China's Courts. "Utterly Worthless" Is Probably An Overstatement.

In the early years of this blog, when discussing China's court system, I would make it a point to emphasize that I was limiting my comments to how the courts handle business law matters. I did this for two reasons. One, my sense is that the quality of court handling of business cases is very different from the quality of judging given to criminal matters. Two, I am not the least bit qualified to talk about how Chinese courts handle criminal matters as I never studied Chinese criminal procedure and my firm has never (and will never) represented a Chinese criminal defendant. Working in tandem with Chinese lawyers, we have represented a number of foreigners in criminal proceedings in China, but those cases do not qualify me to speak on China's criminal justice system as a whole. For these same reasons, I always beg off whenever journalists contact me for my legal analysis on this or that high profile criminal case in China.?

I thought of all this today while reading a post by Stan Abrams, entitled, "Zhao Lianhai and Criticizing China’s Legal System." Stan is all up in arms (and few people do better when up in arms than Stan) about a Peter Foster blog post, entitled, "Zhao Lianhai’s Apology Exposes the Utter Mess of China’s Legal System." Grossly summarizing Stan's ire, it stems from Foster's conflating the Zhao Lianhai case into a claim that China's entire court system is rotten to the core and utterly worthless.

Stan then makes the following case:

But to take the criticism to the next level, saying that China’s legal system is an “utter mess” or that it is functionally nonexistent, well, this is way over the top. Perhaps Foster falls into use of such hyperbolic language because the judicial cases he looks at are the “bad” ones, like that of Zhao Lianhai or perhaps Xue Feng, a US geologist sentenced to 8 years on a state secrets charge.?

One can criticize these cases on their merits, on the choice of the government to get involved in the first place, or on the resulting erosion of public confidence of the judiciary. But if you focus on these cases, you get a very skewed view of China’s legal system.

Lots of law professors have written entire books about this subject, so let me make some sweeping generalizations of my own here in the interest of brevity. China’s legal system is complicated and deals with a wide range of subjects. Highly-charged political cases involving whistleblowers and dissidents are important cases, but they represent a very tiny fraction of judicial activity.

China has a thriving court system, and the number of civil cases, for example, has skyrocketed in recent years along with economic growth. Obviously the public retains some confidence in parts of the legal system here.

Speaking for myself and my own experiences as a lawyer, I have seen tremendous strides made within the legal sector as successive waves of reform have targeted the way courts are run, cases are handled, and judges are selected and trained. China’s economy would not be where it is today without a functioning legal system, its many flaws notwithstanding.

I don’t think anyone would point to the Zhao Lianhai case as an example of China’s legal system at its best. On the other hand, it and other politically sensitive cases represent only one aspect, albeit a very significant one, of China’s judicial framework and its approach to Rule of Law.

Let’s not pretend that a functioning legal system doesn’t exist in this country or that it has not made tremendous progress to date. Whether it can ever reach a point where Westerners would be comfortable with China’s interpretation of Rule of Law, however, is a question for the future.

I completely agree with Stan and I expressed similar views in a 2006 post, entitled, "The Yin And Yang And The Apples And Oranges On Chinese Courts."

What do you think?

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China's Tax System. When "Equal" Is A Very Bad Thing.

In the good old days, China gave foreign companies all sorts of tax breaks. In fact, China's taxation system so favored foreign companies, many Chinese companies would form a company overseas and then enter China that way. This tactic came to be known as round-tripping and it became quite common.

Those days are truly over.

China recently put one more, pretty much final nail in the separate but unequal column earlier this month when it "unified" a few more rather obscure taxes. A friend of mine recently sent me an email from a China-focused accounting firm that nicely describes the most recent China tax changes further harmonizing the tax structures as between foreign and domestic enterprises. The email was from Kaizen Certified Public Accountants Limited/Yen and Associates Limited, and it stated the changes so clearly, I am going to just quote it directly:

Commencing from 1 December 2010, foreign enterprises, foreign funded enterprises and foreign individuals will begin to pay Urban Maintenance and Construction Tax and Educational Surcharge.

Urban Maintenance and Construction Tax (城市维护建设税) and Educational Surcharge (教育费附加) are two types of surcharges, levied on taxpayers who pay Value Added Tax ("VAT"), Consumption Tax (CT) and Business Tax (BT). Specifically, each surcharge is calculated as a percentage of the actual amount of the VAT, CT and BT paid by the taxpayers. The rate for Educational Surcharge is 3%. Depending on the location, the rates for City Maintenance and Construction Tax differ:

• In city areas, the rate is 7%,
• In county and township areas, the rate is 5%,
• In other areas, the rate is 1%.

