February 18, 2008
As my two-week guest blogging stint is now over, I want to thank Gordon for inviting me and hope that readers found some of this stuff interesting. If you did, I invite you to continue reading over at my regular blog, the Chinese Law Prof Blog. My final post here will be on an interesting aspect of Chinese tort law: the absence of a direct tie between lost income and tort damages for wrongful death.
If you tortiously injure someone in China, the damages are as you might expect: medical expenses, lost income due to missed working time, and maybe even something for emotional distress. (Article 119, General Principles of Civil Law.) Thus, given identical injuries and identical fault, you pay more for punching a doctor than for punching a taxi driver. (I mention these only as examples of high-income and low-income professions, and mean no disrespect to taxi drivers.)
If you go a bit further and end up killing the person, however, in which case they will (if young) have a lot of missed working time, the calculation of damages changes completely. Lost income drops entirely out of the picture, and there is no attempt even to estimate it. Instead, the law switches to an attempt at a need-based standard. The tortfeasor is to pay medical expenses, funeral expenses, "necessary living expenses of the deceased dependents," and "compensation for the victim's death."
These last two terms were specifically defined in an interpretation issued in 2003 by the Supreme People's Court (which has the power to interpret and clarify laws by general rulemaking). "Necessary living expenses" are "calculated on the basis of the average consumption expenditure of those living in the city where the court is located, or the average cost of living for rural residents where the court is located, as the case may be." Clearly, this calculation takes no account of the actual lost income of the decedent; instead, it tries to estimate what the dependents will need to survive at a relatively decent standard of living until they can fend for themselves. Thus, compensation is not apparently paid to adults who have the capacity to work; it is paid only to minors on the basis of the number of years until the minor turns 18, and to other adults unable to work and with no other source of income on the basis of 20 years.
"Compensation for the victim’s death" is, according to the interpretation, "calculated on the basis of 20 times the previous year's average net income of urban residents in the city where the court is located, or the average net income of rural residents where the court is located." As with "necessary living expenses," the actual lost income of the decedent has nothing to do with the amount awarded under the Interpretation.
This system has been criticized in China on the grounds that it discriminates against rural residents by valuing their lives more cheaply than that of urbanites; all lives, say the critics, should be valued equally. To be sure, China does indeed have official discrimination against rural residents; they are explicitly intended to be underrepresented in the National People's Congress, for example. But the problem with this rule is not that it values lives unequally; it is that it values lost income equally: at zero for everyone. Thus, the compensation for lost income is the same (nothing) for wrongful death where the victim is a doctor and where the victim is a taxi driver.
I have heard it argued that this is due to cultural differences: that Chinese (and some civil law jurisdictions) simply view it as wrong to give different amounts of compensation for death. But this misses the point: giving equal compensation for the death itself - in which case there is an argument for treating all lives equally - does not preclude also giving compensation for lost income. And civilian lawyers I have questioned assure me that killing a doctor in their countries does cost more than killing a taxi driver.
Thus, far from being too inegalitarian, the rule in China can be seen as too egalitarian: the dependents of the deceased Shanghai doctor get exactly what the dependents of the deceased Shanghai taxi driver get, even though they have been deprived of much more money. And of course, you get equally inappropriate results when the dependents of urbanites with small earning capacity get more than the dependents of wealthy rural entrepreneurs, for example.
A recent case brought out the importance of location, as well as some of the ambiguities associated with it. A migrant worker living in Beijing was killed in a traffic accident, and because of his rural domicile registration (something that's not easy to change, even though geographical mobility itself has increased greatly in the last several years), the award to his family included only 70,000 yuan (about $9,764) as compensation for death. They appealed, asserting that he should be treated as an urbanite because he was actually living and working in Beijing. The higher court agreed, awarding 170,000 yuan ($23,713), in addition to enhanced amounts under other heads. The case was welcomed by many as an example of "same life, same price," but of course it was just an application of the existing rule, not a negation of it. It showed a willingness to be flexible about which standard to use, but it didn't suggest that the rural-urban distinction was in any way illegitimate.
Although it's not my place to give advice to China's legislators, it seems to me that this problem could be solved relatively easily by allowing courts to include an estimate of lost income in damages for wrongful death - just as they now do in damages for injuries short of death - while separately stipulating another amount to be paid as compensation for the loss of life per se, just to make it clear that the former amount is not compensating for the lost life, and thus carries no offensive implications in being different for different people.
For the time being, though, the moral of this story is: don't pull your punches.
Permalink | China| Comparative Law| Torts | Comments (2) | TrackBack (0)
February 12, 2008
To continue from yesterday's post on problems with bringing securities-related lawsuits: In addition to the standing and cause-of-action problems, there are other obstacles peculiar to China and its political situation: specifically, the government's fear and distrust of large groups, especially organized ones, that are not under state control. (All social organizations, for example, must be approved by and registered with the state; even fishing clubs and associations for the study of antique furniture have been disbanded for failure to get official recognition.) Securities litigation, of course, is often possible only if the claims of small shareholders can be aggregated through the class action or some other form of group litigation. While Chinese civil procedure does not provide for class actions in the American sense (where non-participants without notice can be bound by the result), it does provide for various forms of group litigation. But the system makes it difficult for plaintiffs in securities litigation to use these forms.
First, one of the criteria for the professional assessment of Chinese judges is the number of cases they handle. Thus, they have every incentive not to aggregate claims, but rather to disaggregate them. Securities plaintiffs coming to court as one group have on occasion been instructed to split up into several smaller groups - based not on any common characteristics, but simply on numbers.
Second, the system of court fees also contributes to the incentive to split up cases. Court fees are a progressively declining multiple of the amount in controversy: the percentage charged for lower amounts is smaller than the percentage charged for higher amounts. Thus, a court earns more hearing 10 claims of $X than hearing one claim of $10X.
