1	A Peek Behind the Bamboo Curtain of China Businesses* Presented to The U.S.-China Peoples Friendship Association June 1, 2008
2	A Peek Behind the Bamboo Curtain of China Businesses
3	Outline A survey of the complex array of Chinese business structures that span global traders to local entrepreneurs. The ascent of Chinese businesses and China’s accession into the World Trade Organization bring both global opportunities as well as problems. Background Diverse Types of Businesses From Global Trade … to Technology and Innovation … to Local Entrepreneurs Constant Change and Business Opportunities What’s the Problem? What’s China’s Future? (Y)our Future? Questions and Online Resources
4	Background “What’s past is prologue.” Shakespeare, The Tempest, Act II Scene I
5	Background (Cont’d.) China is possibly the longest continuous major civilization, maybe 5,000 years old Was a great nation and largest economy in the world that pioneered many innovative breakthroughs when Europe was in the Dark Ages, for centuries outpacing all others: Movable printing type, paper, paper money; horse harness & stirrup; iron casting, steel; compass, navigation scepter, stern-post rudder; gunpowder, fireworks, cannons, multi-stage rockets; tea, noodles; porcelain; clock; abacus; wheelbarrow; umbrellas, fans, kites; brandy and whiskey; the game of chess; etc. Long history of trade surpluses Today, return to normalcy?
6	Background (Cont’d.) Southern Song Dynasty (1127-1279): During time of Western Crusades – “Chinese Renaissance” of economic prosperity, artistic creativity, rapid technological advances, intellectual achievement … but also infighting, indulgences, and decadence that weakened it Yuan (Mongol) Dynasty (1279-1368): Genghis and Kublai Khan ruled the largest empire the world has ever known; visited by Marco Polo(?); developed trade with India, Arabia, Persian Gulf Ming Dynasty (1368-1644): Moslem eunuch Admiral Zheng He* was explorer, warrior, conqueror, diplomat, trader … and largely unknown: His “treasure fleet” (1405-1433), led by flagship “The Boat Bound for the Galaxy,” enabled China to become a 15^th century superpower Exacted tribute and opened up trade routes that helped develop the enduring taste abroad for Chinese porcelain and silk The spectacular and costly voyages came to an end Going to sea was made a capital offense … and Columbus tried to find the sea route to the riches of the Orient!
7	Background (Cont’d.) Qing (Manchu) Dynasty (1644-1911): After losing the American colonies, King George III sent Lord Macartney in 1793 to present Emperor with birthday gifts of glass, copperware, pottery, carpets, scientific instruments, clocks, globes, telescope, planetarium: Emperor had already been there, done that Lived in largest palace complex ever built, more wealth than all European monarchs combined, presided over flourishing arts and culture (and literary inquisition), provided peace and prosperity to over 300 million people during longest reign in Chinese history Rejected request to establish permanent British embassy in China and improve trading relations Famous quote*: “[We] possess all things. I set no value on objects strange or ingenious, and have no use for your country’s manufacturers.” Same old, same old … but what was he thinking ?! … later leading to the Opium Wars!
8	Background (Cont’d.) “I don’t care if the cat is black or white as long as it catches the mice.” Deng Xiaoping (1904–1997), head of China’s Communist Party and pioneer of “Socialism with Chinese characteristics” never held office but served as China’s de facto leader from 1978 to early 1990s
9	Background (Cont’d.) Timeline of Economic Reforms: 1972 – Richard Nixon visits China and Zhou Enlai signs the Shanghai communiqué 1973 – Deng Xiaoping’s “Four Modernizations” (agriculture, industry, national defense, science and technology) during the cultural revolution 1976 – Death of Chairman Mao; end of the cultural revolution 1979 – Opened China by permitting joint ventures 1980 – Established the first Special Economic Zone in Shenzhen 1984 – State Owned Enterprises issued shares 1989 – Tiananmen Square protests met with violent suppression 1990 – Shanghai Stock Exchange created; Shenzhen Stock Exchange in 1991 1992 – Deng Xiaoping famously called for introducing a market economy in China 1993 – The Company Law significantly diminished state’s interference in SOE operations and permitted private enterprises; issued accounting standards 1996 – Decentralized control of small and medium SOEs to provinces 1998 – Government eliminated communist party direct SOE control 2001 – WTO accession; Accounting Regulations for Business Enterprises (ARBE) 2003 – SOE Restructuring Provisions permit foreigners to acquire SOE shares or assets; M&A “Takeover Rules” and “Disclosure Requirements” go in effect 2005 – New Company Law eased entry of new businesses
10	Background (Cont’d.) “Quand la Chine s’éveillera, le monde tremblera.” (“When China wakes, the world will tremble.”) Napoleon Bonaparte (1816)
