China Forum

The Chinese Communist Party feels the "Domino effect" from Google's pullout

The Chinese Communist Party feels the "Domino effect" from Google's pullout:

Go Daddy stops playing with Chinese companies

I have been deliberately reticent about Google's announcement of its pullout from China until a more definitive picture emerges.  Now, after Google's redirection of its web traffic from China to its Hong Kong search site and the Chinese firewall blockage of the same,  I feel compelled to provide a layman's analysis of this decision and its impact on the growth of the internet in China as well as the hope for greater freedom in the Middle Kingdom.

Firstly, I applaud Google and Go Daddy for standing up for its principles in lieu of short-term profit.  It is often difficult to do the right thing rather than to do things right.  This is especially valid in a rapidly growing marketplace like China that does not have much regards for the right thing.  The media, and increasingly internet media, is under tight scrutiny by the Chinese Communist Party (CCPC), for it can stray popular opinions on a variety of sensitive subjects (e.g., Tibet, Xinjiang, Systematic corruption, endemic public inefficiency, Taiwan, Hong Kong, religious freedom, activism and many more) that are not favorable to the ruling regime and its cronies.  Matter of fact, if information were to flow freely within China, it is estimated that the tyrannical powers that control the Chinese economy, government and society will collapse within 12 to 18 months.  This may be a good thing for the populace who are exploited within the current socio-economic system but is detrimental to the ruling class and its colluding partners.  Therefore, CCPC will and must employ the full might of its resources, including but not limited to its information ministry, state security apparatus and other departments to control directly and/or to intimidate all service providers (foreign or domestic) to toll the party line and to provide otherwise confidential and personal information about their users.  Case in point: the arrest and prosecution of a Singaporean journalist for subversion through his personal emails via Yahoo in 2005.  To the self-serving dictatorship that reigns over China today, these and other tactics are an invaluable tool to its command and control as well as self-survival.  It will not relinquish this power.

What's not surprising is the lack of support or sympathy for Google and Go Daddy’s courageous stance from the American, European business communities and governments.  Microsoft, whose email accounts were breached, and Apple Computers, who prided itself with an anti-iconic image, have been silent on this subject, while multinational companies such as GE, PG, JJ and GM have actually denounced Google for standing up for its principles against the wishes of the CCPC.  Though China has a long and prosperous history and a rich culture, it is not exempt from the rule of laws, universal justice, human rights and dignity.  CCPC is a political party that does not have the support of 1.5 billion Chinese and is not representative of the citizens there.  Its ability to grant favorable access to these companies into its rapidly emerging marketplace with the potential of huge profit can not be deemed just cause for denial of basic rights to its citizens.  If the cowardly management or political leaders in the US and Europe are not willing to stand up for their long-espoused principles (e.g., "Life, Will and the Pursuit of Happiness"), I hope that they would have the decency not to decry the brave action taken by Google and Go Daddy this week.

In the words of Thomas Jefferson almost two and a half century ago:

  " ...  We hold these truths to be self-evident; among them, life, liberty and the pursuit of happiness....... We freely pledge our self, wealth and families to this course ......"

The question remains; Do the founding principles of America still hold true for Americans or does the opportunity to gain economically trump these principles after two and a half century?

Has Americans evolve to a state where self-perservation and obession with material comforts, including but not limited to watching football, baseball and basketball as well as video games on large screen HD televisions, transcend over the values that made this nation into a global superpower and the envy of the civilized world?

Is there the courage and strength to stand up against tyranny and the suppression of free will, liberty and human dignity that form the basis for the US Constitution and our Bill of Rights?

As for me, I say Kudos to Google and Go Daddy.  May God guide their path forward and bless them for doing what's right.   

The Chinese Communist Party feels the "Domino effect" from Google's pullout

The Chinese Communist Party feels the "Domino effect" from Google's pullout:

Go Daddy stops playing with Chinese companies

I have been deliberately reticent about Google's announcement of its pullout from China until a more definitive picture emerges.  Now, after Google's redirection of its web traffic from China to its Hong Kong search site and the Chinese firewall blockage of the same,  I feel compelled to provide a layman's analysis of this decision and its impact on the growth of the internet in China as well as the hope for greater freedom in the Middle Kingdom.

