Feb

9

 Not to be hostile or anything, but I have never had dealings with Chinese where they haven't cheated me. I am told that there is a Northern Chinese persona and a Southern Chinese persona, and that I believe in the South, everyone is dishonest with Westerners, and the more you have done business with such a one without a wrong being committed the more likely it is that it will happen the next time, a very strange kind of hazard rate by the way. I may be wrong about this, it cost me much of real time wrongness, many years ago which compounded, my goodness—I'd be a wealthy man— but I'd like to know if there's a kernel of truth to it. You, Mr. Jia seem like a very worthy and honest man, and nothing in this is personal, but the memory still stings, especially in these markets.

Yishen Kuik writes:

China today is often compared with America in the 19th century. What I find remarkable is how true this can be.
The Chinese in China will cut corners, bamboozle, harass, deceive and cheat you on par with any 19th century "wily yankee". They are energetic, entrepreneurial and as hungry as any red blooded capitalist can be.

The melanine milk poisoning scandal is often held up as the worst example of Chinese business men run amuck.

And it is an echo of New York City in 1858 where "swill milk" killed thousands.

The horrors of working conditions in Chinese sweatshops is an echo of Upton Sinclair's expose of the Chicago meat packers — which created such an uproar that Roosevelt sent a secret fact checking mission that largely corroborated Sinclair's novel.

If you have ever been on a boat or a plane in China and it is about to land, they will all surge towards the exit, pushing each other out of the way to save a few seconds on exiting. They are a nation that has industrialized late and are pushing and shoving to catch up.

Scott Brooks writes:

I believe Yishen is correct. China as a nation is where the US was back in the 1850's (of course, with modern technology and infrastructure mixed in). They are still transitioning from a 3rd to 2nd to 1st world country. If you stop and think about it, they are really all three mixed into one. To expect a country to act and behave like a mature adult when they are really more like an adolescent, raised by dysfunctional parents is simply not foolhardy.

It will take the Chinese several generations to move into full 1st world status, and several generations to after that to mature into a moral system that is akin to the US.

We all go through our growing pains, the key is recognizing where the other person, or country or trading partner is on the "national maturity continuum" and the relate to them accordingly.

However, it is also a mistake to underestimate or minimize someone or a group of people because you see them as "less sophisticated" than you. That's why there is such a divide in America between the coastal elite snobs and us backward country bumpkins out here in fly over country.
 

Jay Pasch writes:

One of my best friends had an IT business selling computer mainframes and services into overseas markets. He did fine everywhere he went until he wound up in China; he had the equipment shipped, put boots on the ground, bolted the mainframes together, bus & tag to the disk systems and tape drives, IPL'd the system and turned the project over to the Chinese with a perfectly turned-up MVS system complete with blinking cursor. To his dismay the Chinese all of a sudden wanted application support, which was not in the contract, nor part of the company's forte. The Chinese government detained the engineers for six months, holing them up in their hotel rooms, and withheld contract payment until the company was forced into bankruptcy after the big bank notes came due. That was a long time ago, but even today we can't get through a pitcher of beer without the inevitable cussing about dealing with the Chinese…

Rocky Humbert writes: 

My dealings with the Chinese are largely limited to my contact with the venerable General Tso. I should note that The General has treated me well over the years. However, one serious exception comes to mind: It was in a small, nondescript restaurant inaptly named, the Jasmine Rose, located on a hardly-traveled road in northwestern Massachusetts where my friend, who was seriously allergic to garlic, and I ordered dinner. We advised the waiter of his food sensitivity and were assured that our dishes would be prepared without any garlic. After my friend started to show preliminary signs of anaphylactic shock, we discovered some garlic in the dish and called over the manager. What amazed us was not that the kitchen had made a mistake (which happens), but rather that the manager when faced with irrefutable evidence simply kept repeating (in broken English), "NO GARLIC! NO GARLIC! NO GARLIC!" as if his protestations were proof that we were wrong and that he was right. It was a bizarre, but memorable experience, and left an indelible impression on my mind, and on my friend's medical chart.