Since their introduction in 1985 and 1986 respectively, the two surcharges have been imposed on domestic enterprises and Chinese individuals only. Foreign enterprises, foreign invested enterprises and foreign individuals have been specifically exempted from these two surcharges.

The extension of Urban Maintenance and Construction Tax and Educational Surcharge to foreign enterprises and foreign funded enterprises, following the unification of Vehicle and Vessel Usage Tax in 2007, Enterprise Income Tax in 2008, Farmland Occupation Tax and Urban Real Estate Tax in 2009, is the last of such moves to unify the different tax systems applicable to domestic and foreign funded enterprises. This very last move signifies that the unification of the two tax systems has been completed and the beginning of a new era of “unified tax system and fair taxation” and now that there is one and only one tax system applicable to all enterprises doing business in China or with Chinese enterprises.

At the end of 2009, I did a post, entitled, "China's Top 5 Business Law Trends For 2010." In that post, I predicted 2010 would see China stepping up its tax collection efforts:

China will increase its tax collection efforts. This has been going on at a rapidly accelerating pace over the last six months or so. If your China operations are not making a healthy profit, do not be surprised if the government imputes healthy profits to it. In particular, the government will look very closely at your transfer pricing and in many cases it will not like what it sees.?

There is no doubt the same will hold true for 2011 and beyond. ?

My friend had this to say about the above changes: ?

My 2-cents on the tax increase are that I don't really mind but wish there had been more advance notice. The amount is small and for a company with decent margins it shouldn't be too harmful. But how do I know what other changes are just around the bend? In any case, the move to bring taxes for foreign and domestic enterprises in line is no surprise (especially to CLB readers!) and this is exactly the kind of thing we've learned to roll with. Maybe we can ask knowledgeable CLB readers to guess what other changes might be on the way...

So what tax changes do you see for China? For foreign businesses operating in China? ?

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The Chinese Dream And The Rise of China's Middle Class.

This review was written by Miriam Roth, who recently joined our?international law firm as a legal assistant/paralegal. Miriam graduated this year with a degree in English Literature from the University of Maryland. ?When not working with us, she is an assistant editor at PIF Magazine.

By Miriam Roth

In her newly published book, The Chinese Dream, Helen Wang explores the rise of China’s new middle class: an up-and-coming force that is growing and changing at an unprecedented rate, and also opening a Pandora’s Box of social, political, and environmental issues. As this powerful demographic continues to grow, Chinese ideas and values are becoming increasingly important on a global scale. But to many Westerners, especially those who fear Chinese competition, those ideas can seem strange or threatening.

Taking this reality into account, Wang argues that “oneness” -- understanding and collaboration between East and West -- can and should happen. And the key to this “oneness,” she suggests, might well lie in the very differences that have alienated us in the past.

Having grown up in China and lived most of her adult life in the U.S., Wang speaks from a uniquely informed perspective. Not only is she fluent in both English and Mandarin, but she also clearly understands the subtleties of each nation’s attitudes and values. The Chinese Dream shows the depth of her knowledge in these areas.

But besides her professional expertise, Wang is a talented storyteller with a knack for turning the abstract into the tangible. A truly enjoyable read, the book brings foreign concepts to life through a blend of facts, reflections, and personal experiences.

Wang manages to make sense out of modern-day China’s most baffling paradoxes. Especially interesting is her discussion of the ways in which communist and capitalist values coexist within a single nation -- even within individual minds. Interviewees like Wu Haitao, a Party member who plays the American stock market, show a culture that, Wang explains, is full of ambiguity. One cannot read this book without putting at least a dent in the idea of a stereotypical Chinese.

The Chinese Dream looks at the tensions that trouble China and its relationship with the world: the tensions between old and new, collectivism and individualism, growth and preservation, East and West. Wang understands that though these issues are not going to disappear and may be handled badly, she nonetheless presents a hopeful picture of the future.

?

Wang’s call for unity never suggests that total agreement can or should be possible. Instead, she argues that ideological struggle is necessary for positive change. She explains how, like Yin and Yang, conflicting countries and ideologies can interact to form a more balanced whole. The U.S. and China, for instance, can capitalize on their different economic policies to counteract their respective trends of overconsumption and over-saving. In this and other ways, the two countries can benefit from one another, not despite, but because of their differences.

The Chinese Dream describes countless possibilities for shared growth, on both national and international levels. For those looking to gain a deeper understanding of modern Chinese society, and those looking to prepare for a new age of globalized collaboration, Helen Wang’s The Chinese Dream is an exciting and timely resource.

?

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Be Sure Regarding China's Sinosure.