Third, there are two recent rules explicitly aimed at putting the lid on group litigation - probably aimed at social discontent, not securities lawsuits, but nevertheless putting a crimp in the latter. The first rule, issued in the name of the All-China Lawyers Association [PDF here], requires lawyers handling any case involving ten or more plaintiffs to report to the local government for instructions and imposes various other burdens on representation. The second rule, issued in 2006, relaxes the previous (spottily enforced) ban on contingency fees, but keeps it for specific types of cases, including - you guessed it - lawsuits involving multiple plaintiffs (which normally means 10 or more).
Finally, there are special rules governing holders of shares listed on stock exchanges outside the PRC mainland, such as Hong Kong and New York. The China Securities Regulatory Commission requires Chinese companies listing outside of China to include in their articles of association a provision stating that all disputes between holders of non-mainland-listed shares and the company or its high-level management shall be resolved through arbitration. Interestingly, this may well have been intended as a shareholder-friendly measure, on the theory often held in Chinese officialdom that you should require people to do what you think is good for them. We don't see such arbitration clauses in the certificates of incorporation or bylaws of American public companies, and (perhaps because nobody wants to be a test case) it's not at all clear that a federal court would accept such a clause as valid grounds for dismissal of a claim arising out of federal securities law. (My information may be out of date or just wrong; I'm interested in this question, so please add a comment if you know something to the contrary.) But there is little doubt it would be effective in China. Interestingly, this arbitration clause does appear in Article 181 of the Articles of Association of PetroChina, a Chinese company listed (among other places) on the New York Stock Exchange. Do investors generally know it's there? Did the SEC? Does anyone care?
Bottom line: don't look to the Chinese legal system to protect your interests as a small shareholder. (The story is a bit better for holders of significant minority stakes.) There are, of course, other institutions out there that might do the job: for example, equity markets, banks, various gatekeepers, and the financial press. In China I don't think they do the job very well. But that's exactly the paper I'm working on now, and it's a lot more than can be contained in a blog entry.
Permalink | China| Comparative Law| Corporate Governance | Comments (1) | TrackBack (1)
February 11, 2008
In my first post, I mentioned that one question one must always ask about corporate governance rules in Chinese law is: do they matter? One reason the rules often don't matter is because there is no practical method of enforcing them. In this post I propose to look briefly at the obstacles to shareholder litigation against companies and their management.
As I mentioned in my first post, although the Company Law and the Securities Law provide that companies and their directors and officers have certain duties, the court system is not always willing to grant a private right of action if the duty is violated. Very often courts may take the view that the problem is one for administrative agencies to deal with. Sometimes the courts' reluctance to take cases is based not on a legal analysis of whether there exists a private right of action, but on a practical analysis of whether the court system has the capacity to handle such cases. Thus, from 2001 to 2003, the Supreme People's Court (SPC) issued three sets of rules instructing lower courts not to accept shareholder lawsuits under the Securities Law unless (a) the suit was for misleading disclosures, and (b) an administrative or criminal punishment had already been imposed on the defendant(s) for the act complained of. (The rules also provided a set of procedures for hearing such cases.) In effect, a disgruntled shareholder must get a key to the courthouse from a government body, and cannot sue at all for losses from insider trading or market manipulation, even though both are equally prohibited in the Securities Law.
The justification for the key-to-the-courthouse rule offered by the SPC was that this was favorable to plaintiffs: a previous finding against the defendants would reduce their evidentiary burden. I have discussed this rationale with a number of academics in China, and have never really gotten a satisfactory answer to my objection that that rationale justifies allowing plaintiffs to bring in a previous finding as evidence, but not requiring them to do so.
A few months ago I read an article in Caijing, a Chinese business magazine, stating that the "spirit'" of a recent SPC document meant that plaintiffs could now sue for insider trading and market manipulation, but the article did not mention the name or source of this document. I e-mailed the author requesting further details, but got no response. When I was in China in December, I questioned a securities litigator about it, and discovered that the article was referring to a speech by a particular SPC official in which he said that such lawsuits should now be allowed to go forward. Does a speech by an SPC official give standing where an official document says otherwise? I guess if local courts think it does, then it does.
More on barriers to litigation tomorrow.
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February 09, 2008
A recent discussion on the Chinalaw listserv has revealed a fascinating loophole in Chinese real property law: nowhere does it seem to contain a clear prohibition against trespassing. The relevant laws regarding state-prosecuted offenses don't seem to include anything like this; at most, one is forbidden from disturbing order at a workplace, but that doesn't turn on whether one is trespassing or not, and is not an offense against the employer's rights to a particular physical space. On the civil side, one could (if one wished) construct an anti-trespassing norm by combining various provisions in the Property Law: Art. 2, stating that rights in rem include the right to exclude, Art. 32, which says that a rightholder can sue for damages resulting from infringement of his rights, and Art. 35, which says that an aggrieved rightholder may request a court to eliminate an impairment of the right. But whether this amounts to an action against trespassing - in particular, to an action for ejectment, or an injunction against further trespass - doesn't seem clear. A Chinese scholar specializing in real estate law, in his contribution to this discussion, said it does not; according to him, the most Chinese law requires is that someone entering onto the property of another should "restrain [himself]", minimize damage, and compensate for any damage done.
The interesting question, of course, is why this should be so. My hunch is that it's connected to China's pre-reform economy, in which all important urban spaces were under the more or less direct control of a governmental or quasi-governmental entity with access to tools of physical coercion (i.e., people with clubs). Physically as well as politically, pre-reform China was a very closed society - workplaces and apartment buildings were often walled or fenced, with all entrances manned by guards. Trespassing would have been difficult to accomplish simply as a practical matter. Furthermore, much urban land was owned by the state (technically, all of it after 1982), and the particular way of understanding state ownership of land may have contributed. In the US, we have no problem saying that citizens can be trespassers on state-owned land, because the state owns land more or less just like any private party owns land. But in China, state ownership, sometimes called "ownership by the whole people" (the terms are explicitly said to be synonymous) is sometimes and for some purposes interpreted as direct ownership by the citizens of China. Obviously, this couldn't be true in any practical sense - you would need the consent of all joint owners to alienate, for example - but perhaps it's felt just enough to make a notion of trespassing unthinkable.
