by Andrew Hupert
Mario Cavolo and Andrew Hupert take two different views on China’s emerging business environment.
China’s economic and regulatory policies are a work in progress that are constantly evolving. Lately the pendulum seems to be swinging against the interests of multinationals, but the reality defies easy answers or rash generalizations. ChinaSolved.com presents for your consideration two different views on recent developments and future directions of Chinese economic policy:
Mario Cavolo, Vice President – Media/PR Training; Scott PR China, www.scottpr.cn and author of China: The Big Lie? published by Long River Press, North America
Mario Cavolo reminds us that not all the China business changes are negative – and some beneficiaries of recent policies are the good guys.
Any worthy China watcher has noticed the increasingly unfavorable trend toward foreign entities present here, whether it is reporting on security issues with Microsoft and Apple or the recent position papers by the European and American Chambers delivering a somber rather than upbeat view of the current business environment in terms of ease of doing business. It’s not all bad, but we wish it was better.
Good News for Some
Yet such an observation is too often noted without its flipside equivalent, While the Chinese government may be cracking down, so to speak, on foreign businesses in China, at the same time how are they doing in terms of encouraging domestic Chinese companies started by Chinese citizens? While hesitant to compare Xi Jing Ping with Abraham Lincoln, evidence suggests that of the people, by the people, for the people, seems to be the order of the day. China’s rising lower/middle class households have quite simply never had it better. Did you know that in fact, China’s private sector has been booming? It’s not as if the great domestic rebalancing needs to happen, it already has happened and the primary benefit is to Chinese households, not just big corporations.
Private Business at the Forefront of the New China Inc.
The private sector is now a larger % of total GDP than both the first tier agriculture/commodity sector and second tier manufacturing/infrastructure sector. While China’s exports have declined from 24% of GDP in 2002 to only 11% of GDP in 2013, the great domestic rebalancing into a stronger domestic private sector is a roaring, expanding success in the period from 2009 through 2013 and that’s even with what is known as company registered capital requirements. Let me explain. In previous years, if a Chinese citizen wished to register a company in pursuit of a business idea, they were required to put up registered capital of at least 50,000rmb with the actual policies pointing toward the need for them to typically put up much more than that, up to 100-500,000rmb in order to get properly started. Obviously that makes it quite tough for a person in the lower/middle income class to start a business.
Easier than Ever for Chinese Start-ups
But as of March, 2013, that registered capital requirement is now a thing of the past. It is now a zero capital requirement, making it even easier than ever for a Chinese citizen to start a business in China. There are a host of other increasingly SME friendly practices, like a super friendly, low fee, small business bank account available at Minsheng Bank, which mark a sharp contrast to places like the United States where just about anyone will remark that the requirements, taxes and expenses of running a small business have made it more prohibitive over the past two decades.
It’s just Business – Not Politics
I’ve always suggested that the media reporting on the subject of censorship in China was actually more about business rather than politics – about favoring local Chinese companies and brands over foreign ones. Many countries engage in such classic protectionist practices to favor their own citizens – not just China. Making life tough in China for Google, Facebook and Twitter favored China’s Baidu, Kaixin, Youku, Weibo and Weixin/WeChat. The latest news stories indicating a favorable environment for the rise of Xiaomi against Apple serve to put a finer point on the matter.
That’s the duality of today’s China business: tougher for the foreigners, easier for the locals.
International business in China today feels a lot like 2005. Unlimited economic possibilities – hamstrung by bureaucracy and burdensome regulations.
2006 was the high-water mark for economic freedom of international firms in China. The onerous WFOE regulations on foreigners requiring high registered capital deposits were relaxed enough to put a Chinese enterprise within reach of most international entrepreneur, freeing foreigners from the need to form joint ventures with well-connected Mainland partners. Local entrepreneurs and private businessmen got the okay to join the Party – and gained new legal protections and privileges.
Ever since the post 2008 government stimulus package that directed funds and credit to SOE (State Owned Enterprises), Beijing has steadily been rolling back the trend of free market competition in China – particularly in respect to international competition.
Rule of Law vs. Rule of Men
AML (the Anti-Monopoly Law) is a noble sounding endeavor, but Western companies are being targeted for regulatory action and then being actively discouraged from pursuing legal recourse after an investigation has begun. Western luxury brands are routinely found guilty of price gouging and anti-competitive practices – even when their pricing and service policies are clearly part of their stated brand strategy (i.e.: premium service and top-tier pricing). Western companies must also face the risk of “national security threats” (Microsoft) and the state media apparatus whipping up public suspicion without evidence (Starbucks , Apple, Samsung and others).
Bureaucratic Remedies to Market Problems.
AML and State leverage are being used as market levelers. The effect is to bring the top down instead of raising the existing mediocre standards – thus making local brands more competitive. Chinese consumers have repeatedly “voted” international products such as milk powder, autos, restaurants, electronics, liquors, and other luxury goods into positions of market leadership, despite high prices and limited availability. Unfortunately the present administration’s response has been to control the market by hamstringing companies with bureaucratic and regulatory hurdles rather than to let market pressure raise the level of local brands.
No Country for Old (Successful) Men
International cafes and networking events are full of young idealistic entrepreneurs with China dreams and nothing to lose, but those who have made it – from MNC management teams to wealthy Chinese – are heading for the exits. China seems to be a great place to try out ideas, but once you start making money it is time to leave.
Some Competitors are More Equal than Others.
We are returning to a time when foreign enterprises can’t operate independently, and anyone hoping to do business in China requires a well-connected local partner who can help navigate the regulatory landscape and prevent minor bureaucratic hitches from permanently derailing their enterprise. There’s nothing particularly wrong or unusual about overseas businesses requiring local knowledge, the methods Beijing is using undermines the market function and threatens China’s position as an attractive investment target.
Is it worth it to try doing business in China?
Is it still worthwhile to try doing business in China? More and more, the answer depends on whether or not you have a trustworthy, well connected Chinese partner who can safeguard your interests against government interference and a predatory bureaucracy. It’s a giant step back into the past before the reforms that made Chinese business registration transparent and even-handed.