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.

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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.

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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."

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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