China Problems – One Perspective

This is why China needs to improve their infrastucture

There is probably no company outside of GM that has helped China in manufacturing more than Apple. Even today they have a battle on their hands to stop counterfeit. A lack of government intervention shows a lack of respect for copyright and Rule of Law

There has been great hype about how China is a fantastic market for any manufacturing group or even sales. While this sounds terrific and simplistic in discussions, on paper there are many prohibitive reasons why China is a problem today for any business.

A recently found a great post over at Dartmouth Business Journal which is an excellent perspective about China and how their internal structure actually fails them to perform in the free markets. While one can argue about size of deals and number of manufacturers that are operating over there, the points in this article can not be disputed with real evidence. China is gigantic, and to do business over there requires all kinds of deal making and monitoring of money transactions, quality controls and constant watch of political players to find success over there.

Here is one great section from this article:

Hindered by a maze of administrative procedures, foreign investors in China have complained that the Chinese government does not allow them to compete fairly with native businesses. Chinese investors that want to invest overseas, too, are heavily limited by esoteric guidelines.

However, beginning in October of 2011, the Chinese government took a significant step toward freeing up its hold of the financial sector. The deregulations include allowing foreign companies with RBM deposits outside of China to use their offshore account to directly invest in China, and allowing direct investment overseas for private Chinese investors in Wenzhou, also known as a “general financial reform zone” experiment. The government, afraid of the volatile international financial sector, decided to allow Wenzhou–a city in China recognized as the “birthplace of China’s private economy” due to its role as leader in developing a commodity economy, household industries, and specialized markets in the early days of economic reforms–to experiment with direct investment overseas. Concerns over inflation and property risks have held back the Chinese government from allowing a larger-scale deregulation, but nonetheless the Wenzhou experiment is widely acknowledged by the international community as a significant step forward.

Besides de jure governmental regulations, there are many de facto barriers to Chinese involvement in foreign trade. The most prohibiting factor to foreign trade is not what the laws say, but rather the existence of confusing, and often conflicting, laws at all levels of government. A unitary state with 23 provinces, 5 special autonomous regions, 4 self-governing municipalities, 2 special administrative regions, and a hierarchy of departments at all levels, China has innumerable bodies with legislative and enforcement powers that can influence foreign firms’ operations. Many foreign, and even native, companies have vocalized the impossibility of navigating the Chinese bureaucracy. A common phrase in Chinese business circles is, “It’s okay since no firm is 100% in compliance with regulations.” This trend poses significant legal risk for potential foreign investors.

Check out the full article on line over here, and let me know if you have any thoughts on the matter.

Another article in the Economist goes into greater detail of this problem.  To continue the point above from the Dartmouth Business Journal, the Economist claims:

A disproportionate share of China’s investment is made by state-owned enterprises and, in recent years, by infrastructure ventures under the control of provincial or municipal authorities but not on their balance sheets. This investment has often been clumsy.

I look forward to the days when the Global Markets actually sync well together, but today they are only a hint of what is needed to play along with American business. Perhaps this is what they call trail blazing?


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