everywhere except in the Middle Kingdom.
China's seduction of foreigners with money to burn
enters its third century with waiguoren no closer
to the jackpot than back when garment moguls dreamed of
adding an inch to every Chinese shirttail.
Consider for a moment what the A T Kearney
survey means. Executives of the world's 1,000 largest
companies with US$10 million ($100 million, $1 billion
...) to invest outside their home country believe they
can make a better return in China than in the US, Japan,
Brazil, India, the United Kingdom or Mexico. This belief
grows even though the most successful example of Western
investment in China remains the opium trade.
According to A T Kearney, the US fell from the
top spot it held since the survey's inception in 1998
because of "slow and uncertain economic recovery,
stock-market uncertainty, corporate scandals, and
continuing concerns about homeland security". These are
all legitimate concerns, and shareholders should applaud
such caution among corporate decision makers.
Bull in the China case
The survey
continues: "The key factors driving China's impressive
boost among investors undoubtedly include its relatively
stable political environment, robust economic growth,
recent entry into the WTO, and its successful bid for
the 2008 Olympics." These assumptions invite greater
scrutiny.
In China's "relatively stable
political environment", the favorite Beijing parlor game
is guessing which posts President Jiang Zemin will keep
and which he'll give up. He is required to step down as
president; his anointed successor Hu Jintao is virtually
unknown outside the inner circle of Communist Party. Of
course, the real power lies in the party and the army,
and no one knows whether Jiang will surrender his
leadership of either.
The delay of the Communist
Party Congress from September to November appears to be
an indicator of wrangling over the Jiang's future; in
the absence of any transparency in China's political
process, observers can only guess. If Jiang moves aside
without a fuss, it will mark the first orderly
leadership transition in history of the People's
Republic.
Also in this "relatively stable
political environment", Premier Zhu Rongji will also be
replaced. Zhu has been the driving force behind both
World Trade Organization (WTO) membership and reform of
the sclerotic state sector. Despite those glossy
magazine cover stories about millionaire entrepreneurs
and Quentin Tarantino's love affair with Beijing
nightlife while he makes his latest movie there,
abysmally inept state companies still overwhelmingly
dominate China's economy. Fixing state enterprises -
whether through restructuring, sale (to those eager
foreign investors), or closure - remains a political and
social minefield that could put a real dent in "robust
economic growth", assuming you put any more faith in
those figures than a WorldCom income statement.
The impact of WTO membership is more illusionary
than real. WTO members - think Japan, South Korea, or
even the US - erect formidable barriers to restrict
outsiders in their markets. Given its struggling state
sector, growing unemployment, and political control of
the economy, there is no reason to assume China will act
differently. With or without the WTO, China will open
its markets as it suits China.
Five ring
circus
Mentioning Beijing's successful Olympic
bid as a reason to foreign investment in China must be
someone's idea of a joke. Yes, there may some
opportunities for foreign companies to bid on the $10
billion of improvements in areas ranging from pollution
control to construction that the government has promised
to make the games a success. But it's hard to imagine
Western firms grabbing a significant piece of that
action; Hong Kong companies have plenty of experience
building things in China and plenty of guanxi
with the officials responsible for letting the
contracts.
Moreover, the Olympics will make
Beijing a far less inviting place to live and do
business. The grand scale of construction will be
disruptive. As with celebrations for the 50th
anniversary of the PRC in 1999, expect plenty of
restrictions on public activities of all kinds ahead of
and during the games, as China crafts the right image to
present to the world. The summer of 2008 will be a great
time to be anywhere but Beijing.
The A T Kearney
report does acknowledges a number of negative factors
for FDI in China, though 46 percent of the surveyed
executives are more optimistic about prospects there
than a year ago, while just 6 percent are more negative.
One negative is a "shaky financial system".
Somehow, China's uncounted and untreated mother lode of
banking-sector bad loans and its rigged stock markets
are less troubling to overseas investors than the
handful of US scandals that are being vigorously
addressed.
In fact, one factor contributing to
the decline in US attractiveness for investors is not
the fact of corporate scandals, but concern over fixing
them. Apparently, corporate executives are more
comfortable with a system that exposes them to being
cheated while offering them opportunities to cheat than
one that closes loopholes in an effort toward honest
accounting and good governance. If that's the case, then
China is their fantasy island.
Cover your
assets
The survey acknowledges China's
"inadequate legal and regulatory regimes". To put it
mildly, rule of law in China is in the developing
stages, while corruption remains rife. Investors can't
rely on legislation or courts for protection; they have
to rely on political cover.
In 1997, Hong Kong's
Peregrine Asset Management was the largest investment
bank in Asia outside Japan. Peregrine's leader Philip
Tose had pulled the firm to that position by cozying up
to the region's political leaders, particularly those in
Beijing and similarly ruthless dictators. Tose
contended, as many of the participants in the A T
Kearney seem to, the great thing about China was its
lack of freedom. Countries like the Philippines and
India could never hope to catch up because of the mess
democracy makes, Tose famously said in a speech at
Harvard during the foreign investor frenzy over the
emerging tiger economies.
Confident that being
on the right side of the Suharto clan assured success, a
phenomenon known throughout the region as crony
capitalism, Tose bet the bank on an Indonesian taxi firm
called Steady Safe, where the strongman's daughter Tutuk
Suharto was a director. Even before the Smiling General
fell from power, with the regional economic crisis
biting, Tutuk decided to let Steady Safe fail. Peregrine
went bust.
In the coming year, China's politics
at the center, always mysterious, will be a particularly
uncertain. Moreover, Beijing's iron grip on regional
leaders has been broken, so investors have to be more
careful about where they get their cover.
At
best, that means more palms to grease. At worst, it can
mean getting whipsawed in a catfight between local and
Beijing mandarins. If the key politico decides he's not
content with his son-in-law as a director, but instead
wants the whole company, investor options are walk away
or go fight City Hall (or the Great Hall of the People).
While Premier Zhu has improved the climate for
foreign investors, the weather in China can change
overnight. Some might argue that China's need for
foreign investment to fuel growth and maintain
employment will keep it from acting rashly.
It's
just as reasonable to argue that foreign investors'
enthusiasm will make China's new leadership more boldly
cavalier, especially as regional FDI competition
falters. Vietnam, the only other East Asian country to
experience FDI growth last year, is even worse than
China on protection for investors, with a domestic
market 6 percent as large. A $1 billion digital video
disk (DVD) plant, such as Sony announced last week it
will build (in a country where 90 percent of those
products are counterfeits), or even a 30 percent
financial stake in a listed company, is tough to salvage
if the winds shift.
While China, with its cheap
labor and vast domestic market, remains the dream
destination for foreign investors, executives ignore
evidence and history that show doing business there is a
nightmare. In the ongoing FDI party in China, expect the
string of many unhappy returns to continue.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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