 

Firstly, I applaud Google and Go Daddy for standing up for its principles in lieu of short-term profit.  It is often difficult to do the right thing rather than to do things right.  This is especially valid in a rapidly growing marketplace like China that does not have much regards for the right thing.  The media, and increasingly internet media, is under tight scrutiny by the Chinese Communist Party (CCPC), for it can stray popular opinions on a variety of sensitive subjects (e.g., Tibet, Xinjiang, Systematic corruption, endemic public inefficiency, Taiwan, Hong Kong, religious freedom, activism and many more) that are not favorable to the ruling regime and its cronies.  Matter of fact, if information were to flow freely within China, it is estimated that the tyrannical powers that control the Chinese economy, government and society will collapse within 12 to 18 months.  This may be a good thing for the populace who are exploited within the current socio-economic system but is detrimental to the ruling class and its colluding partners.  Therefore, CCPC will and must employ the full might of its resources, including but not limited to its information ministry, state security apparatus and other departments to control directly and/or to intimidate all service providers (foreign or domestic) to toll the party line and to provide otherwise confidential and personal information about their users.  Case in point: the arrest and prosecution of a Singaporean journalist for subversion through his personal emails via Yahoo in 2005.  To the self-serving dictatorship that reigns over China today, these and other tactics are an invaluable tool to its command and control as well as self-survival.  It will not relinquish this power.

 

What's not surprising is the lack of support or sympathy for Google and Go Daddy’s courageous stance from the American, European business communities and governments.  Microsoft, whose email accounts were breached, and Apple Computers, who prided itself with an anti-iconic image, have been silent on this subject, while multinational companies such as GE, PG, JJ and GM have actually denounced Google for standing up for its principles against the wishes of the CCPC.  Though China has a long and prosperous history and a rich culture, it is not exempt from the rule of laws, universal justice, human rights and dignity.  CCPC is a political party that does not have the support of 1.5 billion Chinese and is not representative of the citizens there.  Its ability to grant favorable access to these companies into its rapidly emerging marketplace with the potential of huge profit can not be deemed just cause for denial of basic rights to its citizens.  If the cowardly management or political leaders in the US and Europe are not willing to stand up for their long-espoused principles (e.g., "Life, Will and the Pursuit of Happiness"), I hope that they would have the decency not to decry the brave action taken by Google and Go Daddy this week.

In the words of Thomas Jefferson almost two and a half century ago:

  " ...  We hold these truths to be self-evident; among them, life, will and the pursuit of happiness....... We freely pledge our self, wealth and lives to this course ......"

 

The question remains; Do the founding principles of America still hold true for Americans or does the opportunity to gain economically trump these principles after two and a half century?

As for me, I say Kudos to Google and Go Daddy.  May God guide their path forward and bless them for doing what's right.   

Second Act is more challenging than the first

Premiere Wen's speech to the Peoples Congress in March of 2010

Premiere Wen set some pretty ambituous growth and inflation targets for the Chinese economy for 2010 to 2015 during the Peoples Congress last week.  Will he pull off the "hat-trick" for the 2nd act after the global financial collapse of 2008?

Here are seven concerns that will affect the Chinese economy:

1)  Dealing with excessive liquidity

2)  Dealing with excessive property speculations and prices

3)  Dealing with Tibet and other ethnic concerns

4)  Dealing with endemic and systematic corruption

5)  Dealing with a chronic shortage of clean drinking water and a worsening ecological and environmental disaster

6)  Dealing with populist dissatisfaction of an inept, corrupt and tyrannical regime

7)  Competing against the US for supremacy in East Asia   

Each concern requires a near-herculean effort; conquering all seven will be epic for the Chinese leadership in the coming years.  Will China suceed?

How to profit from China's Money-led Diplomacy !