More relevant to Specs is some below-the-radar-screen litigation currently underway against certain Chinese companies and their US underwriters. A lawyer friend, working on these cases has explained to me that vast numbers of listed Chinese companies are complete and total frauds — and that in fact, a variety of (private) Chinese firms exist solely for the purpose of providing seemingly-kosher accounting paper trails for the fraudulent Chinese companies– so legitimate US accountants will see their (completely bogus) payables, receivables and assets, and provide a clean bill of health. Every time I am tempted to buy a Chinese stock (or index), I think of this story and I stay away. It's not that US companies are immune to malfeasance (Worldcom, Enron, Adelphia, MF Global?), nor it is true that US companies don't massage their earnings (GE, etc.). But, rather, if you throw a dart at a list of US companies, the odds are good that you won't hit a complete fraud. It's my impression that the same cannot be said about Chinese companies, hence I will not invest there directly, but prefer to invest in world-class US companies that can complete their own on-the-ground due diligence in China. Lastly, the Chair has opined periodically on nature vs. nurture. At the risk of putting words into his mouth, he has usually come down on the side of nature. Without taking a position, I would suggest that corporate and personal behavior MIGHT BE more influenced by genetics than by culture. If this is so, certain countries and people will be inhospitable to passive investors for a very very very long time, while other countries and people will demonstrate very different characteristics. Again, I am NOT taking this position. I'm just putting it out there…


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3 Comments so far

  1. Mr. TG on February 10, 2012 5:00 am

    YK, thank you very much for sharing this fine observation with us.

    It is true that one hundred and fifty years ago America was considered by Europeans a lawless nation of subsistence farmers.

    It was also embroiled in a struggle with the greatest power of all times, and soon after it got tangled up in a brutal, merciless civil war.

    Its government was deeply corrupt - as bad as the CCP - and most of its business community had very questionable ethics.

    The country’s state of development ranged crazily from Manhattan to the Wild West, and in virtually every city you could find urban slums and sweatshops.

    Slavery, persecution of indigenous population, child labor and uncontrollable crime completed this joyful picture of the glorious America, no later than four generations ago.

    So, is China following the same path? I really don’t think so.

    Yet the beast is surely flexing its muscles, it is in my humble opinion clearly lacking the most important skill, brainpower - you name it.

    In China the system tries to create homogeneous personalities, just like making chopsticks. For chopsticks to work properly, you have to make them all exactly the same length.

    In this context imitation is generously rewarded and new ideas - perceived as threats to the irremovable doctrine of social harmony – are almost systematically killed in the egg.

    You may live in a Chinese family, work in a Chinese corporation, deal with the Chinese government, or study the Chinese society, you see everywhere the same thing: an overcautious attitude (if not a strong disapproval) toward innovation.

    Anyone living and working in China – and to a certain extent, anywhere else in Asia – knows what I am talking about.

    It really is nothing that you can compare with the rise of America one century ago.

    See, it is often said that it is not the strongest that survives, but rather the one most adaptable to change. My take is that China doesn't have one per cent of the West’s ability to reinvent itself.

    Progress and power, I believe, will remain fueled by innovation and freedom - not by slavery or political oppression.

    China has a spectacular growth, sure (even if, well, who could ever trust the numbers given by a communist government?) but in 2012 scientific knowledge is to be found in the US, in Europe, in Japan and in Israel - not in the Middle Kingdom, or just a cheap and often dysfunctional copy of ours.

    See what’s currently happening in the industry. While ten years ago the robots designed in Japan could replace a Chinese worker at a cost of $50/hour, nowadays this cost has fallen to $2/hour.

    What is China going to do once its legions of slaves become useless?

    Predicting the future always is a risky speculation, but one can easily observes the industry following the same path as the agriculture did during the 20th century (-90% manpower, +90% productivity), and this may very well be the dawn of a new industrial revolution - a revolution led by robotics, automated complex engineering and artificial intelligence.

    What is currently happening at Foxconn is an accurate illustration of this massive switch, and it’s no wonder that it gives such bloody nightmares to the CCP.

    China is a bit like the Titanic, so to speak – a behemoth said to be unsinkable. In the press, a "sure thing" exactly like Japan was in the 80's.

    “Many shall be restored that are now fallen and many shall fall that are now in honor”, wrote Horace. Just wait for a moment, China – the West hasn’t said its last word yet.