11	Background (Cont’d.)
12	Background (Cont’d.) 23 Provinces 4 Major Municipalities (Beijing, Tianjin, Shanghai, Chongqing) 5 Autonomous Regions 2 Special Administrative Regions (Hong Kong and Macau)
13	Background (Cont’d.) Based on the categorization of income by the World Bank, the Chinese population can be divided into four groups based on per capita GDP:
14	Background (Cont’d.) Chinese market is one of the largest in the world and continues to grow China is the 3^rd largest trading nation in the world USA is China’s largest trading partner (imports + exports) China overtook Japan in R&D spending (2^nd in the world) and overtook Germany for patent filings (5^th in the world)
15	Background (Cont’d.)
16	Background (Cont’d.) Major Chinese bank M&As in 2004-2005: HSBC acquired a 19.9% stake in Bank of Communications for $1.75 bil. in August, 2004 A Goldman Sachs-led consortium paid $3.8 bil. for an 8.45% stake in Industrial and Commercial Bank of China in 2005 UBS and a Royal Bank of Scotland-led consortium bought stakes in Bank of China for $500 mil. and $3.05 bil., respectively, in 2005 Bank of America bought a 9% stake in China Construction Bank for $2.5 bil. in 2005
17	Background (Cont’d.)
18	Diverse Types of Businesses “All warfare is based on deception.” Sun Tzu, The Art of War (453 B.C.E.)
19	Diverse Types of Businesses (Cont’d.) State-Owned Enterprises, the Communist “company town” for social, political, economic purposes that controls jobs, wealth, power ≈ 95% of Chinese stock exchanges listings are SOEs or their subsidiaries Government owns or controls over 60% of total outstanding shares From command and control to shareholding control … but this “overhang” is not traded, hence not very liquid Only 25-40% of SOE’s outstanding shares are traded on the market A Shares – Held only by mainlanders and selected foreign institutional investors, denominated and payable in Chinese currency B Shares – For foreign investors payable in foreign currency C Shares – Held by state-owned “legal persons” (i.e., SOEs and banks) H Shares – Listed on Hong Kong exchange, with the best-rated called “Red Chips” L Shares – Listed on the London Stock Exchange N Shares – Listed on the New York Stock Exchange Remainder owned by institutions and employees Wants to reduce 135,000 wholly state-owned enterprises to “core” 1,000 Protects large SOEs (iron & steel, coal, machinery, light industrial, textiles) and “critical” or “pillar” industries (aerospace, defense, energy, telecommunications) Over $200 billion in nonperforming commercial bank loans
20	Diverse Types of Businesses (Cont’d.) SOE’s (cont’d.): 100 million Chinese have invested in equities with government’s encouragement How can money-losing companies keep increasing in value, mining companies be worth more than all the reserves they have to mine, and buyers stubbornly ignore trading scandals and government warnings about overvalued shares? In two years the Shanghai Composite Index up 5x and the Shenzhen Component Index up 6x China’s market of 1,500 companies with A shares is trading at 40 times earnings (and sometimes as high as 60) … but only guessing since no one knows what the P/E on the market is because no one knows what the real “E” is! The government, as the largest shareholder in many of these “publicly-traded” companies, can inject assets to change their effective value overnight The Chinese stock market this year has helped create some of the world’s richest companies
21	Diverse Types of Businesses (Cont’d.) Top Ten Global Chinese Firms (2007)
22	Diverse Types of Businesses (Cont’d.) Fueled by a complex interplay of state policy, opaque deal-making, questionable accounting, insider trading, mergers and acquisitions, interlocking holdings and rampant rumors Nearly a third of reported Chinese corporate earnings come from earnings of other Chinese companies from trading the scarce A shares of other listed companies, or declare a profit from the rise in their own share prices Circular ownership (like check kiting) when a pair of companies to prop up each other’s share price and earnings SOEs release only a small fraction of their shares to the market Stringent capital controls keep most Chinese currency in the country, leaving investors very few places to put their money (lots of cash chasing few shares) With Chinese banks offering negative returns (interest rates lag inflation) and property prices already sky-high in big cities, Chinese stocks win by default Government declared in summer 2005 that it would not suddenly dump large blocks of its own shares on the market (no dilution danger) After four years of steadily declining share prices in an economy that was growing at 10% a year, this one change in policy unleashed a huge amount of pent-up demand Short-selling is not allowed on the Chinese markets China-listed companies are not required to disclose anything
23	Diverse Types of Businesses (Cont’d.) Chinese blue-chip stocks traded on the New York Stock Exchange in trouble*: NYSE’s usual corporate governance requirements do not apply to foreign firms or those with more than 50% control by a single entity – including all 10 Chinese firms with NYSE-listed American Depositary Receipts, all of which are ultimately controlled by the Communist government Worrying signs: Poor quality of earnings, lack of transparency, conflicts of interest, etc.