It's hard to believe - and to the best of my knowledge it's not true - that in China you can simply waltz into someone's living room (provided the door is unlocked) and make yourself comfortable provided you act with restraint and are willing to compensate for any damage you cause. But the legal basis for saying you can't is surprisingly obscure.
Permalink | China| Comparative Law| Law & Society | Comments (7) | TrackBack (0)
February 06, 2008
Having taught the first-year property course for eight years and instructed my students in the "bundle of sticks" model of property rights, I was fascinated to run across the following Chinese property law case a couple of days ago. (For those who can read Chinese, it's here.) By way of background, China passed its first comprehensive statute governing rights in rem (the "Property Law") last year, and it came into effect in October. Although it did not (at least in my opinion) fundamentally revolutionize anything - contrary to some breathless reports, private property existed and was protected in China prior to Oct. 1, 2007 - in any case we are now starting to see cases in which courts look to it for guidance.
In the case in question, Husband (H) and Wife (W) divorced by agreement in 2005. Their agreement provided that the 2-bedroom apartment held in W's name (China has a community property regime, so the nominal owner is not necessarily important) should be divided, with ownership over the southern room to H and ownership over the northern room to W. By 2007, W had had second thoughts about this arrangement, and brought suit in January to have the agreement declared invalid. She sought full ownership of the apartment, with a payment to go to H representing the value of his interest.
The Beijing No. 1 Intermediate Court agreed. (I believe the judgment was issued after Oct. 1, and applied the Property Law as the rule of decision.) According to the court, while there can be joint ownership over the same thing, there cannot be separate ownership rights over the same thing, and an apartment is the smallest "thing" you can have in real property law; you can't subdivide it any further.
The news report of the case appends an explanation from the judge who decided it, but it's not very helpful - there's a hint that what's driving the decision is China's property registration system, which doesn't have the capacity to register ownership of separate rooms within an apartment unit. But one also gets the sense that the judge thinks it's just self-evident that you can't own rooms within an apartment; he says specifically that you are not allowed just to make up ownership interests at will.
Interestingly, though, this is precisely what you pretty much are allowed to do in the US; there is no elementary particle of property rights. In my last post, I talked about the way Chinese law often seems centered around the needs of officialdom. That may go some way toward explaining the different approach to property rights as well. The creation of property rights in the US is highly decentralized and contractual. China is simply not willing to let individuals have this kind of undisciplined power to create property rights that the state is then going to have to protect. The state wants more control over what its coercive machinery is going to be asked to do.
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February 04, 2008
Many thanks to Gordon for his kind introduction and for inviting me on as a guest blogger. I'm a regular reader of Conglomerate and it's an honor to be asked to join in.
My research interest is in modern Chinese legal institutions generally and corporate governance in particular; recently I've been looking not at the substantive rules of corporate governance, but at the institutions that would make those substantive rules matter, and the extent to which they exist in China.
One can't spend much time studying Chinese law without being struck by the tremendous gap between what the rules say and what actually happens. This goes beyond the usual law-on-the-books versus law-in-practice gap that one can find in any jurisdiction, where the gap is attributable to obsolescence, resource constraints, and political factors such as government unwillingness to enforce certain types of laws. In China it seems to arise sometimes from a different view of law altogether:
essentially a kind of didactic text that regulated parties are supposed to read and obey. If obedience is not forthcoming, the response is to blame the regulated parties for their willfulness. An alternative response would, of course, be to look at the enforcement structure provided by the regulations in question: do regulated parties have any reason to obey? But this response is relatively rare.
Thus, for example, the Chinese Company Law provides that joint-stock companies (more or less the equivalent of the Delaware corporation) shall have both a board of directors and a board of supervisors. The latter is supposed to keep an eye on the former. But it is elected by exactly the same body that elects the board (i.e., the shareholders) and, while it can ask questions of the directors or request explanations of certain acts, it has no real power to do anything if the answers aren't satisfactory. A recent revision to the Company Law (in 2005) gave it the power to call a shareholders' meeting, but that's about it.
Another example is the director's duty of care and loyalty. This is stated in one provision of the 2005 revised Company Law, but there is no right of action clearly attached to it. Where the law does not very clearly provide you with a right of action (and even in some cases where it does), Chinese courts are typically very unwilling to give you one.
This in turn stems from another feature of Chinese law: that it often seems to make sense more as a set of instructions to officials than as a rights-granting instrument. For example, one type of company under the Company Law may dispense with a board of directors if it is "relatively small" and has a "relatively small" number of shareholders. But the law provides no clue as to how we are to know what counts as "relatively small" in each case. If we think of the law as a recipe for entrepreneurs, it's bad drafting. But if we think of it as instructions to officials in the bureaucracy that handles corporate registrations, then it's easier to understand: it's telling them to make a discretionary judgment. The same thinking is behind regulations that look like private law but say that something or other "should normally" be done or "should in principle" be done.
One might reasonably ask, "But is that so different from US (or other Western) law? Surely we have vague terms such as 'due process' and 'reasonable' that we happily give to judges, juries, or administrative agencies to interpret." This is not a bad point. I think the difference, though, is in the fact that in the US system, we now have a pretty good idea of who has the power to interpret what; when people draft legislation, they could probably readily tell you which body would be interpreting which term and under which principles. Very few of these matters are well worked out in the Chinese legal system. Legislation will always have problems, but the courts have very little power and prestige, and thus aren't a good institutional solution to these problems. As a result, while all legal systems generate uncertainty and contradiction, China's is unusual in not having well-understood techniques for resolving that uncertainty and contradiction.