    [Edited 2012-Aug-18]

  2. Sanjay Kohli on February 10, 2012 7:39 pm

    Wow!! Sounds like Transparency International is being very harsh with India with a 95 rating. Being on the ground here I think Governance is improving very rapidly after the year long anti-corruption movement. Delivery of Public Services is also improving. Although accounts being fudged here is also not uncommon, there are a large number of Companies where one can rely on the financial statements. Also, the pushing that used to take place in the aircraft no-longer does. But our infrastructure is the pits compared to China. There are miles to go before we sleep & miles to go before we sleep.

  3. douglas roberts dimick on February 12, 2012 6:21 am

    Another Thought on China — No Franchise, No Recourse

    Having surveyed the articles here from Victor, Yishen, and notably Rocky and Leo, both preceded by Stefan calling out Professor Xu’s communistic contortions of history (this time being Europe in the 1800’s), one may favor “nature over nurture” when rationalized by cultural and social-economic applications within a one-party system. That said, we may conclude that it is not genetics.

    Rock’s collage of fraudulent Chinese companies defrauding US underwriters a la the Jasmine Rose manager’s denials (“No GARLIC”) reveals precisely how a “culture-business confusion” pervades China’s communist party’s control of “the peoples’” state. Moreover, after living and traveling throughout China, one sees the cause for what can best be described as “the greatest evil of our time against all free market nations.”

    For a developed or developing country, a centralized bureaucracy controlling a nation’s economics has proven destructive to the cultural heritage and economic veracity of a people. Granted, at times, such as during war, the protecting of human rights from conflicting social order may be balanced. We have seen how the rule of law can protect human (and divine) rights of social freedom while enforcing social order to develop economic liberties.

    In the US, we fear how (patriotic) exceptions could consume that rule of law preserving democracy, whereby an Orwellian state takes control of our individual lives. The problem with China is that such exceptions have long been masked as the rule; 14 dynasties (or 14 failed tyrannies) precede what can best be described as the modern day version of its 15th Dynasty – the Communist Party of China or CPC (or what some here refer to as the 9 little emperors). As a party member recently noted, “the Chinese Communist Party is bigger than the Chinese Government.”

    So how does this autocratic characterization, one which is not disputed by the dictatorial regime itself, answer the Chair’s query about Chinese business and its markets in toto?

    Given Rome also rose and fell with a militarized central bureaucracy, Cicero comes to mind…

    To understand, ask what is the nature of a thing.

    Ever wonder why China’s municipal and provincial as well as central governments continue to persecute religious groups and leaders? Cicero wrote that both justice and law “derive their origin from God.”

    See… http://en.wikipedia.org/wiki/Natural_law

    The first lesson in Communist China is that no one and no one thing (be it company or church or rival political group) can be bigger than the communist party. There are nine members of the standing committee that dictate the party organs, which in turn governs the state that controls the individual daily lives of the people here. Propagating such pervasive control for it to remain in power, as with reference to Greek mythology, the CPC has transformed into the beast that rules its own land by fear.

    Beast? As it suppresses its own people and others within reach of its SS-like state (and secret) police, the CPC is itself controlled by its own hunger. The hunger consists of political and economic appetites. It needs money to maintain political control – that simple.

    By reviewing the past 60 years of Chinese history, one may see how Chinese Communists have and continue to lie, steal and cheat, as well as kill to satisfy those appetites to establish and maintain centralized control with themselves being at the center. Of course, this history is neither a genetic, racial, nor ethnic trait. In China, the citizenry is schooled on the US-EU histories of African slavery and Indian(s) genocide. Ironically, the communists here apply such lessons not for enlightenment but rationalization. A common example of such is cited in Stefan’s article on (CPC) economic nationalism.

    And, in fact, we in our lifetimes have seen a similar (Asian) variation with the phoenix of Japan in the 1970s-80s. Not until Reagan’s 1981 and 1986 tax acts – though not the main thrust of these laws – was there a correction to the implosive hubris of the Japanese epic rise within international commerce. Recall how folk’s from the 70s talked of Japan owning America? One may now snicker with similar talk of China given it holding one quarter of US debt.

    See… http://en.wikipedia.org/wiki/Reaganomics

    The second lesson here in Communist China is understanding the central question of modern day Chinese economics…

    Who is in control of the relationship, the creditor or the debtor?

