DiligenceChina

On Chinaview.cn, we finally get evidence to help us all be done with the mythical notion that China is becoming a privatized nation of nimble entrepreneurs and independent businessmen. The truth is that the State sector is still dominating the domestic Chinese landscape. China’s economy is a developing into a bigger Singapore. Large state-owned enterprises (SOEs) are getting bigger, more powerful, more profitable, and more rational. Mainstream media have fallen in love with the idea of a “wild wild west” China where no rules apply and all you need to make it big is an idea and a dream. The truth is that the SOE business structure is still the dominant model of China’s economic growth.

Read this article from Monday:
http://news.xinhuanet.com/english/2007-09/01/content_6644798.htm

WUHAN, Sept. 1 (Xinhua) — The combined business revenue of China’s top 500 companies accounted for 83.5 percent of the gross domestic product in 2006, almost six percentage points higher than the previous year.

The China Top 500 Enterprises 2007 List released here on Saturday said that the top 500 gained 17.49 trillion yuan (2.3 trillion U.S. dollars) of business revenue last year, up 23.7 percent over 2005.

A total of 349 enterprises, or nearly 70 percent of the total in the list, were state-owned or state-controlled. Their combined assets reached 14.9 trillion yuan at the end of 2006, accounting for 85 percent of the total.

And here:
http://news.xinhuanet.com/english/2007-09/03/content_6656847.htm

China’s major state-owned firms report 34% rise in profits

BEIJING, Sept. 3 (Xinhua) — China’s major state-owned enterprises (SOEs) reported a 33.5-percent rise in profits for the first seven months, said the State-owned Assets Supervision and Administration Commission of the State Council on Monday.
Total profits of the 417 major enterprises rose to 661.5 billion yuan (88.2 billion U.S. dollars) in the January-July period, from 495.5 billion yuan a year earlier.

If your business plans for China have ignored SOEs or worse, have factored in a general trend toward privatization at all levels, then you need to be careful. If you plan on doing anything innovative in telecom, banking, mining, shipping… and the list goes on, then you are probably going to need the approval of your biggest competitor.

We used to say that when the US economy sneezed, other countries caught cold. Or something like that. You know what I mean. Now the US economy is starting to show signs weakening and it will be interesting to see what the impact on US-China relations will be. Housing inventory and Consumer Confidence are both big indicators, and the point data we got this week wasn’t great. Momentary blip or the end of the world? Great question. Let me know if you have an answer.

But the real issue for international owners and managers in China is what impact a distressed US economy will have on China’s economy – and what the political fallout will be in an increasing tense relationship. Olympics and Presidential campaigning during a global recession? Will China boom while the US sputters – and move up the value chain in the process? Or will a weaker US economy spark protectionist wildfire that consumes trade links?

Here’s one way to view US-China relations against the backdrop of US economic growth.

If the US enters a mild or rolling recession, look for a quieting of anti-China rhetoric among mainstream political players and media spokespeople.

If the US economy has a severe downturn, expect a sharp increase in the pitch and frequency of fiery talk and frosty trade restrictions.

The swing variable is Unemployment. If people stay employed but have to get by on less – or are nervous about losing the jobs they have – then belt-tightening and budget worries are going to make China look better. The prospect of paying more for non-China stuff is going to add to people’s worries. Besides, the Democrats will have a new card to play and will try to score points closer to home. They will still keep up pressure on safety issues (toys, food) but will start banging the exchange-rate drum a bit more softly.

If the economy weakens further and starts shedding jobs, then it will be a completely different story. The China/job-loss link never resonated too strongly in the US because the employment picture has been pretty bright even as China was steaming ahead. But if the jobless numbers in the US spike over the next year, expect to see China taking much of the blame. Hillary has already been talking to union leaders about banning certain types of Chinese goods. It’s all just so much posturing and trial-ballooning for now – but it’s a message that always plays well when people are worried about finding work.

Churning financial markets distracted the media from the last China-export debacle (Mattel – Sarge the Jeep and Polly Pocket’s edible magnets), but there’s a new front opening down in New Zealand where flamable children’s pyjamas have been recalled.
Read the FT article at Poison pyjamas add to China export scares.

But the real action is unwinding in power centers far from the lands of Middle Earth..
In Beijing, bureaucrats are pitching the touchy-feely new age openness for some good old fashioned wagon-circling:

‘The latest concerns came as Li Changjiang, head of China’s safety watchdog, claimed the product safety scares were “a new trend of trade protectionism”, and accused some governments of “demonising China’s products”. His comments reflected Beijing’s anxiety over growing fears of Chinese exports in the US and Europe, but they were dismissed by Peter Mandelson, the European Union trade commissioner.

