Accounting and Accountability

(N.B. this is my submission for December's issue of Business Tianjin magazine).

I would argue that the most important single decision of the last twenty years – more than the invasion of Iraq or the atrocity of 9/11 - was President Bill Clinton’s 1999 trade agreement with China. This entente ushered Beijing into the World Trade Organization (WTO) and conferred permanent “normal trade relations” between the two nations. Quite apart from the enormous economic consequences (adding an estimated 0.7% to US GDP per annum, and both lowering prices for manufactured products and expanding access to cheaper capital worldwide), the strategic purpose was to tie in China as a responsible stakeholder in the world community and, so Clinton believed, promote democratic reform through economic development. As a prosperous middle-class developed, so they would demand further legal and political rights. Similarly, the imperatives of capital would work through the implacable Chinese bureaucratic wall, advancing the demands of property rights and the rule of law. A more developed economy would require, for example, enforced IP rights, the right to own property, free movement of labor, a market-led currency and far greater transparency regarding transactions and procedures in business and government.

The economic consequences have undoubtedly been unparalleled, but the strategic effects remain to be proven, one way or another. Certainly, the assumption that the Chinese government would cede any control in the domestic sphere has consistently been proven incorrect. (It was perhaps one of the only major governments to refuse the blandishments of Rupert Murdoch, which is something). It is in this context that the US Trade Representative’s office request in October for information regarding China’s internet policy, and the blockages of US websites, is so interesting. Requesting clarity in an area deliberately cloaked in opacity, the USTR did so under the banner of free trade and the WTO rules, though the implications are readily apparent.

Some of the questions included:

Websites of service suppliers based outside of China are sometimes inaccessible in China, which can prevent those companies from marketing products and supplying services to the Chinese market.
a. Who or what ministry is responsible for determining if and when a foreign website should be blocked in China?
b. What are the guidelines and criteria for blocking access to foreign websites? How often are these guidelines and criteria changed or published? Where are these guidelines published? Are they made public in advance of their implementation? Which ministries are responsible for drafting them?
c. What is the process for implementing a restriction on a website? How does the relevant entity determine whether an entire website should be blocked or only services or content deemed illegal?
g. Can an affected service supplier appeal a decision to block access to their website? If so, what is the procedure for appealing, and where is that procedure published?

The Measures for the Administration of Internet Information Services, issued by the State Council on September 25, 2000, describe nine categories of content which Internet information service providers may not disseminate.
a. Are there any laws, regulations, policies or other guidance that establish criteria to determine when content fits into these categories? If so, where can a service supplier access these measures?
b. Are government requests or orders to filter specific terms online ever communicated directly to Internet information service providers? If so, how are these directives communicated? Are these requests or orders made public? Does an Internet information service provider have the right to obtain a written order prior to implementing such a directive?

According to the White Paper on the Internet in China, “telecommunication business operators and Internet information service providers shall establish Internet security management systems and utilize technical measures to prevent the transmission of all types of illegal information.”
a. How is illegal information defined in this instance?
b. Is a written governmental order required for either a private corporation or a relevant authority to block the transmission of illegal information?
c. What types of technical measures are service suppliers expected to use to prevent transmission of the illegal information?
f. Does Internet content from outside of China go through a separate monitoring process for illegal information than Internet content created inside of China? If so, how do the two processes differ?

Clearly, the Chinese government is highly likely to decline to answer all of these, citing national security. But the very act of the request demonstrates the deliberately opaque, obfuscatory nature of Chinese administration (a model repeated throughout the land, from the top down). By remaining behind a shroud of secrecy and ambiguity, officials, state-owned enterprises, businesses, agencies and all concerned give themselves great freedom for maneuver. Once a position is clearly taken, it is limiting; far better to be nebulous, undefinable, and thus unopposable.

Hence, while corporate life in the west is generally – though there are always Enrons trying to gain from the relative information-poverty of others – more transparent, business in China, and Chinese life in general, is still far less accountable. I use this word deliberately: both in the sense of being accurately and opening measured and recorded for all to see, and being accountable for actions and decisions taken. On October 27th, in an illustrative incident, China High Precision Automation Group Ltd. said in a statement that despite “continuous effort in cooperating with KPMG”, it had not provided the auditors with requested information because it risked breaking the “Law of the People’s Republic of China on the Guarding State Secrets”. KPMG resigned as their auditor and the company was suspended from trading. While it’s unclear what state secrets a precision tools manufacturer would be privy to, the imbroglio suggests the enormous tension between sovereignty, state secrets, and the role of cross-national auditors. The full exposure of accountancy, and accountability, is something to which China is yet to become accustomed.

A Pause...

I seem to have accumulated a stupid amount of obligations in my professional life, so I think this blog is going to have to pause for the time being. Shame, but you got to satisfy the people that pay you first of all. (To be honest, I'm mystified how people like Stan Abrams at China Hearsay manage it - how can they find the time to create such good quality posts, all the time? Beats me).

I am currently working on a project that I hope will give more time, in the sense of allowing me to drop other things that I'm currently doing. If that works out, then I'll be back here. Until then, keep reading the fine bloggers and writers featured =>

(I'm sure you do anyway!)

