As the snow melts, flowers bloom, and your pet tries to hump anything that moves, we are all reminded of the changing of the seasons and the other cyclical narratives of our lives. For those of us in the foreign direct investment (FDI) biz, a perennial favorite has been trying to figure out if now is a good time to jump into the China market.
This fundamental China FDI question has been on the minds of foreigners since at least 1978 (maybe the 1840s) when China’s opening up (改革开放) to the rest of the world took place. Many companies cautiously demurred, others parachuted into the country with abandon, and the rest waited patiently for conditions “to be optimal.”
Human events are inherently unpredictable, however, and China’s economic liberalization has not progressed in a linear fashion. Some years we see very positive developments and in others all is doom and gloom. The only thing that does not change is the continuous pontificating on where things are heading, how should Company X respond, and what it all means in the grand scheme of things.
The basic question, immortalized by Sir Laurence Olivier in Marathon Man, is thus: is it safe? In the movie, Olivier plays an amazingly creepy, evil Nazi dentist who wants to get at some diamonds he has stashed at a bank in New York City, but he doesn’t know if the CIA is laying in wait. He kills Roy Scheider, the CIA agent after him, but not after Scheider makes contact with his unwitting brother, Dustin Hoffman. Olivier kidnaps and tortures Hoffman as only a dentist can, repeatedly asking him if it is safe to collect the diamonds.
Olivier: Is it safe?
Hoffman: Are you talking to me?
Olivier: Is it safe?
Hoffman: Is what safe?
Olivier: Is it safe?
Hoffman: I don’t know what you mean. I can’t tell you if something is safe or not unless I know specifically what you’re talking about.
Olivier: Is it safe?
Hoffman: Tell me what the “it” refers to.
Olivier: Is it safe?
Hoffman: Yes, it’s safe. It’s very safe. So safe you wouldn’t believe it.
Olivier: Is it safe?
Hoffman: No, it’s not safe. It’s very dangerous. Be careful.
The evil Nazi dentist is torturing Hoffman’s character at the time, which adds a bit more drama to the scene. Nevertheless, I’ve had client meetings that have resembled that more closely than I would like to admit. Such is our relentless fascination with the China market and whether conditions are safe to enter.
And there’s always something to talk about, isn’t there? These days, it’s all about Rio Tinto and Google, restrictions in the real estate sector, and onerous technology regulations. The grumbling and moaning from international business groups is getting louder, so the usual parade of pundits marches out to do battle.
As a frequent practitioner of the art of FDI analysis and prognostication myself, I am somewhat reluctant to shine a hot, glaring, revealing light on the subject. Eh, who am I kidding? It’s the highlight of my otherwise dull, dreary day.
In my attempts to oversimplify, overcategorize, and overgeneralize, I think I can squish the China FDI debate down into three groups/parts/categories (cliques?): the Bashers, the Apologists, and the Sages. Very few people actually fit into a single category of course, but hey, I’m writing this thing, and I make the rules.
Turning to the China Bashers first, this is a very familiar group, one that I’ve written about countless times. These are people who either do not like the Chinese government, hate the Communist Party, distrust the economic and legal system, or have a (hidden) dislike of Chinese people — or a combination of these things.
It should come as no surprise that the Bashers usually advise against investing in China, citing any number of negative factors, including economic pitfalls, political instability, or human rights concerns. It’s difficult to be pro-China investment when you see this in the future:
Senior Beijing officials now face the dilemma of all reform-minded authoritarians: the economic progress that legitimates their leadership endangers their continued control. As Samuel Huntington taught us, sustained modernization is the enemy of one-party systems. Revolutions occur under many conditions, but especially when political institutions do not keep up with the social forces unleashed by economic change.
The above quote from Gordon Chang, who has been talking down China for the past decade (odds are that some day in the future, he’ll be right), is an example of one of the more eloquent and well-reasoned commentators of the Basher faction. Needless to say, other members of the group tend to rant, and who would want to invest in the PRC after hearing this?
