China: Directing public anger towards foreigners is easy

Although the most corrupt and biggest offenders are Chinese companies, it is unlikely domestic pharmaceutical and food manufacturing firms will face the kind of regulatory challenges imposed on their foreign competitors any time soon

The Chinese leadership wants to rebalance and reform their economy. At a recent conference, Li Keqiang, China’s prime minister, promised that the government would institute a broad range of market-friendly economic reforms. For a change, all businesses will now have equal access to markets and legal protection. According to Premier Li, “Reform and innovation provide an inexhaustible driving force.” The centre piece of this program is a free trade zone in Shanghai. The free trade zone allows for a slight liberalisation in financial products offered by Western funds, but biggest change is to allow unfettered access to Facebook.


It would appear that the Chinese economy is strong enough for these reforms. According to several recent data points, China’s economy is starting to rebound. But there are other ominous indicators. China Beige Book, a poll of 2,000 firms, points to a slightly different direction. Mining and transport growth sank as did manufacturing and real estate activities. Services and retail activities managed only slight gains after a poor second quarter. The author of the study Leeland Miller, the president of CCB International, said "This release represents perhaps the most surprising—and important—data that we have released in seven quarters of polling, with results that undercut the conventional wisdom that [the third quarter] saw both significant stimulus and a significant recovery. Both appear to be a fiction". It continued, "The yellow lights our credit data have been flashing since [the fourth quarter of last year] may now be flashing red."


It is not only the Chinese economy that may not be as advertised. The reforms may not materialise either. As Xi Jinping consolidates power, the government is in the process of a crackdown on corruption. Oddly, it appears that the most corrupt companies just happen to foreign. Not that the Western companies are totally blameless.


The most widely publicised inquiry is a bribery probe into British firm GlaxoSmithKline (GSK). Other drug companies are under investigation as well including France’s Sanofi, joint ventures of Germany’s Merck and Boehringer Ingelheim, Novartis of Switzerland, Baxter of the US and Denmark’s Novo Nordisk. Certainly some of these companies, specifically GSK, probably paid bribes to market their wares, however it is easier to target high-profile foreign companies. The Chinese public is outraged over high prices and safety scares and the foreign companies make convenient scapegoats.


It is not only the foreign drug companies that are targeted. The scandals surrounding baby formula poisonings have created a whole system for the informal importation of foreign brands often at twice the price of local products both foreign and domestic. Naturally parents are outraged. As you would suspect the foreign companies including Mead Johnson and Abbott from the US; Dumex, a subsidiary of France’s Danone; Royal FrieslandCampina of the Netherlands, and New Zealand’s Fonterra, the world’s biggest dairy company, have all been targeted for investigations and fines.


As China’s global economic presence has grown, so has the reach of its regulators. Large mergers now must get antitrust approval from the Chinese. Seemingly unfair or arbitrary actions of Chinese authorities have caused concern in the US but so far the issue has not been part of bilateral negotiations. This does not mean that it has not caused concern for companies doing business in China. Antitrust officials have recently convened meetings of several dozen in-house lawyers. The officials told the lawyers to expect further investigations, and warned of dire consequences if they sought outside legal help to challenge regulatory action through the courts.


Chinese regulators are far more circumspect in challenging local state owned companies. State owned companies have significant power and are well-connected. Although the most corrupt and biggest offenders are Chinese companies, it is unlikely domestic pharmaceutical and food manufacturing firms will face the kind of regulatory challenges imposed on their foreign competitors any time soon.


State owned or controlled companies may be exempt, but private firms with the wrong political connections are also targeted. Last year, in the Sichuan capital of Chengdu, the Communist Party announced that a politician who ran the city as the Party’s secretary and mayor was detained on suspicion of corruption. This year five of the city’s richest citizens have disappeared from view. Zeng Chengjie, a real estate developer from Hunan, was executed allegedly because he insisted on paying back his creditors not only the principal that was required but also the interest, which was prohibited.


The Chinese economy is truly slowing. If years of profligate lending are finally catching up with an overheated economy mired in debt, then it will take a lot more than a special economic zone in Shanghai to solve the country’s problems. It will take reforms that limit government power to interfere with legitimate private business. If the government for political reasons feels that it must direct public anger at foreigners rather than the corrupt and connected, then it will never be able to sustain growth. Even unlimited access to Facebook won’t save them.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

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