Utterly Vile

Doubtless you have heard of the abomination of an event in Foshan, Guandong province, where someone ran over a two year-old girl, paused, and then completed the act with their rear tires. Eighteen people walked past, not bothering their arses to help a seriously wounded infant, and another vehicle also ran over her legs, before someone finally helped her.

Well, it seems the little girl, Xiao Yueyue, has died.

I am wondering if this is a country I can live in. I really am.

Dark Clouds On The Chinese Economy

(N.B. this is my submission for November's Business Tianjin magazine)


A bubble is never known until after the fact. I remember the dotcom madness of the late 90s, when absurdities were occurring like Boo.com burning through $188 million of venture capital in six months (I still remember their TV ads: achingly hip, but no doubt fearsomely expensive), and Yahoo! buying the Geocities web hosting site for over $3.5 billion when it never looked like turning a profit despite then being the third most visited US website. (It was shut down 10 years later: an incredible rate of amortization). Yet while these colossal misjudgments seem self-evident, at the time no doubt intelligent people were urging them on. Hindsight is always perfect, of course, and it’s the easiest thing in the world to criticize the mistakes of others, but only in hindsight can errors like these be known: until then, they are cited as proof of “the new economy”. (The most horrifying phrase in business and finance is surely, “It’s different this time”.)

The question on many people’s minds is whether China is different, and whether it can get through what looks to surely be a deflating property bubble without causing a hard landing (a sudden slowdown). In many respects, of course, China is different. The effects of its economic boom have been unprecedented, transforming the world economy in areas as disparate as raw material markets and the US deficit. But to assess what’s currently happening in the Chinese economy is a difficult task, given its macro scale and unique position of being so large and yet still medium-developing. A wise provincial governor, rather than simply accepting the GDP figures presented to him by statisticians, used to look at the underlying figures, such as electricity demand and shipping volumes. When trying to do similarly, I am struck by some of the stories regarding the Chinese economy, despite it still reaching an annualized growth figure of 9.1% in the Q3 of 2011. Let’s look at the various aspects.

1. Local government debt in 20 provinces is over 100% of GDP. Following the economic crisis of 2008, the central government encouraged banks to lend and local government to borrow, to keep the economy buoyant in the face of a sharp decline in import orders from western nations. This was successful insofar as the economy kept growing above 7% (seen as the essential growth rate, below which the economy may fail to absorb new workers). However, the debts remain to be paid off.

2. As much of the money was issued by banks based upon bureaucratic channels rather than based on credit assessment by banks, the lending and spending too often went into unproductive areas. You may have heard about the “ghost towns”, entire cities constructed with not a solitary soul living there. Consequently, the rate of return on these loans is expected to be poor, leaving banks burdened by bad debts. As Reuters commented on October 10th, “Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered [Bank] reckons as much as 8 to 9 trillion yuan will not be repaid -- or about $1.2 trillion to $1.4 trillion.”

3. One of the main sources of funds for local government is land sales. At the moment, developed cities (and not just those in the richer eastern provinces) have astronomical land values (and consequently property prices). For example, Bloomberg (July 13th) cites Loudi, a city of 4 million in Hunan province, which issued 1.2 billion yuan ($185 million) of bonds, guaranteed by land valued at $1.5 million an acre. That’s about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year”. Average incomes in Loudi, by contrast, are $2,323.

4. Consequently, property prices, as has long been well known, are extremely expensive, but with interest rates below inflation and few other investment opportunities, most Chinese feel there is no other sound investment. However, for prices to be sustainable, there must be willing buyers. Recent moves by the central government to tame property inflation by diminishing demand look to be increasingly effective; but perhaps there comes a time when people at the bottom can no longer afford to step on the property ladder. The Economist (October 23rd) noted, “the number of residential properties sold during the weeklong national-day holiday earlier this month—usually a brisk period for sales—was down by 72% compared with the holiday in 2007”. Prices in one district are down from CNY15,000 a square metre to CNY9,000, while “in March a company in the southern city of Shenzhen caused a stir after it cut prices by 20%”.

5. One of the most worrying signs comes from Patrick Chovanec, associate professor at Tsinghua University’s School of Economics and Management. He says that “With credit conditions tightening, [property developers] systematically ran through the credit lines available:  first the banks, then high-yield bonds in Hong Kong, then the private wealth management vehicles that have been popping up all over China, then the loan sharks.  Finally, they ran out of options, and had no choice but to start selling some of their inventory at whatever price they could get.” This perhaps explains why, as the Financial Times reported (October 9th), “the ‘big four’ state banks suffered a net loss in deposits of RMB420bn – more than four times their lending in the same period – as savers fled to high-yielding shadow banks.” Savers, and developers, it would seem.

*

I am sure there are still many signs of strength in the Chinese economy, too. The fact is still it is still growing at 9.1% a year and doubtless has a great pool of would-be buyers waiting for prices to drop to affordable levels. All the same, it shows the tightrope upon which Beijing is walking. These are very delicate days.