Chinese FDI with a catch

Cases of Chinese cronyism and corrupt practices as they relate to China's foreign direct investments ("FDI") in third world countries may be embarrassing but are not unique or exceptional.  Yes, Chinese officials maximize their advantages by exploiting human weaknesses (e.g., greed, lust, gluttony, etc ...) of administrators from Africa, Philippines and other yet-to-emerged countries with vast nature resources.  Its motivation has been clearly documented in news articles such as the above linked report from the New York Times.  I neither condone the perpetuation of corrupt practices from ill-moral Chinese officials, most of whom are indoctrinated into corruption and immoral practices by way of the Party School reinforced through the Cultural Revolution and its aftermath nor care to elaborate more of their well exposed cases.  I prefer to highlight China's strategic acquisitions and investments overseas and how one can benefit from them.

Apart from China's vast needs for resources (e.g., oil, natural gas, iron-ore, copper and other industrial metals as well as commodities), its industries need innovations and established best practices to compete and grow in the coming decades.  The global financial crisis has demonstrated to Chinese industrialists and officials that they can no longer depend on exports and rapacious demand of US and EU consumers for their low-cost and medium-quality goods spewing out of their factories over the last decade and a half.  They further see that world class companies (e.g., Toyota, IBM, Apple, Research in Motion, Exxon, Nestle Foods, Goldman Sachs and others) not only survive economic downturns but gain market share, customers and earnings while lesser competitors fall down.  It is not size or dominant market position that enables a superior competitive advantage but an emphasis on innovations, the ability to provide greater customization, quality, value and enhancements that target the unmet or soon-to-be discovered needs of customers.  Apart from the traditional 5 Cs, 4 Ps and 6 forces that B-school teaches its MBA students, innovative companies anticipate market-needs at the customer level and create products and/or services that are tailored to their audience.  Its one part science and three parts art!  Since this is not a discussion about creating a dynamic and innovative culture within learning organizations, I will focus on China's needs and opportunities to benefit from them.

A simple SWOP analysis will yield clearly defined sectors where China can compete effectively in the coming years and decades.  One needs only to focus on its automotive, consumer electronics (e.g., smart phones and portable internet-enabled devices), healthcare, professional education and financial services to understand its enormous growth and earnings potential.  In terms of applying industry and cross-industry best practices, innovations and advancements (both incremental and quantum), Chinese companies lack essential resources, capabilities and building blocks.  As leading and secondary Chinese companies engage in fierce battles to compete both domestically and globally, suppliers, partners, investors and strategic customers (those who can support channels or add value in the distribution chain) will be highly valued.  It is noteworthy to add that many or all of the missing pieces are available in developed markets (e.g., US, EU and Japan).  This is a great formula for a new generation of cross-boarders M&A.

In my next posting, I will highlight several sectors and Chinese companies that can benefit from either strategic alliance or investment with foreign parties.

US private investors to benefit from China's RMB 4 trillions stimulus program

 

Foreign investors preparing to partake in China's growth

Most foreign investors and business stakeholders are preparing to partake in China's massive stimulus program by investing into commodities driven businesses and/or producers.  The obvious plays such as Rio Tinto or selective offshore/on-shore oil producers have been well explored.  So where are the hidden or soon-to-be exposed opportunities ahead?

Stay tuned for my answer and updates on investment opportunities that can benefit from China's massive RMB 4 trillions stimulus program. 

Is Chinese Labor Laws a Deterent or a Benefit to Foreign Investors?

Baker & Mckinzie's Analysis of New Labor Laws in China

I feel compelled to disagree with the distinguished Mr. Lau, Vice-Chairman of the Federation of Hong Kong Industries and the many foreign invested manufacturers doing business in China.  It seems that their only competitive advantage and business strategy is to minimize labor cost at the expense of building a viable and differentiated franchise.  Yes, Chinese workers are no longer the cheapest; that ignoble distinction has been passed on to Pakistani and Bangladeshi who now earn roughly 70% of that of Chinese workers.  Moreover, compensation for long term service does not add immediately to a company's bottom-line!  That's no doubt that Hong Kong and other manufacturers will have to pay more to retain Chinese workers.