Many Chinese companies that provide credit to foreign businesses do so because their invoices are insured by Sinosure. ?Sinosure is a massive China-based export and credit insurance company.

Foreign companies sometimes face Sinosure when they have failed to pay their Chinese supplier for product. When that happens, Sinosure usually steps in and threatens to sue. ??

We have worked with a number of companies in dealing with Sinosure and those experiences, coupled with numerous consultations with Chinese lawyers who know and understand Sinosure, have convinced us that the following is typically true:

1. ?Sinosure is not unreasonable. If you are not paying your Chinese supplier because your supplier gave you bad product, Sinosure will "listen."
2. If you are not paying your Chinese supplier because you are having cash flow problems, Sinosure will not listen.
3. If you are not paying your Chinese supplier because you are a deadbeat, Sinosure definitely will not listen.
4. If you are not paying your Chinese supplier because your Chinese supplier gave you bad product, you should do whatever you can to provide Sinosure with documentary proof of the bad product and documentary proof of the damages you have incurred due to the bad product.

What have your experiences been with Sinosure?

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China's Economic Future. By The Numbers.

I tend to put very little stock in economist's predictions and I tend to put even less stock in economist's predictions on China (and even less still on non-economists prognosticating on China's economy as though their doing business there all of a sudden makes them an economist). Though I find the predictions to be of only very limited value, I do often find the assumptions on which the predictions are based to be intriguing and sometimes even worthwhile.

That is how I feel about a recently released Morgan Stanley report, summarized in this Beyond Brics post, entitled, "China 'Negatrends': How to Get Wxposure to China's Growth." The post is ostensibly about the stocks in which you should be investing to take advantage of China's growth, but it also delves in to what Morgan Stanley has to say about the China trends that will be shaping China's economic future:

The trends set to reshape China over the next decade are demographics, urbanisation, infrastructure, social security network, education, and consumer financing. But this is not new. There are, for example, plenty of companies clamouring to tap China’s growing consumer market, but that doesn’t make them likely to succeed.

i agree there is nothing new here, but that is because these trends are so apparent and, to a very large extent, so uncontroversial. ?

But the part of the Morgan Stanley report I found most intriguing was its almost over the top predictions on what will happen by way of wages, consumption and foreign investment in China over the next ten years:

Morgan Stanley’s optimism about the mega-trends is based on the assumption that three factors will change the economy over the next decade: that real wages will quadruple, consumption in total numbers will triple, and foreign investment will double.

The funniest thing is that I think Morgan Stanley might end up being right. ?

What do you think??

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Exploding The Myths Of China's Foreign Investments.

The China Economic Review published an article by CLB Co-blogger Steve Dickinson?in its November issue. Steve's article is on the myths of China's foreign direct investment and is entitled, Exploding the Myth:?China has emerged as a global FDI power, giving birth to a few misconceptions in the process.

Steve's thesis is that the bromides that China is focusing its foreign investments on "pariah" regimes and investing for political purposes during the economic downturn are simply not borne out by the facts:

The rise of China as a player has given rise to two varieties of myth. First, Beijing is using its FDI muscle to make politically motivated investments in "pariah" regimes as a bulwark against the West. Second, it is taking advantage of the global economic crisis to snap up key assets around the world at bargain prices.

Sudan is routinely flagged as the example of Chinese investment in undeveloped and repressive regimes, but it hardly represents a consistent theme. Chinese outbound FDI is disproportionately?focused on highly developed modern financial centers such as Hong Kong (63%), Cayman Islands (9.5%), Australia (4.3%), Luxembourg (4%), British Virgin Islands (BVI, 2.9%), Singapore (2.5%) and the US (1.6%).?

* ? ?* ? ?* ? ?*

Neither is the Chinese FDI program a land-and-resources grab focused on underdeveloped regions like Africa. Only 2.6% of total Chinese investment reached Africa in 2009, the lowest for any region in the world. The figure of US$1.44 billion was down 73.8% on the previous year. Asia was the overwhelming target, attracting 71.4% of FDI, followed by Latin America (13%, primarily in the Caymans and the British Virgin Islands).

The major investment trend in 2009 was the about-turn on Africa, which was compensated for by a marked rise in capital entering Europe (up 280% year-on-year) and North America (up 320%).

China foreign investment is also not nearly as focused on grabbing land in the undeveloped world:

As for claims that China is engaged in a land grab in the undeveloped world to secure access to land and other food resources in order to feed its growing population, again they are not borne out by the statistics.