24	Diverse Types of Businesses (Cont’d.) Example: PetroChina 2003, Warren Buffet acquired a 13% stake (for $400 million) in PetroChina, that explores for oil in Sudan (Darfur) One of Buffet’s first big global investments and his most high-profile investment in China gave him only a 1% voting interest Oct. 24 2007, sold last of his stock for around $3 billion Briefly became the world’s most valuable company at $1 trillion, surpassing ExxonMobil by more than 2x Its IPO on the Shanghai stock market almost tripled in value … but only 1.6% of its shares trade on the Shanghai exchange China now has half of the world’s 10 most valuable companies: China Mobile, Industrial and Commercial Bank of China, China Life Insurance, and Sinopec join PetroChina
25	Diverse Types of Businesses (Cont’d.)
26	Diverse Types of Businesses (Cont’d.) TVEs – Local, non-state town and village enterprises were first to take advantage of grass-roots privatization Family Businesses – The traditional Chinese entrepreneurial clan There were very large family businesses during the Ming (1368-1644) and Qing (1644-1911) dynasties, and all firms required government sponsorship replete with bribes, corruption, and mismanaged funds Private Shareholding Enterprises ≈ 5% listed companies (e.g., Huawei) Foreign-Invested Enterprises (require more than 25% investment*) JV – Joint ventures, originally the only way to enter China WOFE – Wholly-owned foreign enterprise is protected by Chinese laws Investment-type Companies Direct investment – Foreign company creates a subsidiary, but must be treated as a Chinese company “Holding Companies” – About 200 foreign companies hold interests in FIEs, primarily to balance foreign exchange among them
27	Diverse Types of Businesses (Cont’d.) Selected Largest Exporting FIEs (2006)
28	Diverse Types of Businesses (Cont’d.)
29	Diverse Types of Businesses (Cont’d.)
30	Diverse Types of Businesses (Cont’d.) “Unlike the firms portrayed in Western organizational theory, large Chinese firms often consist of affiliated companies organized like families – parents, children, grandchildren and even great-grandchildren, all having independent legal status. Like families, these companies do not have clearly defined boundaries … boundaries between the firm and the state, on the one hand, and the firm and its subsidiaries, on the other, are indefinite, and hence managers must continuously negotiate both kinds of boundaries.” Marshall Meyer, Wharton China Expert
31	Diverse Types of Businesses (Cont’d.)
32	Diverse Types of Businesses (Cont’d.)
33	Diverse Types of Businesses (Cont’d.)
34	Diverse Types of Businesses (Cont’d.) … But No Chinese Global Brands! China is one country but many economies (Pearl River delta, Yangtze River delta, Bohai Bay region): Government policies favor companies that look large but are not integrated Co-existence of all types of economic regimes due to layers of government results in various business-government relations (e.g., arm’s length, developmental assistance, pre-corporatist) Provincial barriers to trade to protect local industries results in national fragmentation but local concentration Regional integration limits overall scale hence global competitiveness Local (and fragmented) markets, not national, results in cutthroat domestic competition: Independent subsidiaries are like holding companies with little coordination Identify with local community rather than parent group, creating duplication and excess capacity Focus on costs (cut expenses for quality, labor, environment, safety, governance, intellectual property, etc.) and short-term growth that is inevitably inefficient Companies lack “soft skills”: Near absence of large, internationally-recognized firms No depth of management – premium on political skills over initiative and innovation Do not export learnings or innovations outside of mainland
