The Great ‘Economic’ Wall of China

Andrew Michael Teo

When China began opening up her economy in the mid 1980s under the Chairmanship of late Deng Xiao Ping, foreign governments and investors had thought that China would be a good market given her population of 1.3 billion and low labour costs.

Attracted by the size of the population and low labour costs, foreign investments started to pour into China then. However, what many foreign investors and foreign governments, who always salivate at the prospects offered by the Chinese double-digits growth stories, failed to realize, and admit, was the fact that they were sucked into an economy which they had not really understood its operation under the Communist regime. More importantly, the mentality and intelligence of the communists has been largely misunderstood and under estimated.

Due to their eagerness to have a share in the Chinese market, these foreign investors began to cultivate “guanxi”, meaning “relationship or connection” in Chinese, with local and provincial officials without ever realizing what they were getting themselves into. And much of these “guanxi” are associated with briberies and corruptions, without which nothing can ever get done. However, what these investors did not understand is, “guanxi” in China is in reality, an indirect yet courteous warning to would-be foreign investors that they [the foreign investors] are at the mercy of their host.

Foreign investors brought with them transfer of technologies and management skills and help to create jobs for the working population, which not only enriched their lives and their standard of living, but consequently also helped China to emerge not only as an economic giant but also a potential military and political threat. Over the past decades since the opening of China’s economy, we have also seen how many foreign investors were “played out” by their host country through theft of intellectual properties, copyrights, piracy, etc. The most recent are the fake Apple Computer stores, Ikea furniture’s stores, Nike stores, etc.

Excluding Competition

During the Xinjiang uprising in 2009, social networking websites such as Facebook, Youtube, Twitter were blocked and subsequently banned citing reasons such as “to prevent circulation of misleading information and rumours”. How much truths were there in those cited reasons can be seen from the fact that other social networking sites such as Yahoo Messenger, Skype, Window Messenger (which have the capability to share videos and files) and the fact that proxy servers were not even blocked.

At the same time, similar local social networking sites such as Renren, Youku, Weibo, which are “replicas” of the Facebook, Youtube and Twitter, respectively, were on the rise then, were also accessible by the average international audience – meaning any “misleading information and rumours” could also be uploaded onto these social networking sites even for just a few seconds!

If the Chinese government had been relatively successful in blocking and banning these international social networking websites, why, then. did they not ban their own social networking websites from international accessibility given the same reasons. In addition, knowing that many of China internet users have resorted to using proxy servers to gain accessibility to these international social websites, why did they not block access to proxy servers?

My answer is simple: Having gained the necessary technology, and that international social networking websites are attracting a large pool of international audience and advertisers, it would be necessary to start “protecting” the interests of their own local social networking websites. Most owners of these websites are businessmen with links to the high ranking officials of the Communist Party in one way or another. Hence, to effectively ban their competitors from the local market is really not that difficult afterall. The Xinjiang uprising and the investigation into a company for corruption in Namibia headed by China’s President Hu Jintao’s son, Hu Haifeng, provided them with the opportunity.

In 1994 when Singapore jointly invested in the Suzhou Industrial Park (SIP) project with China, a similar project, Suzhou New District Park (SND), which the Chinese government had a major stake, was also simultaneously started by the Chinese government. Since then, the Chinese government started to ignore the SIP for which they held 35% stake and chose to promote the SND so as to compete directly with the SIP. After incurring a loss of US$ 90 million over a period of 5 years, the Singapore consortium then lowered its stake to 35% while raising the Chinese stake to 65%.

Many of China’s fastest-growing companies are privately-owned, and founder entrepreneurs, who are usually linked to the Communist Party in some ways, are often reluctant to share power with overseas investors. Thus, the ability of foreign private equity to exert influence on corporate strategy can be severely limited. Industry executives say China’s corporate landscape is littered with disputes involving foreign private equity and local companies over strategy, governance and influence.

“Investing in China requires immense creativity and the agility to respond to fast-changing circumstances,” says Kathleen Ng, managing director of the Centre for Asia Private Equity Research in Hong Kong. “Foreign private equity investors truly need to understand what they are getting into.”

