Friday, June 24, 2005

China in turmoil?

Tony Perkins at Always On reflects on the rapid transformation of China and enumerates the seven sins which threaten peasant revolution and heighten risk for foreign investors.

In part one and part two of a three part series, he outlines the following sins:

Sin #1 Corporate and State Corruption and Thievery

Corruption is pervasive in China. Many state-owned companies have simply been stripped clean. In 2003 alone, officials said that the equivalent of nearly $8 billion was pilfered from state-owned enterprises.

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Something is not right when a public market declines while GDP is exploding at 9.5%. The nation’s glaring cases of fraud, bribery, and embezzlement are also badly hindering the development of the China’s banking and financialsystems, which desperately need to be modernized for China to become a full-fledged economic superpower.

Sin #2 Weak Regulation and Inconsistent Legal Systems

Weak regulation and oversight, deep-seated government corruption, and poor risk-management practices are allowing fraud artists and looters to run off long before the investigators show up.

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The “rule of law” concept, which in America includes ideas like criminal defense, runs contrary to China’s authoritarian roots.

Sin #3 Pirating Intellectual Property

Infringement of intellectual property has been rampant in China for many years. The International Intellectual Property Alliance in Washington states that about 95% of the DVDs sold in China are illegal copies. The latest Star Wars movie is already available on the streets of China for as low as 96 cents. Sellers do not even try to hide their trade, openly flaunting their wares in well-stocked storefronts. Steve Jobs tells a story of begging then-chief of Disney Michael Eisner to distribute and sell Jobs’s Pixar films in China for $1.00 a copy. “At least we would make some money,” Jobs said with exasperation.

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It is a sad truth that media and software piracy is so entrenched in Chinese culture that it doesn’t feel like stealing. But it is, and as long as proper laws and IP enforcement mechanisms are absent, many foreign companies will remain reluctant to invest in China.

It is rather revealing, though, that Steve Jobs, once again, proposes a practical solution to the problem in contrast to the general intransigence of the media to changing their business models to adapt to the digital age.

Sin #4 China’s Bleak Environmental Outlook

In downtown Shanghai, the smog is sometimes so thick you can’t make out the building across the street. A World Bank report says that today, China is home to seven of the world’s 10 most polluted cities. In China’s heartland, the Yellow River, once known as the cradle of Chinese civilization, has in some areas been reduced to a trickle. According to the United Nations Development Program, for some 980 million Chinese, their main supply of drinking water is at least partially polluted.

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The World Bank estimates that air pollution alone costs the Chinese economy $25 billion in health-care costs and lost working hours. It is also estimated that 8 to 10% of China’s GDP is offset by environmental damage. These rising costs, and the pilfering of natural resources, threaten to cancel out China’s future economic gains.

With part three yet to come, it has thus far been a very interesting read. I highly recommend the series.

In this age of globalization, low-cost Chinese production is integral to the economic activities of the western economies. Any disruption in China could have a profound impact on the global economy. For example, most consumer electronics products, as well as electronic components, are manufactured in China. Trouble in China could result to great turmoil in the global electronics industry and all that depend on it.

Consequently, it is of great concern as to how China deals with issues such as working conditions, child labour, environmental degradation, human rights, property rights, etc. China’s ability to responsibly and effectively cope with its growing pains affects us all.

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