35	Diverse Types of Businesses (Cont’d.)
36	Global Trade “There is no nation which does not need to borrow from others.” John Stuart Mill, philosopher and economist (1806-1873), in Principles of Political Economy
37	Global Trade (Cont’d.)
38	Global Trade (Cont’d.)
39	Global Trade (Cont’d.) “Tóng chuáng, yì mèng.” (“Same bed, different dreams.”) Chinese proverb
40	Global Trade (Cont’d.)
41	Global Trade (Cont’d.) Selected U.S. Company Acquisitions of Chinese Companies:
42	Global Trade (Cont’d.)
43	Global Trade (Cont’d.) China’s Overseas Investments: Haier has 26 subsidiaries overseas, including 13 overseas factories (a $40 million fridge-making facility in South Carolina and a new Americas headquarters in midtown Manhattan) Telecom gear-maker Huawei established 8 regional R&D headquarters and 32 branches overseas, including a 500-person software development center in Bangalore, India and R&D facilities in Silicon Valley and Dallas … formed JV with 3Com and snatched contracts from the likes of Cisco Systems and Nortel Networks! Automotive parts maker Wanxiang has 16 overseas firms, including a 21% stake in Universal Automotive Industries (UAI), a bankrupt Chicago automotive parts producer that buys US$25 million worth of brakes from Wanxiang annually more …
44	Global Trade (Cont’d.) China’s Overseas Investments (cont’d.): China National Offshore Oil Corporation (CNOOC), China’s 3^rd largest, failed in 2005 in its $18.5 bil. bid for Unocal (U.S.’s 9^th largest) then bought Nigerian oil assets for $2.7 bil. in April, 2006 China National Petroleum bought a stake in OJSC Oil company Rosneft for $500 mil. in July 2006 and bought refining company PetroKazakhkstan in 2005 for $4.18 bil. Consumer electronics manufacturer TCL purchased bankrupt German television maker Schneider for $8 million and the television production business of France’s Thomson (formerly RCA/GE color TV) for $559 mil. in 2004, making TCL the global leader in TV manufacturing and hailed as the first Chinese company to compete with large international corporations … as well as the mobile phone division of Alcatel Lenovo, China’s largest personal computer maker, purchased control of IBM’s PC unit for $1.75 bil. in 2005, capping the U.S. tech giant’s withdrawal from the business it helped pioneer in 1981
45	Global Trade (Cont’d.)
46	Technology and Innovation “No country has ever before made a better run at climbing every step of economic development all at once. No country plays the world economic game better than China. No other country shocks the global economic hierarchy like China.” Ted C. Fishman, China, Inc. (Simon and Schuster: 2005), p. 1
47	Technology and Innovation* (Cont’d.) Chinese companies make up 12% of high-tech exports; multinationals account for the remainder (only one of the top 10 Chinese-registered U.S. patent holders in IT, Huawei, is a domestic company) Chinese innovation tends to be opportunistic and focused on quick payoffs; technology innovation, on the other hand, typically requires the following: Cleverly combining complementary technologies An innovator that is big or located within a technology-rich cluster of companies Patient capital and willing to take risk While innovation cannot be directly bought, all its players linked by large flows of money Most Chinese companies seem unable to follow up with products: Do not share information and collaborate because new intellectual property is often at risk SOEs are paid to keep doing the same things even in the face of global technology change No culture of experimentation or small teams that take responsibility for new ideas Management buyouts of SOEs could reward maverick turnaround managers China needs the following to generate innovation: Networks of scientists, engineers, savvy investors, intellectual property attorneys Venture capital money to launch start-ups and risk-tolerant IPO investors to cash out Enforce intellectual property protection consistently, expose SOEs to technological change, allow scientists to share in the profits of start-ups based on state-funded research