    There within so pondering may our Chair find his solution – note how the question is framed exclusive of the notion of equity. His sought for kernel of truth then would be based on his mutual balance sheet of prior dealings with the Chinese counterpart.

    Again, what is the nature of thing (or person) here? For instance, is the Chinese business counterpart really a private concern or merely a shell for a government interest? Again, note Rocky’s litigation reference.

    Answering that question is crucial, because the Chinese government has no qualms with stealing from a foreign business interest. Actually, that very commercial creed is promoted both within the walls of their party and government offices as well as among the population via a “wink and nod” campaign against the “foreign devils.” Such dualistic nationalism has fueled party cohesion as well as national propaganda since the early days of the CPC.

    Regardless, as with a Korea that remains divided, so to is China. Victor’s North-South reference as to dealings with foreigners highlights the national political rift for that central power of the state within the party more so than any based, commercial issue of trustworthiness. If one is entertaining whether northern provinces are more ethics minded, try doing a deal with the coal bosses; most if not all of whom have absconded with state and company funds sufficient to own homes in Southern California – true story.

    The distinction that most fail to make with US-EU comparisons to Communist China returns us to that culture-business confusion referenced at my opening. For instance, Yishen analogizes the 2008 Chinese milk scandal to the 1858 New York one. Granted, there are similarities albeit 150 years of political and economic development to include nuclear energy, the Internet, and technological advances in refrigeration and animal husbandry…

    That said, China’s present is not America’s past from the central standpoint of how a nation makes decisions. Franchise, being the right to vote, may not appear to be a determinative factor, but it is…

    In China, those “nine little emperors” (of the party’s standing committee) rule China. Until Chinese citizens can control their individual lives a la taxation with representation, there will be no trust as there is no recourse — for both, foreigners and Chinese nationals. Leo’s “Dealership Distrust” article is on point.

    Right, in the US, advancement of electoral franchise first for women did not come until 1920 with the 19th Amendment and then for racial minorities with the 1964 civil rights act – and here we are today with our first African-American president. Yet think scale… proportion. In Communist China, of 1.4 billion, only 80 million are allowed membership into the one party, which is controlled by nine families. Sure, one can go back to the founding of America… Anyway, as for our trust issue…

    Victor, if you can steal a dollar without fear of being punished, will you do it?

    There within may you find the nature of your Chinese colleague at present. If he or she works for (or with) China’s communist party or its government either directly or indirectly (be it subsidiary or agency), then all the good times before may be a big lie – or a series of little ones — leading up to you getting swindled. Contrary, if your Chinese colleague immigrated to the US to escape communism and has since built a business cache with you, then perhaps the future is bright.

    What I have learned in China is that the economic veracity of markets is determined by political franchise, for it is a government that sanctions a market via its ways and means of taxing and regulating inclusive transactions. I find that many here will attempt to analogize US-EU histories with China, but usually they do so either upon a communist party pulpit or within some ivory or gilded hallway of global and regional commerce.

    My last business dealing was here in Shanghai shortly after both my book was published and at the beginning of my current teaching stint at SHU. It was security consulting, and though the company director presented an independent business faire, heir apparent was his agency with the central government. I created a US-CN intelligence analysis format for evaluating “issues of mutual cooperation” – which is Chinese phraseology translated to mean how to lie and cheat the other — between our two governments.

    I insisted – even after presentation of a bag of cash – that both payments were wired to a US account before delivering each of the two parts of the report. Why? I have no doubt that the boss would have – as others before had – cheated me in some way, shape, or fashion.

    How could I be so certain? There is not justice, no recourse here in China.

    What could I do when cheated in China? No more than a Chinese national can do – unless a member of the CPC. The judicial branch in China does not function independently as a check and balance. The chief justice of the supreme court here reports to and rules in accordance with the communist party – not his judicial interpretation of the country’s constitution.

    Thus, my answer, Victor… do not leave a dollar by the tea pot unless you intend to tip.

    They do not tip here in Communist China, being a remnant of the revolutionary fervor against bourgeoisie-capitalists – also helps the laobans (or government and company bosses) save a few yuan.

    dr

    Ps. Thomas, I wrote this piece before I read your commentary. We both appear to find “beast” apt here. I presume you too have lived in its belly…

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