The real debate should not be about the incremental cost of employing a worker but about creating a skilled workforce that is both competent to meet the needs of a rapidly changing marketplace and is stable enough to create a viable business franchise.  I am reminded of once upstart manufacturing-focused companies such as Honda Motors, Sony, Acer Computers, Samsung Electronics and Johnson Electric Motors (HK) which were able to create successful businesses from leveraging the talents and creativities of their respective highly skilled, well-respected and deeply-loyal workforce.  These revered companies compete not by slashing workers' pay or compensation but by creating differentiated value that meet the needs of their targeted customer groups.  Instead of complaining about meeting a very minimal standard of employee compensation for long-term services, Hong Kong originated manufacturers and other foreign investors should learn from the Honda and Sony paradigm and focus on building sustainable business franchise by leveraging the immense talents and largely untapped innovativeness of the Chinese workforce.

Are US investors giving up on China?

Morgan Stanley sells its strategic assets in China

Though it should not surprise me to learn that Morgan Stanley is planning to sell strategic assets purchased less than 4 years ago in Shanghai, China, I am somewhat disappointed to see the low level of commitment demonstrated by US investment bankers in their self-declared "target-market".  Less than 18 months ago, CEOs of Morgan Stanley, Goldman Sachs, Citigroup and other global-scaled investment banks as long as the largest private equity companies (e.g., Carlyle Group, Blackstone and others) were competing fiercely for a piece of the China economic miracle.  They along with their European counterparts were proclaiming that they were committed to their investments in China for the long haul.  By buying up "strategic assets" from trophy property-projects to pre-IPO equity stakes in various Chinese banks, American and European investment banks were gladly paying premiums for these assets, often at the bequest of Chinese officials.  Naturally, CEOs like John Mack of Morgan Stanley and Lloyd Blanfein of Goldman Sachs were eager to demonstrate their commitments to China and to build relationship with Chinese officials by paying more than market price for these assets.  It is ironic that they are abandoning China at a time when foreign investments and exports are plummeting at an unprecedented rate.  Since October of 2008, foreign direct investments have fallen by over 70% while exports are registering double digit decline for the first time since Chinese market liberalization in 1985.  As Chinese property and stock prices have dropped by over 50% and 75% respectively in the last 12 months, selling off assets now is not financially prudent.  Moreover, the desperate moves by Morgan Stanley, Goldman Sachs and other investors will be interpreted by Chinese officials as an coordinated act to devalue asset prices of strategic sectors (e.g., banks, industries and property), to embarrass its regime and to destabilize their rule on China itself.  Since greed drove these executives and their investments into China during the super boom period from 2001 to 2007, fear and self-survival will bring about their exit in 2009 and 2010. 

Regardless of anyone's ambition, God's will reigns supreme!

Are Chinese banks poised for a collapse?

Why are Chinese banks at risk?

The writer makes a good point as to the socialist responsibilities predicated on the Chinese Communist Party (CPC) and its expressed policy to bail-out Chinese banks endangered of financial collapse.  Since 1999, it has established a national assets management company to take-over and sells bad debts (non-performing loans) to private and foreign parties. As such, it has portrayed a public image of addressing this enormous and pervasive problem burdening the Chinese banking system.

The sad truth is that though bad debt is being addressed openly, the number, RMB-value and percentage of bad debt and risky loans have increased dramatically over the last five years.  In part, the national drive for growth (investments, infra-structure, real estate and industry) and the pride of creating a prosperous image to support the Olympics have driven rampant and high-risk loans (exceeding RMB 5 Trillions) that can not be repaid, non-performing and will go into default.  Unlike the nature and terms of bad-loans/mortgages and their risky derivatives (debt-swap-securities and collateralized debt obligations) which are publicly scrutinized, non-performing loans in Chinese banks are accounted for as tangible assets at the full face-value.  There's no accounting practices for write-offs or establishing their true value (i.e., mark to markets accounting).  Politically, it is tantamount to suicide for a bank manager to propose a write-down of assets within its books.  There's no incentive to value loans according to the market and strong reasons to hide losses.