The bottom line is that when one hears that Chinese corporate law requires such-and-such or imposes such-and-such a duty, one has to ask whether there's any reason to think that this alleged requirement or duty is at all meaningful. One doesn't have to be a card-carrying Holmesian realist to wonder whether a duty that is in substance wholly hortatory should really count, and be reported, as a legal duty just like the legal duty to drive carefully, refrain from embezzlement, etc.
Permalink | China| Comparative Law| Corporate Governance| Corporate Law| Law & Society | Comments (2) | TrackBack (0)
April 20, 2007
Remember that name. She is 25 years old, and she is the richest person in China.
Her father, Yang Guoqiang, is the founder of Country Garden, a real estate development company that went public yesterday in Hong Kong, raising $1.6 billion. Guoqiang gave all of his shares in the company to Huiyan, who is slated to take over leadership of the company in the future.
According to the NYT, Country Garden "is a virtual assembly line of home building for China's raidly growing middle class. Mr. Yang's genius is that he has a created a Wal-Mart approach to housing development for the middle class."
Talk about a growth company!
July 15, 2006
Why are executives so enamored of quoting Chinese proverbs? Daniel Gross over at Slate has the answer. In a nutshell:
[E]xecutives quote Sun Tzu and Lao Tzu for the same reason they started exchanging their bespoke suits for business-casual khakis: They have to show that they're with it. China represents the future and is the locus of immense growth. Casually tossing Chinese proverbs into conversation shows that you're down with the latest trends, even if you haven't (yet) relocated your manufacturing capacity to Shenzhen.
Read the full story for some amusing uses and misuses.
Permalink | China| Management| Marketing| Popular Culture | Comments (1) | TrackBack (0)
May 19, 2006
Fortune Magazine has a nice piece on the battle for China among the big Western investment banks. It opens by describing the beauty contest to lead the upcoming $12 billion IPO by the Industrial & Commercial Bank of China, a contest for which Goldman Sachs seemed to have the inside track. (See here and here for other recent coverage of Goldman).
Goldman Sachs was the hands-down favorite. Its executives had courted ICBC for years. On his many trips to China, CEO Hank Paulson had called regularly on chairman Jiang Jianqing. Jiang's daughter had worked as a summer intern at Goldman in New York City. Earlier this year Paulson had underscored the firm's commitment by pledging to buy a 7% stake in the bank for $2.6 billion.
ICBC hadn't even invited Goldman's archrival, Morgan Stanley, to submit a proposal, allowing Fred Hu, a polished, Harvard-trained economist, to make Goldman's pitch with confidence.
Of course, Goldman got aced out of the offering, which went to a group including Merrill, Credit Suisse, and Deutsche Bank. The story goes on to describe the increasing sophistication of Chinese leaders in playing I-banks off against one another, and the cutthroat competition among the I-banks not only for deals, but for experienced China hands and strategic partnerships with local firms.
Citigroup has apparently had some tough sledding in China, earning ignominy by having led the only China IPO to date that had to be pulled--the CNOOC IPO in '99 (the same CNOOC--China National Offshore Oil Corp.--that bid for Unocal last year). So like a good strategic player in China, Citigroup beefed up its guanxi by hiring former Premier Zhao Ziyang's daughter-in-law for a salary in excess of $8MM. Things didn't work out so well . . . but I'll let you read the rest.
Permalink | China| Initial Public Offerings | Comments (0) | TrackBack (0)
November 28, 2005
The WTO's gamble on China seems to have paid off. Import tariffs have fallen dramatically over the past four years, and trade with China has been booming. This interesting article in the IHT quotes Owen Nee, a U.S. lawyer at the Orrick firm, on the effect of WTO requirements on China's internal political situation:
If Beijing tells provincial authorities to do something, they don't listen. But if they are told these are WTO rules then there is more chance of compliance.... You have this very interesting situation post-Tiananmen Square where, in order to stay in power, the Communist Party has to run a capitalist economy, and they are doing it quite well.
The W$J is also covering this story in anticipation of upcoming meetings in Hong Kong, where the U.S. is expected to pressure China for increased reforms, especially with regard to enforcement of intellectual property rights. We are all familiar with this problem, but the W$J points to another issue that could take on increased importance in the near future:
Standards. Beijing has begun to introduce national technology standards for a range of products that foreign firms say erect new nontariff barriers in violation of WTO rules requiring fair competition. They say China is developing standards that diverge from leading international technologies in such areas as Internet protocols, mobile communications and data protection.
October 17, 2005
When I visited China for the first time last year, I remarked on the new building sprouting up around Beijing. Too bad I didn't see Shanghai, where the scale of building is almost unimaginable:
Move over, New York. This year alone, Shanghai will complete towers with more space for living and working than there is in all the office buildings in New York City. That is in a city that already has 4,000 skyscrapers, almost double the number in New York. And there are designs to build 1,000 more by the end of this decade.
If you are interested in this, you should view the NYT's interactive feature on "China's Real Estate Boom." Very informative.
September 05, 2005
My colleague John Ohnesorge pointed me to a recent article in September 1 issue of The Economist entitled "The Myth of China, Inc." (not available online) The article observes that the fear of China is based on the notion that "China's companies are ... mere tools of an expansionist policy propagated by Beijing's leadership," or more subtly, that "because it is impossible to untangle the ownership of most Chinese companies, foreigners cannot be sure to whom they are selling. When the ultimate authority could be the Communist state, that is a worry."
Notice that this fear presumes a coordinated, centralized power, but according to The Economist, that beast does not exist:
The contrast with Japan is stark. The Japanese government had less direct control over its corporations, but its officials co-ordinated their domestic development before earmarking sectors for overseas expansion. The Chinese bureaucracy, while in direct charge of more of the national economy, is riven by factional infighting.