We are sending a message to the Chinese government: if you refuse to play by the same rules as everyone else, we will force you to. China’s currency manipulation would be unacceptable even in good economic times. At a time of 10 percent unemployment, we simply will not stand for it. There is no bigger step we can take to promote U.S. job creation, particularly in the manufacturing sector, than to confront China’s currency manipulation. This is not about China bashing; it’s about defending the United States.
The China Apologists, our second group for consideration, see the market here through rose-colored glasses. Traditionally, the foreigners of this group are the ones who would speculate, and salivate, about the potential profits if their company could sell just one widget to each person in China. More recently, that story has been upgraded, call it China Fantasy 2.0, to advertising revenue from tens of millions of hits on a web site.
No Cause For Alarm
The Apologists don’t worry so much about economic, political or legal risks. They either firmly believe in what Beijing is doing or at least want everyone to think they believe that. In addition to starry-eyed business people and those who seek to curry favor with Beijing, this group also includes ardent Chinese nationalists and government propagandists, the latter of which are directly tasked with ensuring that the FDI money continues to pour in. Brushing off criticism this past January, a Ministry of Commerce spokesman said reassuringly:
The country [will] continue to attract foreign investment, he said. “Social stability, huge market potential and low cost of productive resources are still advantages for foreign investment,” he said.
Zhang said the government would stress national economic security while seeking to increase foreign investment. “We have to properly handle new challenges and situations when further opening sectors, including finance and telecommunications.”
In other words, unless you happen to be in finance and telecom, China is the place for you.
Even in the face of increased discontentment in the foreign business community, we are assured that all is not as bad as it seems:
Last Monday, Premier Wen Jiabao made clear to a group of global business leaders and economists that the country remains open for international business and investment. Fierce competition in the Chinese market that has been considerably broadened may have given rise to the frustration of some multinational companies. But that is a far cry from a closing door. China’s change in growth model will actually provide foreign businesses with more opportunities that, albeit, also allure more competitors from home and abroad.
Hard to argue against that with numbers like this from the government (or if you prefer, from Businessweek) that show a healthy inflow of foreign capital, nicely recovered from the recession.
Of the myriad hordes of sycophants, toadies, guanxi groupies and name droppers, we all know who they are. No need to name names and burn bridges.
Old China Horn
That leaves us with the China Sages, often called China Hands, the wise folk who strive for balance. I’ll put myself into this category since it makes me look better, and if I don’t, certainly no one else will give me that honor. The Sages, by and large, fall back on their experience and knowledge and attempt to look at the big picture while enjoying their reputation as a Sage — basically this means less ranting and more public preening. Here’s an example from a recent China Radio International show on FDI:
Ni hao, you’re listening to People in the Know, bringing you insights into the headline news in China and around the world, online at crienglish.com, and here on China Radio International. In today’s program we’ll discuss China’s business climate for foreign investment. So let’s get started.
The business climate in China has changed dramatically since the reform and opening up began more than 30 years ago, and continues to change. Our next guest has been in China for 30 years. Gilbert Van Kerckhove is the founder of Beijing Global Strategy Consulting and a member of the European Chamber of Commerce.
Who’s going to argue with Gilbert? The guy is practically an institution. As to the substance of the Sage argument, here are some wise words from Sage David Wolf of Silicon Hutong (and friend of the show, um, of the blog):
The investment climate is changing, as we should expect as China’s economy and it’s relative position in the world evolves. It also means, as some commentators are apt to forget, that America’s door to Chinese FDI is not as open as we would like to think.
It’s impossible to argue against common sense like that. But to be entirely candid about the Sage approach, there is another reason why we “thread the needle” between the Basher and Apologist points of view: business. I’m an FDI lawyer, David and Gilbert (I think) are consultants, and many other Sages out there are accountants and other service professionals. None of us can tell our clients that China is either an FDI paradise or hell on earth or we would quickly gain a reputation for being, well, a very bad advisor (i.e., business would dry up mighty fast).
So there you have it, the broad range of China FDI advice, in perpetual motion, fueled by constant chatter. When the economy is good, China is the boom town, when things are down, it is the one certain growth area, and when international relations become tense, you can be sure there is a China business angle.
Is it safe? I guess it really does depend on who you ask.
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