48	Technology and Innovation (Cont’d.)
49	Technology and Innovation (Cont’d.) Beijing’s Haidian Science Park*: China’s “Silicon Valley” was launched in 1988, the first, largest, most well-known technological region in China Country’s leading incubator of high-tech businesses: 400,000 teachers, researchers, engineers, scientists, support staff 138 top research institutions (including the Chinese Academy of Sciences) and 56 leading higher-learning institutions (including Peking University and Tsinghua University, dubbed as China’s Harvard and MIT, respectively) 6,000 companies (predominantly IT and Internet)
50	Technology and Innovation (Cont’d.) China wants to build a more modern, flexible economy by making the transition from a manufacturing-based economy to an innovation-based one: Targeting controversial areas, U.S.-dominated ones, and emerging technologies China devotes only 1.2% of its GDP to R&D spending, but intends to boost that figure to 2% by the end of the decade and 2.5% by 2020 – $110 billion, with the government pitching in about 40% of the total and private sector contributing the rest Putting China in the same league as the U.S. and Japan Stumbling blocks include financial and tax systems, academic scandals involving homegrown talent, and China’s notoriously lax attitude toward counterfeiting China’s corporate players include Lenovo, Huawei, and Haier Foreign companies include: German software giant SAP that announced its intention to build a Chinese R&D operation; Motorola’s 16 Chinese R&D centers; and Intel’s new R&D center in Shanghai
51	Local Entrepreneurs “Shan gao huáng dì yuan.” (“The mountain is high, and the emperor is far away.”) Chinese proverb
52	Local Entrepreneurs (Cont’d.)
53	Local Entrepreneurs (Cont’d.)
54	Local Entrepreneurs (Cont’d.) Example: Shanda Interactive Entertainment* Founded in 1999 with family and classmates, sold “massive multiplayer online role playing games” (MMORPG) to become China’s largest entertainment company 2003, Japan’s Softbank and Cisco invested $40 mill., sold its 20-25% shares on NASDAQ in 2004 for $100 mill., became one of the Nasdaq’s biggest success stories Introduced EZ Pod TV set-top boxes to deliver movies, music and content online … but heavily regulated and little broadband for coach potato audiences 2005, switched from “come-pay-stay” model to “come-stay-pay” (CSP) platform where gamers play for free but pay for virtual accessories or expansion packs Stock crash caused founder and CEO Chen Tianqiao to lash out at Wall Street analysts for not understanding Chinese market When sued by S. Korea game developer, SNDA bought its parent Over 500 mill. registered accounts and 1/3 China’s market, 2007 revenues around $300 mill. with market growing 30%/year through 2011 with industry exceeding $3 bill. With current market value nearly $2 bill., founder sold 12.8% for $157 mill. in September 2007 but maintains majority ownership … which is why I went to Boston!
55	Constant Change “The only constant is change.” (“Nothing endures but change.”) From Diogenes Laërtius, biographer of the Greek philosophers, in Lives of Eminent Philosophers (3^rd Century A.D.)
56	Constant Change (Cont’d.) Initial Forces for Change: Free Trade Zones – The world’s global corporate giants provide Chinese workers and managers valuable exposure to western business practices Proliferation of International Cooperative Structures – JVs, FIEs, WOFEs, and M&As The World Trade Organization – Attempt to develop China’s economy by bringing market forces but might create advantages for MNEs ISO and other International Standards – Both quality and environmental management requirements Returning Chinese Students (“Sea Turtles”) – Born on the shore, grew up at sea, but eventually coming back home The Internet – Crumbling great wall enables global exposure while providing immense opportunities The Chinese Stock Market, Financial Reporting, and Accounting – Although a casino, still provides equity financing, enables more people to share the wealth of China’s growing economy, and provide shares and options as incentives to employees as well as adopting western financial reporting and accounting standards English as the Universal Business Language – The dominance of English in commerce influences internal and external reporting Western Business Etiquette – Re-defining how Chinese relate to their organizations Training and Consulting Organizations – Chinese organizations aggressively implement the skills and knowledge gained from Western business consultants
57	Constant Change (Cont’d.) China’s economic growth has been driven by exports and fixed asset investment Current economic growth strategy emphasizes domestic demand (i.e., consumption) Strong focus on rural economic development and expanding social services (e.g., education, health care) Actions: Reduced taxes Established minimum wage Developing infrastructure in rural areas Encouraged consumer credit