The most interesting part of the article, from my standpoint, was the discussion of corporate ownership. Far from being a coordinating force, state ownership, control, or influence may destabilize otherwise promising ventures:
Private companies are often beholden to state banks for capital and to local officials for favours and contracts. Since private enterprise was not even acknowledged until 1988, entrepreneurs had to bring state investors aboard as political protection, becoming so-called "red-hat" companies. Yasheng Huang, a professor at MIT, says that the results can be disastrous: "Government shareholders may be passive at first, but once a company succeeds, they interfere. Countless Chinese firms have been driven to bankruptcy or failed to grow big because local governments decided to exercise their legal claims on ownership."
In this light, perhaps what we should fear from the acquisition of U.S. companies by Chinese firms, The Economist concludes, is that the Chinese firms will export their pathological governance practices: "Because Chinese firms have grown up in an irrational and chaotic business environment, they may export some very bad habits."
Does this seem plausible? Or likely? My experience with China is fairly superficial, but I wonder whether Chinese managers might be interested in using acquisitions to free themselves from local politicians. By owning non-Chinese assets and attracting investments from non-Chinese sources, perhaps those managers could begin to extricate themselves from government control.
August 12, 2005
My colleague John Ohnesorge brought this article on China to my attention. Earlier this week, John and I were discussing China's future, particularly, whether years of economic reforms were creating a new generation of Chinese who will demand more freedom. Not so fast, warns David Lynch, who describes the political crackdown by Communist Party General Secretary Hu Jintao, then opines:
After a quarter-century of economic reform, Hu's hard line is confounding the conventional wisdom that economic liberalization inevitably will unravel China's one-party system. Most analysts still expect market freedoms to someday spawn greater political openness. But that evolution appears likely to take longer than once thought.
... China's Communist Party is trying to accomplish something unprecedented: a permanent marriage of economic freedom with political repression.
China seems poised for continued growth, at least through the Olympics in Beijing, though in light of the continued political issues, it looks like a very risky place to invest at the moment. I fear that American businesses may still be too enticed by the thought, "If Everybody Bought One Shoe."
August 08, 2005
Two news items over the weekend caught my eye.
First, as reported by Forbes, Yahoo is negotiating the purchase of a 35% stake in Alibaba, a Chinese e-commerce company:
Yahoo! would be gaining one of China’s most coveted Internet partners. Alibaba.com is led by Jack Ma, a onetime English teacher whose unpretentious style and quick wit have made him one of China’s most revered entrepreneurs. Alibaba operates two online business sites--Taobao.com, an online auction site, and Alibaba.com, an online trading site. Both were ranked among the world’s top 40 Web sites on Sunday by Alexa, the Internet monitoring service.
Second, Baidu -- the so-called "Chinese Google" -- executed a spectacular IPO last Friday that was reminiscent of the 1990s internet bubble. The price nearly quintupled on the first day of trading, and it's still rising. Check out this risk factor from Baidu's prospectus:
We may be adversely affected by complexity, uncertainties and changes in PRC regulation of Internet business and companies, including limitations on our ability to own key assets such as our website.
The PRC government extensively regulates the Internet industry including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet industry. These Internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be a violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government regulation of the Internet industry include the following:
- We only have contractual control over our websites. We do not own the websites due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including online information services.
- There are uncertainties relating to the regulation of the Internet business in China, including evolving licensing practices, means that permits, licenses or operations at some of our companies may be subject to challenge. This may disrupt our business, or subject us to sanctions, requirements to increase capital or other conditions or enforcement, or compromise enforceability of related contractual arrangements, or have other harmful effects on us.
- Certain PRC government authorities have stated publicly that they are in the process of promulgating new laws and regulations that will regulate Internet activities. The areas of regulation may include online advertising, online news displaying, online audio-video program broadcasting and the provision of culture-related information over the Internet. Other aspects of our online operations may be regulated in the future. If our operations do not comply with these new regulations at the time they become effective, we could be subject to penalties.
The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Internet businesses in China, including our business.
We used to call that the "Communist Party Risk Factor." In light of recent sabre rattling by Congress, perhaps U.S. companies should include a similar risk factor in all of their offerings.
July 06, 2005
Larry Ribstein has checked in on the Unocal saga, and he has this original take on why those who are worred about U.S. interests might like the idea of Chinese ownership:
If Cnooc doesn’t own the company, the market will push the resources and jobs to the highest value users and workers, who may not be Americans. But Cnooc and the Chinese government have an incentive to give the US special consideration if they want to do more US deals.
Hmm. Maybe. Though I suspect that the people who are lobbying against this on patriotic grounds would more readily trust the assets in Chevron's hands. In any event, I agree with Larry about this: "the best way to protect US companies from foreign ownership is to ensure that they’re managed well."
Read the whole post.
June 23, 2005
Appropos my last post, one of my summer colleagues here in Lund mentioned that a grade school in Brookline, Massachusetts is teaching Mandarin to students beginning in first grade. In light of Brian Leiter's recent post, what does this tell us about the folks in Brookline?
Did I say "trend"? Today brings more news of a Chinese company seeking a global presence: The China National Offshore Oil Corporation (CNOOC) has made an unsolicited bid for Unocal, which last month agreed to be acquired by Chevron. The CNOOC bid (all cash) is $18.5 billion, and the Chevron deal (cash plus stock) was valued at $16.4 billion.
This could be a huge on many levels. It will undoubtedly draw Washington's attention, but I also am interested to see whether this results in Delaware litigation. Of course, Unocal was the focus of the most famous Delaware case ever, Unocal Corporation v. Mesa Petroleum, in 1985. This bid places the Unocal board on the hotspot again.