It seems that the CPC's hope is to sell equity in its banks to foreign investors and to transfer its bad-debt problems to them accordingly.  In the euphoria of foreign investors chasing growth in China, many brought unwittingly into this scheme.  Unfortunately for them, the awakening comes at a great economic cost/loss.  Any debate that the CPC will come and save foreign investors from huge financial losses in Chinese banks is but wishful thinking.  There's an irony in this situation:

As our free-market and industrialized nations collaborate to save theirs banks and the global financial markets, it is the socialist nations that will abandon their banks and foolish investors (foreign and domestic) that believe in intervention.  It is indeed extremely difficult to distinguish between free-market and socialism!

How Private Equity investors can find and secure great deals in China

Caryle got slammed for Xugong China

As the Carlyle found out, finding a good deal and securing a good investment in China are not always the same thing.  Grant you, Xugong Construction Machinery Co. is not selling its equity on the cheap.  By anyone's calculations, Carlyle was willing to pay a big premium for a large equity stake in this company.  The problem lies not in foreign ownership of one of the largest construction machinery companies in China.  The Chinese government saw no strategic and long-term value in having Carlyle invest into Xugong.

The biggest obstacle confronting foreign originating PE sponsors (especially those from the US) is their incessant pursuit of short-term financial gains without a thorough understanding or regards for longer-term value expansion (non-economic).  So much of the assets and intangible good-will enjoyed by the management of Xugong stem from its privileged position in the Chinese marketplace which has always been protected from external competitors.  The largest Chinese construction companies (e.g., China Overseas, China Construction and others) buy exclusively from Xugong.  Again, Chinese enterprises work together (buying and selling to each other), driven by shared political influences and governance (directed by the CCPC).  When a foreign PE sponsors like Carlyle come-in and negotiate with the management of Xugong for a substantial position in the company, it does not benefit other stake-holders and disturbs the nepotistic collaboration endemic to the Chinese political and socio-economic system.  Unless, the major stakeholders are satisfied, foreign originating PE sponsors will not.

Fortunately, successful PE investors including the Jordan group and Baird Asia have learned to identify other stakeholders when investing in Chinese enterprises.  They epitomize what can work for foreign originating PE sponsors in China.  Most importantly, they are learning from some very savvy and experienced Chinese investors (e.g., Cheung Kong, Henderson Investments and Kugami).  As Chinese middle market companies are trying to move up the value chain in face of intense competition at home and abroad, there will be good opportunities for PE sponsors which can deliver strategic or longer-term value (e.g., market access, closer customer relationship, innovations and management-know-how/expertise) along with monetary benefits.  Though Carlyle is rich and well-known, it is not and most likely will not be the most successful PE sponsors in China.

For my money, I like how the Jordan Group approaches its China investment strategy.  

Earthquale wipes away 1/4 of China's growth

Men succumb to the power of nature

Last week's earthquake in Sichuan, China will likely wipe away 1/4 of its economic growth in the 2nd half of 2008.  Apart from human losses and infrastructural destruction (e.g., roads, dams, bridges and telecommunication), the full impact of this catastrophe will not be felt for another 3 to 9 months.  Then, China must allocate resources to rebuild its infrastructure and telecommunication systems to access its rich natural resources (e.g., natural gas, coal and petroleum) of this region.  More importantly, this refocusing of resources coincides with the end of the Olympics and the realization that all of its "white elephant" projects will become non-productive assets which will depress the value of real properties in and around Beijing.  The result of which is that China has miss-allocated too much of its resources into building expansively and rampantly to accommodate the Olympics and attributed insufficiently to expand its base of renewable energy source capable of sustaining its economic expansion.  Given no choice, the Chinese government must import and burn more oil (mostly imported from Asia and the Middle East) and coals (high sulfur content), furthering contributing to inflation and untenable pollution.  Yes, pollution also has an economic cost and will further dampen growth and will incite greater social unrests and health issues across China.

The picture ahead for China is extremely ominous.  One more major upheaval may lead to widespread public protests from its citizens who are increasingly dissatisfied with an inept and corrupt regime.  More importantly, what's the impact for foreign investors who seek a healthy return on their investments in China? 

Stay tune!