Chinese investment in 2009 in agriculture, forestry, fisheries and animal husbandry amounted to US$340 million, a mere 0.6% of the total. This compares with 51.2% for finance and commercial services - largely investment funds in tax havens such as Hong Kong, Singapore, the Caymans and Luxembourg. These sophisticated financial investments are worlds away from purchases of raw land for farms that is a centerpiece of a common myth about Chinese FDI.

It is, however, true that China FDI has involved substantial investments in natural resources:

It is true that China does emphasize investment in mineral assets. Last year, FDI targeting minerals and mining amounted to US$13.34 billion, concentrating on petroleum, natural gas, and ferrous and non-ferrous metals. Though this is a tiny amount compared to the investments of the Western energy and mining giants, it does constitute 23.6% of China's FDI for 2009.

Though We can expect China to compete with the West for natural resources, "there is no evidence whatsoever that Chinese companies have made any moves to acquire key productive assets and real estate around the world during the global financial crisis: Investment in these areas is remarkably low: real estate (1.6%), manufacturing (4%), research and development (1.4%), energy production (0.6%)."

Steve concludes his article by stating that figuring out what is really behind China's FDI strategy will be "more productive than pursuing the myths that seem to be occupying most analysts."

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Cambodia: China's Newest Appendage?

Co-bloogger Steve Dickinson just returned from a business trip to Cambodia. As China's costs rise, American and European companies are beginning to turn to Vietnam, and to a lesser extent, Cambodia, and even Laos, for their manufacturing outsourcing. This post focuses on Steve's time in Cambodia, and, specifically on its growing relationship with China.

By Steve Dickinson

I just returned from Cambodia. On this trip, I stayed in Phnom Penh and explored the city carefully for the first time. There are a number of notable changes from the last time I was there, about a year and a half ago:

? The Cambodian government has worked hard to develop the riverfront area. Though the rest of the city remains in a state of remarkable disrepair, the parks and riverfront along the Mekong and Tonle Sap have been entirely modernized. The locals have taken to the modern park-like atmosphere and have made the waterfront a local hang-out, especially on mornings and weekends. This is in marked contrast to the old days, where the riverfront was mostly relegated to tourists.

? Most of the current development seems to be highly dependent on Chinese (Hong Kong/Mainland/Singapore) investment. The visible, modern developments in Phnom Penh all seem to be based on Chinese money. The locals even claim that their new parliament building and prime minister’s office were funded by the Chinese. On a larger scale, the Chinese and Cambodian governments on November 4 announced that China had agreed to invest $USD1.6 billion on infrastructure projects in Cambodia over the next five years.

? Cambodia has become a center for outsourcing of textiles. Conditions in this business seem to have improved. When I was last in Cambodia, five of the textile factories in Phnom Penh were on strike. The strikes were all directed at mainland Chinese employers. This worker unrest seems to have passed and on this visit all the factories were operating at full capacity. Cambodia has a small but skilled workforce, primarily composed of young women from the countryside. The government plan is to move more aggressively into outsource-focused manufacturing. The major limitation is the supply of electricity. During my visit I had talks with several consultants who are working on electricity issues throughout S.E. Asia. The problem for Cambodia is that it has no good locations for hydro-power. The Chinese are rumored to be planning a major power plant project in Cambodia as part of the investment program discussed above. The mystery is what will be used to fuel the proposed power plant. Cambodia has no coal resources, no coal port and no coal transport infrastructure. So the building of a power plant requires consideration of all these infrastructure issues.

? The Cambodians I talked with appear to have accepted that their economy will become dominated by China. If true, this would mean that China has successfully moved to dominate Cambodia, Laos and Myanmar in S.E. Asia. The presence of the Chinese is greeted by the locals with indifference. There is very little evidence of any real interest in Cambodia by any other country, so the impression given by the locals is consistent with the facts on the ground. From the standpoint of the Cambodians, Thailand and Viet Nam are their traditional enemies. Alliance with China is seen as a way to keep those traditional enemies at bay. This is in stark contrast with Viet Nam which is moving closer to the United States, in large part as a counter to China.?

? During my stay, Prime Minister Hun Sen announced a plan to close down the United Nations War Crimes Tribunal and terminate trials of the remaining Khmer Rouge. This was a topic of interest in the foreign NGO community. The locals greeted the news with indifference.

? During my stay, Secretary of State Hillary Clinton was also present in Phnom Penh. Her visit was not mentioned on local television or in the local newspapers. The Cambodians I spoke with stated that they feel the U.S. has written off Cambodia as an investment target. In particular, they see the close relations of the U.S. with Viet Nam and Thailand as a threat to Cambodia. As a result, Ms. Clinton’s visit was treated as a non-event.