Corruptions & Cover-up

We have heard of Beijing’s determination to crack down on corruption even among high ranking members of the Chinese Communist Party. Reports had often claimed that government officials and businessmen convicted of corruption faced the mandatory death penalty. However, just how true were these reports that executions were actually carried out on those corrupt officials who are high ranking members of the Communist Party or their immediate relatives? Were these corrupt officials ever executed at all?

In 2009, three people were arrested in Namibia, South Africa, on charges of fraud, corruption and bribery involving a government contract with the state-owned Chinese company Nuctech, a world leader in scanning technology.

Hu Haifeng, son of China’s President Hu Jintao, was the president of the firm until 2008, when he was promoted to become the party secretary of Tsinghua Holdings, the group which controls Nuctech and 30 other companies, had been linked to an investigation of Nuctech for a £34 million deal which Namibia had signed with Nuctech to provide it with scanners for its ports and airports.

Under the deal, the Namibian government was to make a £8 million down payment, with the balance coming from a loan which Beijing had provided Namibia, on condition that it is spent with Chinese companies. But according to Namibia’s Anti-Corruption Commission, within weeks of the ministry of finance making its payment to Nuctech, the company signed contracts for an identical sum with a Namibian consultancy called Teko Trading.

The money was allegedly then disbursed to Teko’s co-owners, Teckla Lameck and Kongo Mokaxwa, and Yang Fan, a Chinese national described in court as Nuctech’s African representative. Paulus Noah, director of the Anti-Corruption Commission, who had been suspicious of the transaction due to the matching sums of money going to and from Nuctech, was suspecting corruption might have been involved.

As the three persons were held in custody pending investigations, Paulus said he would like to question Nuctech’s management, including Mr Hu, who was not a suspect at that stage, but as a potential witness, citing his interests in knowing how businesses are conducted in China.

Nuctech, which claimed to have world-leading technology for scanning the inside of containers and has 90% of the Chinese market for scanners and x-ray systems, and was previously known as Nuclear Technology Company, was spun out of Tsinghua University, the elite university often referred to as China’s MIT which both Hu Jintao and his son attended. Hu Haifeng, graduated from Tsinghua with a master’s in engineering physics, usually kept an extremely low profile to keep out of the media, joined Nuctech directly as assistant to the general manager.

Because the investigation was potentially a huge embarrassment for Hu Jintao, as popular discontent with Communist Party corruption has grown in recent years – with some officials executed on conviction – but only for cases involving local and provincial figures, rather than national ones, had been publicized, the Chinese government censors launched a sweeping campaign to purge any mention of a corruption investigation in Namibia from the internet and also ordered all Chinese search engines to block any searches related to the case because it involved not only a company formerly run by the son of China’s president, but it also involved the son of China’s president. Hence, popular social networking sites such as Facebook, Youtube and Twitter were also shut down.

In addition to the Namibia’s probe, Nuctech was also being investigated in UK for providing clients with “soft loans” granted by China to pay for supplies of its machines. This leads to a significant price reduction, to the detriment of other producing companies such as Smiths, its largest competitor in Europe.

According to British newspaper The Daily Telegraph online, the Chinese company is “under investigation”, a formula that often precedes a formal accusation. The investigation, which begun in March 2009, concerns a contract with HM Revenue & Customs in 2006 for the supply of these machines, and NucTech negotiations with other customers. It was not known whether Hu Haifeng had been interviewed by the Commission of Inquiry, but he had since relinquished the post in the management company Tsingua Hondings.

China is rife with corruption, and is particularly widespread among Communist Party officials. For years Beijing has proclaimed zero tolerance. There have been serious arrests and convictions also for high ranking officials, throughout the country according to local reports. However, when it comes to corruption involving family members of the President, it is either usually covered up or quashed even if found guilty, which should come as no surprise to anyone since the Judiciary Courts are under the powers of the Chinese Communist Party.

Food for thought

Accounting frauds and irregularities, the reluctance of the local investors to share powers, the inability or limitation of the foreign investor to exert influence on corporate strategy, the trust in employees in handling confidential and sensitive information, etc, which are rampant across the country, are just some of the factors which present and future foreign investors will have to consider or re-evaluate their investments. guanxi may not help. The higher the “guanxi”, the greater the impact of the consequences should a dispute breaks out.