New Economic Challenges for China in 2005
The new year will bring a series of new challenges for
the Chinese government, and for investors in China.
Just some of the challenges China now faces are:
- Excess liquidity (cash) in the market
- Weak corporate governance
- Internal reform of the Chinese Communist Party
- Continued weakness in Chinese SOEs (state-owned enterprises)
For non-Chinese investors interested in investing in
China, the greatest single danger is an excess of experts
who claim to have insights into the China market, even
though they do not speak the language, do not have local
connections, and don't understand the business ecosystem
in China.
In 2004, the official amount of foreign direct investments
(FDI) will be more than US$60 billion. The unofficial
number is even larger. The trouble is that there are
not enough good investments to go around. In order to
meet demand, many investments which are not good are
dressed up as prime investments. Expect this trend to
continue in 2005.
The recent CAO
scandal in Singapore showed that a company with
excellent corporate governance controls, and auditing
by a Big Four accounting firm could still spin out
of control. Ultimately, good corporate governance depends
on the character and integrity of key individuals.
Smart desperate individuals can beat any system, anytime.
This is the main problem with the internal reforms of
the Chinese Communist Party. The CCP will continue to
play a leading role in China's state-owned enterprises
(SOEs), particularly strategic sectors such as oil exploration,
import and distribution. The government needs honest
solid management personnel, at a time when huge amounts
of investment capital are pouring into China, and which
ultimately depends on the good character of key individuals
to succeed. It's not impossible, but it sure is a hard
task. At this time, the actions of a single or a few
dishonest individuals can do tremendous damage.
In addition, Chinese companies need a new breed of management,
one which not only knows how China works, but which knows
other languages and cultures, and is willing to learn,
and can work with teams of people from different cultures.
The recent IBM-Lenovo
deal will be an early indicator of how successful
Chinese businesses can be when going international.
It is almost too easy to say that there will be a culture
clash; the question is how these two very different companies
will handle it.
This deal underscores a very interesting trend: Non-Chinese
firms such as IBM want to go into the Chinese market
to capture market share, while Chinese leading companies,
with the support of the Chinese government, want to expand
beyond China's boundaries.
Hi-tech firms, such as IBM and Lenovo, have been traditionally
weak at international marketing, and the soft skills
needed to succeed internationally. Most of their customers
are businesses. In 2005, we should see deals which are
more oriented to consumer marketing. This will be more
interesting than the current range of deals, and it will
take time to see results.
Moreover, the hard-dealing, testosterone-driven hard-sell
techniques championed by companies such as Oracle up
to 2000 are over. The whole business ecosystem has changed,
and the hi-tech companies are still struggling to adjust
a new world where the advantage lies with the customer.
On the monetary side, the greatest single challenge
for the Chinese government is how to soak up the excess
liquidity slushing around in the Chinese economy. Failure
to soak it up will rapidly lead to multiple bubbles in
the economy. There is already excess investment in hard
assets (factory production) and certain parts of real
estate, especially residential properties in the tier
one cities. Much of the smarter real estate money has
already gone into the tier two and tier three cities,
which are experiencing real growth.
In 2004, Chinese premier Wen Jiabao has done an excellent
job of preventing excesses from building up in the economy.
The Chinese have learned very well that the bubble which
built up in Japan in the late eighties can do tremendous
damage to the economy, and will not allow a repetition
of that scenario in China.
For non-Chinese investors, a special note of caution.
There is too much hype going on about China. In the short
term, China's growth is overblown; in the long term,
it is under-estimated. There will be corrections, some
of them major, along the way.
If you decide to invest in China with a non-Chinese
firm, make sure that you invest with someone or a firm
with a solid track record in China. Some questions to
ask are:
- How long have you been there?
- Do you speak Chinese yourself, or do you depend on
others for research?
- What are your main sources of information?
- What Chinese organizations have you worked with?
- What have you learned from your mistakes in China?
- What have you learned from your successes?
- How are you going to avoid investing in bubble investment
schemes?
Your gut will tell you what the answers should be.
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