“The allegation that European companies’ action against toxic Chinese goods is politically motivated and shows bias against China is totally false,” said Mr Mandelson on Monday. “As trade commissioner, I will not accept claims of toxicity being used as a pretext for protectionism.’’ ‘

Meanwhile back in Washington, Hillary Clinton was putting the finishing touches on her “We won, the Iraqi government lost” formulation that will probably be her first and last contribution to non-partisan foreign policy – in anticipaton of General Petraeus’ speech in the second week of September. While not exactly cooling off, the Iraqi (and greater Middle East) situation seems to be stabilizing – and depriving Democratic campaigners a powerful foreign policy issue. If the White House and Congress are debating about the SPEED and SIZE of a troop cut, the Dems are going to have to find a new foreign policy problem to showcase their international credentials.

Lead paint on toys, antifreeze in medicine and flamable kiddie PJs make China a great target. Old-style paranoid bureaucrats snapping at the press are going to paint a bull’s eye on it. Once the bureacrats and hard-liners take hold of center stage, tensions between the US and China can escalate quickly and unpredictably.

Well, they got Barbie – and even Batman took a hit. Mattel is in for another tough week. And so is China Inc.

Now, here’s a morbid test for all you China-Watchers out there: Who will get more air-time, Sarge the Jeep or Polly Pockets?

Unfortunately, I’m being serious. ‘Sarge’ is the toy car from the Pixar movie Cars. Finished in toxic lead paint that was intentionally substituted at the factory level, Sarge is a textbook example of supply chain failure. Because of the way it happened (close personal relationship between the provider of the paint and the toy-factory owner) is seems to be a particularly China-type problem.

Polly, on the other hand, is a toy for toddlers that contains a series of tiny magnets glued to fabric. Little kids consider tiny magnets a delicacy, and gluing them to fabric is like putting steak on a bed of greens. It just adds to the presentation. This really sounds like a design flaw which started – and should have stopped – at HQ early in the product development cycle.

Polly has already made a few kids sick. Lead poisoning doesn’t start showing up for years.

Mainstream media has two ways to go

If the mainstream media interprets the kids who got sick from Polly Pockets as victims of China Inc, we have got a pretty severe situation on our hands. It will meant that: A) China Inc is a lightning rod for everything wrong with consumerism in the US, and B) China will have gotten little kids sick on CNN. That’s a pretty big deal.

BUT if the media folk focus on the lead paint issue then we are still on reasonably high ground. An optimist would say that there is still a chance for clearer heads to prevail. Pessimists might say that there’s still room left to fall and that the situation may get even tenser before it improves.

The week is still young. Stay tuned.

Earlier this week two Party officials speculated aloud about the possibility of using China’s large dollar holdings as a weapon against the US economy in the event that Congress passed what the Chinese consider to be punitive or threatening trade legislation:

“China threatens to trigger US dollar crash”

The officials speculated that a sell-off of Treasuries and dollar-denominated assets would devastate the US economy.

Just yesterday, however, the People’s Daily devoted a lot of home-page space to denying that this was official Chinese policy. ( http://english.peopledaily.com.cn/90001/90778/90857/6238259.html )
China has ‘no plans’ to sell off greenback

Reassuring? Well… no.

1) China has never had a good relationship with Congress. Beijing doesn’t seem to acknowledge their authority or importance. While at times this has been hilarious, it is getting to be a little scary and inappropriate. Beijing likes dealing with personalities, not institutions. In China, the politburo is low-key, and the Premier makes speeches. They’ve never been able to get a handle on the notion of hundreds of officials with shifting agendas giving daily press conferences.

2) Beijing’s practice of sending mid-level academics or technical spokesmen out to make a “misstatement” in a foreign business center is becoming standard operating procedure for floating trial balloons and issuing veiled threats.

3)Saying “We never really planned to do the devastating thing that irresponsible Party official/general /government spokesman said we would do” is Chinese Tough Talk. The soothing response in the People’s Daily is a tacit acknowledgement that the issue is real and on radar screens in Beijing.

China doesn’t see any linkage between dangerous product exports and its own internal financial policies. Western politicians are trying to portray China in terms of a broader, multi-faceted threat. The mismatch has the potential to lead to an escalation in tension.