Is China “a country filled with Enrons”?

SmartMoney has a smart article for those eager to invest in China. A key point is that (surprise surprise) business in China isn’t like it is in the West, and when it comes to corporate governance, the Chinese can seem “like gawky adolescents.”

The Celestial Kingdom was the world’s hottest market in 2003. But the growth spurt might soon come to an abrupt end. While Chinese stocks are like late-1990s dot-coms on amphetamines, the country’s equity markets are rife with debt-plagued, corrupt companies on the brink of collapse. For some, the only lifeline has been the steady stream of investment capital pouring in from U.S. investors. If that spigot were to close — as it has many times over the years — China could suffer a full-fledged financial meltdown, one that could spread to other developing economies in Southeast Asia.

For many reasons that we’ll enumerate in a series of articles in coming weeks, China remains a very high-risk marketplace, with fragile legal institutions and lax regulation — a fact many investors seem to be ignoring amid the incredible run-up.

Talk to any China expert, and inevitably guanxi will come up. In Mandarin, it means “powerful connections.” When guanxi is invoked, the rule of law goes out the door. Power is the arbiter of all business transactions in China.

Obviously, this presents a problem. “There’s no transparency in such a system,” says William Gamble, author of “Investing in China” and president of Emerging Market Strategies, based in Providence, R.I. “I’m not always sure if my connections are better than the next guy’s connections. And what if my connection goes away for some reason? The problem in China is that, without a reliable and enforceable legal system, there’s nothing to limit [those with the most power].”

The potential result: “A country filled with Enrons,” says Gamble. “It could be a disaster.”

Again, I go back to my experience as a PR manager in China, and I have to agree — at least with the guanxi part. I’d never worked anywhere else where the first question potential clients asked was, “Do you have good connections with people in the government?” That’s what matters, and these companies are willing to pay big bucks for anyone who can “open doors.”

I don’t necessarily agree with the article’s other point, that China could be standing on the brink of a total meltdown. I think that’ll happen eventually, but things look too good and under control right now. Famous last words?

The Discussion: 2 Comments

I think the author overstates the importance of US investors in China. I haven’t looked at recent numbers, but as long as the PRC can rely on US consumers to keep the dollars flowing to Beijing and keep investment money flowing in from Taiwan and Hong Kong, the PRC economy won’t meltdown from a cash deficient position.

If the PRC lost the investment (cash, management, and tech) flow from Hong and Taiwan, then Beijing would have a problem. “Papa” desperately needs the remittances from “the sons”, which is why “papa” is always so eager to remind “the sons” about not straying too far from home and how much they owe “their beloved papa”.

April 14, 2004 @ 6:34 pm | Comment

Personally, I hate guanxi. But then sometimes we really have to practise that, or we are dead like hell.

As for the “Enrons”, I’d agree with that. China economics are unhealthy. But guesss what, even the big giant(the states) had this happened. It is expected to take place in China sooner or later. I wouldn’t like to see that though, at least not in the near future.

April 17, 2004 @ 10:19 am | Comment

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