58	Constant Change (Cont’d.)
59	Business Opportunities “Everything is possible, but nothing is easy.” Chinese proverb
60	Business Opportunities (Cont’d.) Accession to WTO helps strengthen China’s ability to maintain strong economic growth rates … but also pressures hybrid system (strong political controls + growing market influences)
61	Business Opportunities (Cont’d.) Critical Success Factors to Succeed in China*: Learn About China – Have a detailed knowledge of the new market Due diligence – Study thoroughly! U.S. Export Controls – Check regulations by the Departments of Agriculture, Commerce, Defense, State, Treasury Find the Right Partner – It’s all about relationships and contacts Pick a trustworthy and reliable Chinese partner Maintain good guanxi with all relevant Chinese parties Listen to Your Customers – Customer satisfaction and insights are invaluable, and having a good healthy feedback channel is important Hire the Right People – Must understand the culture of the parent company, be able to lead cross-cultural teams across multiple geographies, and have a good communication skills, but also … Must have both technical and management skills Send best expatriates to run the China venture while developing a strong local management team (“localization”)
62	Business Opportunities (Cont’d.) Critical Success Factors to Succeed in China (cont’d.): Location, Location, Location – Consider local investment bureaucracy, policy, laws, taxes, cost of labor; available skills, infrastructure, resources, R&D, universities The 6 “golden cities” are Hangzhou, Qingdao, Shaoxing, Suzhou, Xiamen, and Yantai Have a Realistic and Flexible Strategy – Parts of the economy are very well developed and modern; other parts are less developed and inefficient Pick a market with limited competition Start Small – Grow with the market Business success in China is a long-term commitment Expect initial pain and suffering Be Prepared for Fast Growth – Keep up with the pace of change in China and make decisive moves when the time is right Give yourself sufficient time to keep up with continuously changing China environment Patents and Intellectual Property – And don’t forget about piracy protection!
63	Business Opportunities (Cont’d.) “If we learn anything from the history of economic development, it is that culture makes all the difference.” David S. Landes, The Wealth and Poverty of Nations (Norton: 1998)
64	Business Opportunities (Cont’d.) Don’t: tell anyone that you’re in China because of cheap labor insist that things be done “your way” (“TIC”) litigate in China, there is no such tradition as in the U.S. hire local management without doing serious due diligence (e.g., it is very easy to get a diploma from a leading university printed up for a job application) sign on with a local partner without doing serious due diligence (see lack of litigation, above) assume that you need to have all the answers (China is changing very quickly, and there is a lot to learn) Do: be careful, but don’t be paranoid … and don’t let it affect your upbeat attitude make sure your Chinese partners are clear about the contribution you are making, but don’t try to dominate them because you are bigger enjoy yourself … engage, listen, and learn for this is now the most challenging and interesting market in the world the “3 P’s” – Be patient (even if you are in a hurry, don’t show it); Be polite; but Be persistent
65	Business Opportunities (Cont’d.) China introduced a system of “current account convertibility” in 1996*: Any company operating in China can purchase foreign exchange to make payments abroad for trade settlement, commissions, fees, royalties, and dividends without the need for State Administration for Foreign Exchange (SAFE) approval Any foreign investor can go to a bank to arrange remittance of funds in a foreign currency of their choice even if there is insufficient foreign currency in their accounts No government approval is required to remit after-tax profits if proper documentation is provided to the remittance bank Maintain a “settlement account” on the books for foreign currency non-capital inward remittances (there is an upper ceiling for the amount retained)
66	What’s the Problem? “China is a lake of gasoline, and [one] individual … will only have to throw a match.” Gordon G. Chang, The Coming Collapse of China (Random House: 2001)