Checking Out Beijing: Laowai Fatigue

One of the oddities of living in Beijing is the extremity of choices. For the foreigner, there is so much to check out, more than could ever be experienced, unless you are some superhuman social butterfly who has to try everything. I’m sorry, but now I’m over thirty, I don’t have the energy anymore. Call it laowai-fatigue or early-middle age, but there comes a point when checking out every interesting-sounding place seems less a worthy project than an example of Sisyphus’ Rock. No matter how many places you check out, more of them open up!

In Tianjin things are easier: if you want to go shopping, there’s Nanjing Lu and Binjiang Dao, and Da Hutong, if bargain hunting; there’s Ali Babas, Helens, and Truemans; clubbers can go to Scarlet or Sitong; and dining choices are fairly consistent. By contrast, Beijing has so many places and opportunities that after 18 months of living here, I feel that I have barely scratched the surface.

Choice is often presented as the sine qua non of modern life, an irrefutable Good Thing. But there can come a point where the multiplicity of options is actually detrimental to your experience. For example, my music collection now contains over around 2000 albums by 300 artists. Cable TV offers hundreds of channels, while I have thousands of e-books on my Kindle. In such circumstances, it’s sometimes easier to just stick with what you know rather than constantly explore new things. We all need a comfort zone of some kind, and it’s good to have places which are regular hang-outs. You get to know the staff, the customers, what to expect. “Where everybody knows your name”, as Cheers said.

Now, if you’ll excuse me, I have to go out – there’s an Ethiopian restaurant and a new Russian bar I just have to check out.

On The Buses

(I hope somebody appreciates the 1970s British TV series reference in that there title... OK, maybe not).

I don't often take the bus here in Beijing: usually it's subway, taxi or foot. Yesterday, though, I was in one for a short ride to the "cat hotel" to pick up teh kitty after our sojourn in Jiangsu. Like most places with a captive audience (elevators, subways, public fucking toilets, airports), there was a flat-screen pumping out some bullshit that most people were ignoring or half paying attention to. It's the very definition of passive viewing. Not being familiar with it, though, it struck my eye and I watched some cute young pop singer prancing round a car (driving through empty streets), in a nice big new house, with cool hip young friends, in the nice modern city (not many people there either).

I thought to myself, "This just looks just like some bullshit 'Life is getting better and better' propaganda video". I asked my wife what it was all about. She said she was a very popular Taiwanese pop singer. "Right," I said, "but what's she saying in the song?"

"Oh, it's about how life is getting better and better."

I couldn't help laughing. It's just so subtle. I hate to make the hackneyed "Nineteen Eighty-Four" reference, but there we were on public transport with a telescreen pumping out propaganda about how life was improving day by day. It's sometimes frightening to realise that, yes, you are indeed in the reality which Orwell was imagining/anticipating. I do not doubt that life is improving in many ways for your average Chinese person, but the relentless propaganda ("guiding public opinion") never fails to turn my stomach.

Short Trip To Jiangsu

I was in Jiangsu over the National Day holiday, visiting the in-laws with my wife and daughter. The town they live in is a satellite town of a Tier 3 city, and by Chinese standards very small - probably only home to around quarter of a million people. While Jiangsu is the richest (I think) province, excluding the direct governed cities like Shanghai and Tianjin, it was the first time I'd been in such a small place during my time here: salaries average around RMB2000 a month, there are no resident foreigners, and prices are significantly lower than elsewhere. Fares for taxis start from RMB4, baby clothes were around half the price of those in Beijing (which was nice), and so on.

You won't be surprised to hear the town is in the middle of a construction boom. In the centre, a large shopping mall is going up (with a billboard proclaiming the major brands which will take up residence there, such as Pizza Hut, Li Ning et al), and behind this will be numerous high-rise apartment blocks. Fencing off this construction site were numerous billboards proclaiming the merits of this development, in Chinese and Chinglish. You know the kind of thing. What struck me were the outlandish claims these billboards were making. No notices saying "Prices may go down as well as up" or "Your investment is not guaranteed to rise", oh no: here were slogans like, "EXCELLENT MANAGEMENT, ACHIEVEMENT WEALTH HEAVEN AND EARTH" and "INVESTMENT TO BE BESTOWED FAVOUR ON NEWLY, CREATE RICHLY PREFERRED" and (I'm not making this up, these are literally what they say) "WANT TO MAKE MONEY? GREED IS A JOYOUS PROCESS".

I'm not doing this to make fun of the Chinglish. Well, not exclusively. But the worrying thing is the total lack of hedges or qualifiers. Buying a property is simply presented as a no-fail way to make money. There was nothing about anyone actually living in the properties, about the great life they could enjoy, the opportunities and convenience. (This might be no surprise, given how many people just want to get rich and get out). But worse is the idea of property as a fool-proof method of investment. In this town, with average salaries of RMB2000, these apartments were going for RMB4000 a square metre: a 2-bedroom apartment of 100m2 sells for RMB400,000. Obviously, like all other Chinese cities, property far exceeds the usual income multiples. But when something is being sold on the expectation (the promise) of perpetual price increases, then you have to worry. A lot.