Saturday, November 19, 2005

Bone-Jarring Red Knuckle Read

The China Dream (2002, 2003)
Joe Studwell

Pick up any issue of Businessweek or The Economist in the last decade of reporting and it is highly likely that you will read an article related to the Chinese economy. Even last year's figures reported that while Korean investment in China has increased, that of European, Japanese, and US MNCs had shown a steady decline. It is an important topic namely due to the export market trade which propels many local Asian economies. Studwell takes a historical perspective and reviews the seemingly unending lists of new entrant failures to profit from China's perceived domestic purchasing power. Western, as well as Chinese diaspora efforts to sell products and services in China have often failed to secure profits and exit with enormous losses.

The root causes, from as early as the first European explorer, Marco Polo, are a result of perceptions of trade and consumption potential which has always been applied with non-complimentary or non-relevant research or wishful analysis aggregations. China due to its large size and enormous population has always been believed to retain outstanding market capitalisation and consumption capacity. But time and again, due to economic factors unique to China, reality fails to meet expectation.

Studwell surveys the early industrial imperial era and with the outrageous exception of Chinese opium trading routes which originated in the silk routes and impacted upon Adam Smith's influences on global trade economics, it appears China was never historically more than a consumer of specialty items affordable to cultural elites and luxury commodities from far flung trading partners. Exports were usually foreign owned and concessional. Eventually European nations fought their ways in to the marketplace through outright hostilities and threatening military intimidations which ultimately impacted upon the royal destabilisation of Chinese provincial unities and alliances. The nation became loosely aligned through foreign investments in infrastructural developments such as railways, trade, manufacturing, and real estate from the mid-1800s up to the early 1930s. Shanghai grew as a singular trade hub and the most robust global trading center in the inter-world-war period. But growth soon became decline.

Perhaps no single negative economic growth inhibitor has limited Chinese aspirations more than Communism. Studwell describes Mao's influences indirectly as they are more related to the strategies Deng employed from the 1980s to set a domestic and international buzz that originated in real, qualifiable changes but from which few profits could be squeezed domestically. Certain sectors, mostly limited to foreign fast food francises flourished and the dip in global public opinion caused by the Tiananmen Square Massacres was a fleeting one.

Studwell notes a frenzied increase in FDI from 1992. Deng's tours and speeches were directed towards a new cause, "globalisation" which became the mantra of a generation of multinational investments internationally not seen previously since the 1880s. Some economists see the possibility of a cyclical element influencing such global growth periods. The pitch was set with new development zones and a high turn over among party membership leaders. Promises of reform stoked "stir-fried stocks" frenzies never before (or since) seen in places like Hong Kong.

Growth was primarily taking place in the manufacturing export sectors, with heavy profits being taken in industrial real estate development. The signs of impending doom were implicitly couched in the irregularities and idiosyncracies of reality versus legislation and outright law breaking. Studwell details that the primary growth points were often coastal areas, often in the south, within easy logistical reach of Hong Kong and Taiwan. His description of Hainan real estate speculation is especially satisfying reading. Repeatedly with such examples he demonstrates the root causes of expectation misalignments.

These feeding fests spread to far flung provinces and culminated in several glad-handing and golden tour visits by greedy global capitalists and heads of states all cozying up to an economic growth pipe-dream which easily explains why trickle economics became synonymous with trickle human rights standards as part of western business. It fits western political leaders strategies to explain what exactly they were doing giving away their tax-payers money for Chinese infrastructural projects such as nuclear powerstations, subways, and feel-good profitless exercises. The calishtenics Studwell describes performed by the likes of Helmut Kohl, Canadian former slippery P.M. Jean Chretien and several US roving congressmen makes it look all like a freakish ballet taking place when what everyone should have been doing was rearranging those deck chairs on The Titanic. There appears to have been precious little enlightened self interest displayed by CEO after greedy CEO and one head of state signing worthless fortune cookie deals or another after another.

This is where Studwell really begins to bring the blueberry filling to an already crusty and satisfyingly well baked pie. He nails several high-flying individuals for their antics in China paid for by other peoples' money, something necessary, the trimming of the fat. But the industries will rarely acknowledge whistle blowing and horn hooting over their fumbles and squabbles. For such a bunch of intelligent financiers, I hope I never unwittingly entrust my investments to any number of greedy wastrels which make the antics of Enron look merely as a continuation of business as usual. The mere fact that so many cooks and business interests and sectors could be so utterly caught with their collective pants down in China from the 1990s to the present...have any of them really learned for the experience? Or are there just so many companies falling over themselves to weather years of Communist party red tape and downright dirty dealings to eke out a profit in a domestic basket case of an economy?

One cannot even begin to describe briefly what is wrong with Chinese domestic growth expectations. Utterly, it has existed as a failed economic system for generations. It perpetuates the sin of enslaving the majority of its participants savings and investments potentials in loss making industries, banks, and ludicrous lack of accountability measures. State flippings of state enterprises, loans, perpetual bad debts, the infinte rolling of one short term unpaid debt into a longer term one, on and on, and on... A chosen elite, capable of doing and buying anything, bleeding the system dry of virtue, accountability and global competitveness. Scratching the backs of foreign investors stupid enough to pay for the privilege to sell themselves short, in virtually every domestic market save a few such as telecoms and technology, in hopes for future bonanzas.

The entire descriptions of GM and MacDonnell Douglas woes simply reaffirm that these MNCs which so ignorantly assume positions which are unattainable due to misplaced allocation of investor resources cannot but fail due to the short-sightedness and lack of overall common sense which would have prevented astounding, jaw-dropping losses.

This book is about five years out of date. But I have read corraborating reports in several studies in the areas of intellectual property rights and the absolute corruption of Chinese judicial and legislative processes in regard to foreign owned companies. Studwell is right to exemplify the differences in purchasing power between slower growth, more developed economies, and the frantic profit taking going on in China today over a few dollars of increased purchasing power annually. As investors seem to be following or being led by the nose more often than not as is the case in China, I think I would place more faith in the fundamentals of Eastern Europe, and even the post-Saddam reconstruction of

Actually I have more faith in the economic future of Afghanistan than China after reading this book. China's long-term future simply looks far too gloomy to contemplate. But you be the judge. Read the hype. Then read this book. The gaping distance between promotion and some hard to define reality is evident in the comparison. China simply holds the potential for the largest economic meltdown in world history.

According to the red tape, it appears inevitable.

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