June 22, 2005
First, Lenovo Group purchased IBM's personal computer division, now Haier Group is looking to buy Maytag. Two data points, and already this has the makings of a trend: flush Chinese companies are seeking a global presence by acquiring established firms.
September 13, 2004
Loïc Le Meur has an interesting take on Chinese growth over at the World Economic Forum with the eye-catching title, "'China's growth is a tougher event than anything we faced since World War Two' - Jeffrey E. Garten, Dean, Yale School of Management."
Among other things, Loïc writes:
I had a great dinner with the New Asian Leaders which is a very active community of young entrepreneurs and investors of the World Economic Forum and they are not wondering how they will increase their revenues by getting more business from subcontracting but rather how they can help building new Chinese World leaders.
When I visited China in May, I had very similar conversations. Same goes for India. While neither country's growth is a secret, I have the impression that many Americans view them as the places that manufacture consumer products designed and sold in the US. Even those of us who pretend to know better may be surprised at the speed with which Chinese and Indian companies break out on the world stage.
Will there be an economic crisis first? Something that will rival World War II in its impact on the U.S.? I am skeptical of the doomsayers, primarily because China and India both have so much room to grow. In my view, the biggest threat in both countries is not growth, but political uncertainty.
July 03, 2004
Before China's Communist Party collapses on the weight of its own obsessions. Check out this story in The New York Times. The two key sentences:
China has begun filtering billions of telephone text messages to ensure that people do not use the popular communication tool to undermine one-party rule.... Chinese mobile phone users sent 220 billion text messages in 2003, or an average of 7,000 every second, more than the rest of the world combined.
Yes, they are using technology to fight technology. And they are counting on ISPs to participate in the monitory. And they are counting on the ISPs being motivated by fear of sanctions. But this does not seem sustainable.
May 24, 2004
We returned from China late last night. We were supposed to arrive in Madison at 7 pm, but we had the misfortune of routing through O'Hare on a stormy day. Our original flight to Madison was cancelled, but we were able to take a later flight, arriving in Madison at about 11 pm. Once we arrived home, my daughter and I were wide awake. It was midday on our body clocks!
On the way to school this morning, my daughter commented that this was her best trip ever, and I have to agree that it was pretty cool. Our favorite part was socializing with the Chinese students. This picture shows me with my student Jonathan, who is a member of the Communist Party of China. As we rode around the old part of Beijing (the Hutong) in this pedicab, we discussed China's past, present, and future. Jonathan is an enthusiast for the Communist Party. He said that the Party was encouraging entrepreneurship and that business people had the freedom to start and build (almost) any business they might want. To listen to Jonathan talk, the Communist Party of China would rival Venturpreneur for entrepreneurial cheerleading.
Later in the day, a group of nine (four Chinese and five US) ate dinner at a restaurant whose name literally translated was "The Noodle King." According to our Chinese hosts, this restaurant was known throughout Beijing for its fine noodles. During the meal, one of the American students asked his Chinese counterparts about religion. The question -- which was prompted by a discussion of Buddhism in China -- was phrased something like this: "What religion are you?" As a person who has no qualms talking about religion, I was a bit surprised at the discomfort caused by this question. All of the Chinese students demurred, disclaiming any religious affliation.
The discomfort caused by that question was magnified by the next question from an American student: "When you read the Chinese newspaper, do you believe what you read?" I was interested to see that one Chinese student began to answer the question reference to how often he was able to see CNN and the BBC. As he fumbled for a way to express himself, another Chinese student interrupted and an animated discussion in Chinese followed. It was apparent to the Americans that it was time to change the subject.
These discussions were not the only times that we were made aware of the still precarious position of freedom in China. Despite Jonathan's protestations, the constraints on personal freedom were all too obvious to Americans. For example, when I attempted to show a Chinese student how to retrieve Google's registration statement, I was told that classroom computers could not access websites outside of China. Although students have broader access to the internet from their dorm rooms, the American students found that certain websites were blocked from their university dorms. (I had similar problems from my hotel room, but I couldn't tell whether sites were being blocked or were merely down.) The military presence on Tiananmen Square was a reminder of those deadly events 15 years ago next week, and recent efforts to raise the topic illustrate the continued sensitivity to discussions of real democracy in China.
Driving and walking around modern Beijing, I was struck by how Western the country had become (or is becoming). Businesses are flourishing, and not just on tourist dollars. China has a conspicuous middle class, which wears fashionable clothes, buys cutting edge electronics, and (increasingly) drives luxury automobiles. New, sleek buildings are popping up all over Beijing, replacing or supplementing the drab white and gray boxes. The people of Beijing remain excited about the Olympics, despite the fact that construction is everywhere. The theory of our foreign policy towards China has been that economic development will spur political reform, but the jury is still out on that. issue. In Eastern Europe -- the closest I have come to the situation in China -- political reform has been driven by economic desperation. Will prosperity give new force to reform efforts? Or cause them to lose urgency?
May 21, 2004
Today my daughter and I visited the popular Silk Market. We had been warned against it by some of our Chinese hosts, while others said that it was popular even with the locals. Having visited the more genuine local markets, however, we decided to leap into the tourist trap. In this photo, I am bargaining over some silk scarves, which I ultimately passed on. The Silk Market has much more than silk: watches, purses and packs, shoes, "jade" trinkets, etc.
If you are familiar with the problem of adverse selection, the Silk Market is a vibrant example of it. Many of the items are copies of famous designs. Close examination sometimes reveals the shortcomings of the goods -- for example, I picked up a Prada pack today and the imprint on the front was off center and crooked, and many of the "Pashmina" wool scarves are of such low quality that they threaten to tear in my hands -- but other items seem to be of good quality to the untrained eye. For example, many of the ties are attractive and the fabric looks very much like silk. Everyone knows that the products in the market are knockoffs, but the consumer is hard pressed to distinguish the good knockoff from the bad.
