On Wednesday, Economix asked readers to submit questions for David Barboza, who has reported for The Times from Shanghai since 2004. Mr. Barboza’s article, “Entrepreneur’s Rival in China: The State,” was published on the front page of Thursday’s paper.
Below are his responses.
From Michael Hauge, of Huangshan City, Anhui Province
In light of your experience conducting extensive due diligence in the past on corporations such as Enron, what are the biggest mistakes foreigners can commit when examining companies for investment in China? Genuine balance sheets? Government influence on industry? Trustworthy executives? I’d love your take on the issue.
Michael, great question. And a really tough one.
Few would argue that investors should avoid China. Many of the hottest initial public stock offerings during the past decade have been Chinese companies. And today China has two Internet giants — Baidu and Tencent — whose market capitalizations top $40 billion! But the risks are considerable. China has a weak rule of law, and has struggled to contain rampant corruption and accounting fraud. There is also a lack of transparency in government operations and the way many companies operate here.
I am not an investment adviser, but based on my experience on the ground, I would suggest caution and counsel investors that there are many hidden risks here.
Also, looking at your recent ‘Entrepreneurship’ article through the lens of a writer experienced in Chinese MA (referring to the Lenovo-I.B.M. deal here), could you see a trend of Chinese nationals such as Cathay’s Mr. Liu getting frustrated in China and taking their business abroad via MA? While reverse mergers have been common in the past few years, it seems as though many Chinese companies are trying to unwind their abroad positions and return home, but as your most recent article depicts, the grass might not be greener for them at home…
The executives at Cathay have told me they have considered moving some facilities outside of China. We’re already seeing many wealthy Chinese entrepreneurs investing overseas. But they also know there are major challenges operating overseas. Many Chinese executives don’t have experience outside of China. And they’d lose some of the labor and supply chain advantages they’ve built up here. Also, it’s probably hard to leave a country that continues to grow at 9 percent a year. My feeling is they’ll dabble overseas but mostly stay at home, despite the frustrations.
From Jonathan Huneke of New York, N.Y.
I wonder if anyone is looking at the impact of state-owned or state-championed companies from China (or Russia) who may have an advantage over their U.S. or other Western rivals in bidding on contracts in third markets? It’s well known that state firms have a competitive advantage in their home markets. Now, as Chinese and other state companies begin to invest abroad, are they crowding out established private companies, and is there a need for new rules to address this?
I have begun looking at this, and I’m sure many, many others are too. But I have not yet seen a thorough study that compares China’s efforts with those of other countries. I believe the U.S. government and European governments also find ways to support their own national champions. What the comparisons look like I don’t yet know. Many may quibble over how the evaluations are done. But this is an area ripe for study. And with so much at stake, I imagine we’ll see many such studies in the coming years.
My colleague Keith Bradsher, who is based in Hong Kong, has dealt with some of this in recent articles about China’s government-backed solar industry.
What are your views on the possibility of severe recession in China due to bad loans made by local governments?
I wrote a lengthy article on China’s investment binge in July, and based on that earlier reporting, and what I continue to hear about and read about from analysts like the Beijing-based banking expert Charlene Chu at Fitch Ratings, I’d say this is cause for major concern. A consensus is building that, perhaps in the next year or two or three, China can absorb the waste and excess. But after that, the country could slide into a long, protracted recession that lasts five to 10 years. I’m not an economist, but there have to be consequences to a system that encourages overspending and overbuilding.
Do you think there is a real estate bubble in the eastern, industrialized cities? If so, what affects will it have on policy makers in Beijing and elsewhere?
This continues to be a major concern among policy makers. And I had these worries when I arrived over six years ago. So I was reluctant to buy. I stood by and watched as housing prices in Shanghai went up about 400 percent in the area I live in! It is perhaps too simplistic to say China is one big property bubble. But there are certainly plenty of bubbles in eastern cities, including the one I live in, Shanghai.
Nicholas Lardy, an economist at the Peterson Institute and one of the leading authorities on China’s economy, traced some of this to China’s system of financial repression — punishing household savers by paying them low interest rates and subsidizing state companies. Because households cannot earn a decent interest rate in banks, they are doing what’s natural: piling into real estate. “If I wanted to create a real estate bubble,” Professor Lardy told me, “I’d do what China has been doing. If you leave money in the banks, it vaporizes!”
In your opinion, can Western companies compete successfully in China? Is it a level playing field?
American companies complain a lot these days about how the Chinese government places them at a disadvantage when competing with Chinese companies. But probably you need to think in terms of sectors or industries. In some industries, like telecom, Chinese state-run companies have big advantages, and even oligopoly status. But in others, like the retail market, there are great opportunities, and American and European companies are thriving here, selling Coke, Nike, Gucci, Mercedes Benz and dozens of other brands. Affluent Chinese want the best, and right now, China still doesn’t have much in the way of reliable brands. Apple is probably going to sell more than $15 billion in greater China next year. That’s a remarkable figure, considering some of the best brands are lucky to have retail revenue of $1 billion.
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