67	What’s the Problem? (Cont’d.)
68	What’s the Problem? (Cont’d.) China’s 200 million people living comfortably results in the greatest migration in the history of humankind: Each month, the major Chinese cities receive enough new inhabitants that they need to build the equivalent of Houston to handle them Inadequate infrastructure (e.g., water control, transportation, energy) and environmental projects, especially in interior Financially beleaguered local governments Increasing costs of doing business (no free Chinese lunch): Actual market remains far smaller than potential and fragmented Restrictions on imports (and rationing exports), currency convertibility, profit expatriation Intrusive government (corruption and other economic crimes) “Network (Crony?) Capitalism” based on long-term relationships and trust is tough to break into
69	What’s the Problem? (Cont’d.) Political and social instability: Labor unrest Poverty (e.g., 80-120 million “floating” rural workers adrift between the villages and the cities) “New Deal” with farmers to narrow rural-urban income gap and stem social unrest Looming retirement crisis and tattered social safety net exacerbated by aging “one child” families Undeveloped legal system (intellectual property; dispute resolution) and minimum rule of law: By statute, everything is forbidden unless expressly permitted Business activities are limited to the scope specified in charter Constantly changing policies and regulations Be aware of local interpretation and enforcement
70	What’s China’s/ (Y)our Future? “Never make forecasts, especially about the future.” Samuel Goldwyn, one of the most powerful men in Hollywood who found MGM and helped to establish Paramount Pictures, famous for his convoluted, accented malapropisms referred to as “Goldwynisms”
71	What’s China’s (Y)our Future? (Cont’d.) China’s Selected Targets for 2006-2010*: Economic growth GDP up 7.5% annually Per capita GDP up 6.6% annually Economic structure Increase share of service industry’s value added to GDP from 40.3% to 43.3%; increase share of employment in service industry up from 31.3% to 35.3% Increase share of R&D spending from 1.3% of GDP to 2% Resources and the environment Reduce energy consumption per unit of GDP by 20%, water consumption per unit of industrial added value by 30%, total discharge of major pollutants by 10% Increase rate of comprehensive use of solid industrial waste from 55.8% to 60% Public service and people’s life Create up to 45 million new jobs for urban residents Transfer up to 45 million rural laborers to non-agriculture sectors Increase urban registered unemployment rate from 4.2% to 5% Increase per capita disposable income of urban residents 5% annually Increase per capita net income of rural residents 5% annually
72	What’s China’s (Y)our Future? (Cont’d.) Selected Predictions for 2035*: Population: 1.49 billion GDP: $6.7 trillion (vs. about $14 trillion U.S. GDP in 2007); $4,500 per capita (vs. about $44,000 in U.S. for 2006) The Service Economy: From 40% of the economy in 2005 to 48%-49% Income Inequality: Moderate steadily over the next 30 years Automobiles: 53.4 million (with 350 million tons imported oil annually) Trade Surpluses: Decrease China’s dependence on foreign trade as a percentage of GDP World-Class Companies: Currently, there are 22 Chinese companies among the world’s top 500 based on revenue; 30-40 additional companies will enter the world’s top 500, most likely in telecom, petrochemicals, electric power, banking, autos, electronics, and computing Competitiveness in Global Markets: Chinese corporations will reinforce their international competitiveness by higher R&D and the continued advantage of comparatively low labor costs and huge economies of scale Science and Technology Level: China’s basic sciences will lag far behind the U.S. Mobile Phones: Telecomm will become the most dynamic element in China’s national economy Internet Users: 223 million; will be accessible to approximately 70% of the total population Economic Reform: By 2030, China's economic reform will have been basically completed Financial Sector Reform: Relatively slow due to the large burden of nonperforming assets on the banks
73	What’s China’s (Y)our Future? (Cont’d.)
74	Questions and Online Resources “May you live in interesting times.” Alleged Chinese proverb*
75	Questions? A survey of the complex array of Chinese business structures that span global traders to local entrepreneurs. The ascent of Chinese businesses and China’s accession into the World Trade Organization bring both global opportunities as well as problems. Background? Diverse Types of businesses? Global trade … Technology and innovation … Local entrepreneurs? Constant change and business opportunities? What’s the problem? What’s China’s future? (Y)our future? Anything else about China? All nations are very interdependent in this global economy so we must learn to live with our large “new neighbor” who only recently moved from the poor part of town and does not play by the establishment’s rules
76	Online Resources China Business Information Center http://www.export.gov/china/ China Business Weekly http://www.chinadaily.com.cn/english/bw/bwtop.html China Economic Review http://www.chinaeconomicreview.com/ The Eagle and the Dragon http://hoover.archives.gov/exhibits/China/index.html Frontline: China in the Red http://www.pbs.org/wgbh/pages/frontline/shows/red People’s Daily http://english.peopledaily.com.cn/ South China Morning Post http://www.scmp.com/portal/site/SCMP/ The Standard http://www.thestandard.com.hk U.S.-China Business Council http://www.uschina.org/ U.S. Embassy, Beijing http://beijing.usembassy-china.org.cn/