Of course, buyer and seller do not trust each other in the least. There is almost no reputational capital at stake in a market like this ... on either side of the deal. So when the seller says "trust me" (or some variation), all but the most gullible buyers just roll their eyes.
In this environment, the price drops toward zero very quickly. Some very handsome ties sell for about $1, for example. The sellers start the bidding much higher, of course, usually at $6 - $10 per tie. This, in itself, is an interesting experiment in anchoring. The temptation is to bargain from the initial asking price, which is a very bad indication of value. When approaching these negotiations, I counter the temptation to bargain from the initial asking price by offering a price based on my predetermined willingness to pay. This counteroffer would seem ridiculously low to the disinterested onlooker, but it usually ends up being very close the sales price. Most items that I purchased today sold between 10% and 30% of the initial asking price.
The Silk Market is more about the experience than the goods. I enjoy interacting with the vendors. While my daughter negotiated a particularly thorny purchase, I spoke with a neighboring vendor who wanted to practice her English. She had learned some English in school, but most of her English was comprised of the very limited vocabulary of the marketplace. My daughter's purchase completed, I wished the young woman the best and departed for the next shop. Now, thinking back, I wonder about her and how her life here will change over the next decade or two. Whether the "rich Americans" will continue to make their way to the Silk Market. Whether her life's work will consist of more than haggling with tourists over a few pennies.
May 19, 2004
This evening we went shopping on Wangfujing, which is a pedestrian mall in Beijing not far from Tiananmen Square. We had asked our hosts to recommend a local market not overrun by tourists, and this was certainly a good pick. We visited several modern malls and shopped for souvenirs and clothing. After two hours of that, we made our way to the Night Market.
The following photographs provides a sense of the Night Market, which is a series of food stands selling primarily freshly cooked kabobs or fruit. The closeups of food show squid (octopus?), frog, snake, fish, and silkworm, among other things. The young vendor is attempting to entice my daughter to try fried centipede, but he didn't close that sale. If you want to see larger versions of any of the following photographs, just click on the photograph.
The University of Wisconsin attracts a large number of Asian law students for its Masters of Legal Institutions (MLI) program, and a fair percentage of those students hail from China. Last year one of my favorite students was Chen Jianling, who is now teaching at the University of International Business and Economics. Even if you have never met Jianling, you have met someone like her. She is bright and energetic with a contagious smile and a kind word for everyone. Sort of a Mary Tyler Moore from Beijing. She recently applied to pursue a doctorate of laws degree, and she expressed her concern about the entrance examination, which is highly competitive. I hope she makes it, but she is irrepressible. For people like Jianling, failure is fleeting.
Despite the tone of that last post, I strive to avoid being the ugly American. If you have traveled abroad, you can recognize this person from a distance. We had one -- the same person -- on both of our tours. She took every meal she possibly could at Western restaurants. (The Hard Rock Cafe around the corner came highly recommended!) Chinese customs "don't make sense." Chinese drivers are the worst ever. (They don't hold a candle to the Indians, by the way.) And that annoying habit of writing with characters that I can't read! (Ok, she never said that, but she implied it.) For this person, the only function of China, it seemed, was to be a source of cheap jewelry and clothing. Watching her has reminded me to strive to be as gracious as those who have been hosting us, and that is a high standard, indeed.
We spent our first two days touring Beijing, and I am exhausted of touring. My problem here is not primarily the physical effort -- though that can be exhausting, too -- but rather the psychic energy required to sustain a day full of Chinese culture. The initial challenge is understanding the Chinese accent, which is coming easier now after a few days, but is not as natural for me as German or Scandanavian accents. Then there is the problem of constructing Chinese history (almost) from scratch. Having been reared on European history, my sense of Chinese time is sketchy at best. Frequent repetition of the dynasties helps, but I need much more practice. (I should mention that I am perhaps the most unprepared tourist in the country. I didn't even read the guidebook before we arrived, so the pain of ignorance is at least partly self-inflicted. I am so thankful for The Last Emporer!)
The most trying aspect of the tours, however, was completely unexpected: symbol overload. Chinese art, architecture, folklore, music, etc. are packed with symbols. I suppose that I knew this, or sensed it, but I felt it deep in my bones by the end of the day yesterday, as our tour group was introduced to various teas and the symbolic meaning of the tea set. Oi! That was painful.
May 17, 2004
What did Richard Nixon say about the Great Wall? "It sure is a great wall" ... or something like that. I visited the Great Wall today, after arriving in Beijing late last night. We visited the Jūyōngguān Pass section of the wall, which is the closest section to Beijing. (That's me in the white "Wisconsin" shirt. Click on the photo for a better look.) This was a strategically important section, as it was positioned to guard the pass from Mongolia into Beijing. For my purposes, however, this section of the Wall was just steep. Embarking from the bottom of the pass, we climbed uneven stairs for an hour at a very steep incline, ascending about two-thirds of the way to the top. When a thunderstorm chased us inside one of the towers, I decided that I had reached my limit. My daughter and two other women from from our small tour group proceeded to scale the mountain, and the men didn't hear the end of it for the rest of the day. Here's my travel tip: if you come to China hoping to appreciate the magnitude of the Great Wall, don't visit the Jūyōngguān Pass, which provides none of the grand vistas of the Wall stretching across China's northern desert.
Earlier in the day, we visited a Ming tomb just outside of Beijing. It was mostly not worthy of pictures, but I noticed that the toilet received a four-star rating, and that drew me in for a visit. Apparently, the person who rated the toilets was a man, because the men in our group were raving about the cleanliness and quality, while the women were all complaining about the accommodations.
Other signs that caught my eye: "No striding" (on the Great Wall ... apparently an admonition against running) and "Do not scale" (a warning at the Ming tomb not to climb on the wall).
