Follow the Money:

Deciphering US-China Relations for Business Decision-making 

By Diana K David

1 July 2002

 

When the US Ambassador to China spoke to the bankers, businessmen and honored guests at the Asia Society’s business lunch on June 11, 2002, I expected a hard-hitting analysis of the current US-Sino relations.  However, his talk, United States-China Relations in the Wake of 9-11, on this one year anniversary of his tenure as Ambassador to one of the United States’ foremost trading partners, Ambassador Randt talked a lot about his own path to position, past Bush visits to China and…hair loss.  “My doctor told me that one year as an ambassador had served to make me balder and a little bit shorter”, he quipped.

 

His reminiscing pointed to good things for foreign investment in and trade with China.  On a 1974 business trip to China to find out what kind of foreign goods were most popular, Randt found dust-covered Swiss watches and Cuban cigars languishing in display windows.  Today the PRC boasts Starbucks, Dunkin Donuts and a Hard Rock Café. Hong Kong has two of MacDonald’s top grossing MacDonald’s franchises. 

 

When Randt was a commercial attaché from 1982-84, the commercial section was in the Ambassador’s garage.  Now there are 113 people in the commercial section in Beijing alone. “A real American story”, commented Randt, “from the garage to the Big House”. 

 

Randt spent a full quarter of his speech listing dissidents in Chinese jails as a main focus of US foreign relations with China.  So how on earth could that help the business people in attendance in figuring out their China strategy?  Randt sent up a clue for anyone listening to focus on the primacy of economic ties over political bluster.  “Follow the money, not the missiles”, he instructed, referring to Taiwan’s $80-100 billion investment into Mainland China.  Randt could have been making a parallel comment on his own government’s motivations and policy. 

 

As investment guru Jim Rogers said about his own trip through China:

 

All in all I am sure there are some rights’ violations; they exist in every country, especially in developing countries. Even Plato wrote about them as long ago as The Republic. My sense after six weeks close to the ground, however, is that the human rights’ tempest in the West is a cover for those with some other agenda, such as protecting their own interests from a dynamic new country.

 

Human rights abuses in China may not seem like a commercial issue for the company or investor interested in China. But they rear an ugly head into the commercial realm because of two issues:  they are used as an illegitimate excuse to protect the West from China, and they are an indication of the freedom of China’s markets. 

 

The latter is important to people wanting to gain a return on their efforts and investment in China.  A lack of human rights may imply that China is still under a rule of man, where the politburo makes the law on a whim.  For international business to thrive in China, it must follow a rule of law adhering to understood international standards.  Though the letter of the laws invoked in China’s accession to the WTO may not appeal to specific industries, the fact that international law is being applied to China’s markets is a big first step in the country.

 

So political bluster aside, what do we get when we “follow the money”?  After all, one savvy venture capitalist once remarked to me, “what do I care about laws and corporate governance if I am getting a ten times return?” 

 

Well, China is one of the largest recipients of foreign direct investment these days.  The government is courting foreign investment of up to 20% in its infrastructure projects.  Private equity firms have ear-marked pharmaceutical and medical devices, infrastructure and insurance as good and growing sectors as regulations are lifted in the atmosphere of WTO accession.  

 

US-based private equity firms such as Walden, Warburg Pincus, Advent and Carlyle all continue to focus and re-focus on what will work in China.  From AOL Time Warner to Alcoa, large American firms are finding the perfect relationship for success in a country and culture at the other end of the world.  This is not to say that there haven’t been spectacular failures in China. Those are, perhaps, even more instructive.

 

To enter a country with 5,000 years of history inherently demands a bit of prior study.   In the coming months, I will talk about specific deals which have succeeded and failed in China in the last ten years.  Watch for the lessons of rights and repatriation.  These are the firms whose money we follow, in order to know what works inherently, beyond any political bluster.  Each one a case study on the road to knowing what will work for your own china strategy.

 

Diana David is a private equity specialist with a focus on Asia. She has worked for Henry Kissinger at Kissinger Associates, PriceWaterhouseCoopers and various American media companies around the world.  She can be reached at chinafinanceyenta@yahoo.com with questions, comments and suggestions.