We made it. The trip to China was largely uneventful, which is a minor miracle given that we passed through both O'Hare and Narita on the way.
My first impression of Beijing was the beautiful road from the airport to the city. Not beautiful in an aestheitic sense, but rather in a functional sense. Smooth and organized. The drivers stayed in their lanes, and we saw no elephants or camels. Such a contrast to the roads of Delhi. The Indians envy the Chinese their physical infrastructure, and my initial encounters with Beijing's roads suggests that their envy is justified.
Beijing seems like an intensely ugly city. Many of the buildings we have seen are dreary and gray. The color in the urban landscape is provided mainly by enormous billboards. Though trees are plentiful, mountains surround the city and create LA-like smog. Worse actually. Thankfully, it rained yesterday and for a brief time today, clearing much of the pollution in the afternoon.
If our hotel is any indication, the people of Beijing are accustomed to Western tourists. Although fluency in English appears to be rare, most people we encounter are able to provide simple directions ... and to bargain, of course. We went to several shops on our first day, and the bargaining proceeding much like it did in India, though it seemed less desperate for some reason.
I haven't had much of an opportunity to observe the business environment in China, and Beijing is not the best city to do that. (By all accounts, Shanghai is the place to be for business.) But my small Great Wall tour group (seven people) included two businessmen, one from Sydney and one from Mexico City. As you might guess, both are importers who were visiting China to check on their relationships with suppliers. I asked one of them why China had been so successful in obtaining manufacturing business, and he noted that China offers one-stop-shopping. Fabric, buttons, zippers -- whatever you need to make a complete garment can be supplied by a firm in China. If you were to attempt the same thing in Cambodia, for example, where labor is even cheaper than in China, many of the component parts would need to be imported. This would entail additional taxes as well as the usual payments made to government officials. Enough of those and fairly soon you have lost any labor cost advantage.
The "bloke" from Sydney also related an interesting story of a joint venture involving an Australian firm, a Taiwanese firm, and a Chinese firm. To encourage the formation of the joint venture in China, local government officials were exceedingly accommodating. They helped the joint venture partners obtain land, and taxes were relatively low. Once the joint venture had returned the initial investment, however, all sorts of new taxes began to be levied. It became clear to the Australian party that the local government officials were attempting to use the success of the joint venture to build local infrastructure, and the Australians sold their share.
Another example of the way in which China uses outside investors to build local capacity: when a joint venture locates in China, it must hire local managers to work alongside the outside managers. The local managers do not have the same level of management experience or industry expertise as the outside managers, but over the course of years, the local managers develop both. When the joint ventures dissolve, therefore, the local managers are in a good position to assume control. (Because the outside managers would not accept such a position at the level of pay offered to the local managers, the outsiders are paid a Chinese salary here, but supplemented by payments outside the country.)
For these two international businessmen, both longtime followers of China, the economic advances here have been dramatic. They view as naive those who protest against low wages in developing countries, not because they misapprehend the benefits to the outside firms, but because they fail to account for the benefits to the local economy. Both of these fellows expected much of the cheap manufacturing to leave China within a generation or two in search of lower labor costs elsewhere, and they fully expect China to replace any losses of that sort with indigenous firms serving both the local economy and the export market.
May 14, 2004
I am about to pack up my computer for the trip to China, so blogging will be light over the next couple of days. I hope to post some thoughts on entrepreneurship in China, and I am bringing my camera in hopes of doing some photoblogging. Until then ...
May 02, 2004
Next month I am headed to Beijing, my first trip to China. Believe it or not, I have been asked to teach a class on U.S. venture capital agreements to students from the University of Wisconsin and the University of International Business & Economics in Beijing. In anticipation of this experience, I have begun to read more about China, and with this post, I inaugurate a new China category on this blog.
What better place to start than Thomas Friedman, editorial writer extraordinaire. In today's New York Times, Friedman writes that every Western political leader should utter this prayer tonight:
Dear Heavenly Father, please keep the leader of China, President Hu Jintao, healthy and on an even keel. Please see to it that he moves steadily and carefully toward restructuring the Chinese banking system and ridding it of its huge overhang of bad loans and corruption, before there is a real meltdown that would be felt around the world. Give him the wisdom to cool the overheated Chinese economy without creating a recession that would prompt China to stop importing like crazy and start just exporting like crazy. And Father, forgive us for all the bad words we used in recent years to describe China's leaders — terms like `Butchers of Beijing.' We did not mean it. We meant to say `Bankers of Beijing,' because their economy is now fueling growth all over Asia, bolstering Japan and sucking up imports from everywhere. May China's leaders live to 120, and may they enjoy 9 percent G.D.P. growth every year of their lives. Thank you, Father. Amen.
We talk about China in the U.S. but we as a people are so self-centered that most of us miss the overwhelming importance of China on the world stage. This recognition had largely passed me by prior to my trip to India, where the people we met with were fairly obsessed with China.
The issues are similar to those that confront India and largely revolve around creating a middle class. Several big differences between China and India: (1) China began trusting markets (more or less) to build its economy 15 years before India; (2) language barriers and the absence of traditional Western ties (i.e., China was not a British colony) caused China to grow within before turning to the outside; and (3) Communism versus Socialism. Of course, the first two differences favor China, but the last provides recurring speed bumps. Still, Friedman gives China's current leaders pretty high marks:
Given how opaque China's decision-making is, it's hard to predict how Chinese leaders will balance their obligation to behave in a way that promotes global equilibrium with their need to create millions of jobs each year in order to stay in power. One can only say three things: 1. They've done a pretty good job so far. 2. The job gets harder every day. 3. No one will be immune to the fallout. The relationship of the world to China right now reminds me of that old banker's rule: If a client owes you $1,000, that's his problem. If a client owes you $1 million, that's your problem. China's stability is our problem.