? I took a number of visits into rural villages. In the area around Phnom Penh there is definitely a feeling that more money is moving into the rural economy. The people are starting to paint their houses and they are moving from wood construction to concrete. These are the usual signs of rural wealth. The birthrate in the country side is high, which means there will no doubt be plenty of laborers down the road to work in the textile, shoe and furniture factories being planned for the Phnom Penh area. Let’s hope they get the electricity situation figured out by the time these kids are ready to go to work.

? I visited for the first time the National Museum in Phnom Penh. This museum houses most of the fragile sculpture from the Angkor Wat temple complexes. This museum is one of the best I have been to in Asia and is well worth a visit. It is very laid back, like the rest of Cambodia. The exhibits, however, are world class.

? My overall impression is that Cambodia is not trying to compete with Viet Nam for American business, nor would it be likely to succeed if it did. ?At this point, most foreign direct investment in Cambodia is coming from China and from overseas Chinese and I do not see that changing in the shot term.?

What are you seeing out there?

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Cambodia: China's Newest Appendage?

Co-bloogger Steve Dickinson just returned from a business trip to Cambodia. As China's costs rise, American and European companies are beginning to turn to Vietnam, and to a lesser extent, Cambodia, and even Laos, for their manufacturing outsourcing. This post focuses on Steve's time in Cambodia, and, specifically on its growing relationship with China.

By Steve Dickinson

I just returned from Cambodia. On this trip, I stayed in Phnom Penh and explored the city carefully for the first time. There are a number of notable changes from the last time I was there, about a year and a half ago:

? The Cambodian government has worked hard to develop the riverfront area. Though the rest of the city remains in a state of remarkable disrepair, the parks and riverfront along the Mekong and Tonle Sap have been entirely modernized. The locals have taken to the modern park-like atmosphere and have made the waterfront a local hang-out, especially on mornings and weekends. This is in marked contrast to the old days, where the riverfront was mostly relegated to tourists.

? Most of the current development seems to be highly dependent on Chinese (Hong Kong/Mainland/Singapore) investment. The visible, modern developments in Phnom Penh all seem to be based on Chinese money. The locals even claim that their new parliament building and prime minister’s office were funded by the Chinese. On a larger scale, the Chinese and Cambodian governments on November 4 announced that China had agreed to invest $USD1.6 billion on infrastructure projects in Cambodia over the next five years.

? Cambodia has become a center for outsourcing of textiles. Conditions in this business seem to have improved. When I was last in Cambodia, five of the textile factories in Phnom Penh were on strike. The strikes were all directed at mainland Chinese employers. This worker unrest seems to have passed and on this visit all the factories were operating at full capacity. Cambodia has a small but skilled workforce, primarily composed of young women from the countryside. The government plan is to move more aggressively into outsource-focused manufacturing. The major limitation is the supply of electricity. During my visit I had talks with several consultants who are working on electricity issues throughout S.E. Asia. The problem for Cambodia is that it has no good locations for hydro-power. The Chinese are rumored to be planning a major power plant project in Cambodia as part of the investment program discussed above. The mystery is what will be used to fuel the proposed power plant. Cambodia has no coal resources, no coal port and no coal transport infrastructure. So the building of a power plant requires consideration of all these infrastructure issues.

? The Cambodians I talked with appear to have accepted that their economy will become dominated by China. If true, this would mean that China has successfully moved to dominate Cambodia, Laos and Myanmar in S.E. Asia. The presence of the Chinese is greeted by the locals with indifference. There is very little evidence of any real interest in Cambodia by any other country, so the impression given by the locals is consistent with the facts on the ground. From the standpoint of the Cambodians, Thailand and Viet Nam are their traditional enemies. Alliance with China is seen as a way to keep those traditional enemies at bay. This is in stark contrast with Viet Nam which is moving closer to the United States, in large part as a counter to China.?

? During my stay, Prime Minister Hun Sen announced a plan to close down the United Nations War Crimes Tribunal and terminate trials of the remaining Khmer Rouge. This was a topic of interest in the foreign NGO community. The locals greeted the news with indifference.

? During my stay, Secretary of State Hillary Clinton was also present in Phnom Penh. Her visit was not mentioned on local television or in the local newspapers. The Cambodians I spoke with stated that they feel the U.S. has written off Cambodia as an investment target. In particular, they see the close relations of the U.S. with Viet Nam and Thailand as a threat to Cambodia. As a result, Ms. Clinton’s visit was treated as a non-event.

? I took a number of visits into rural villages. In the area around Phnom Penh there is definitely a feeling that more money is moving into the rural economy. The people are starting to paint their houses and they are moving from wood construction to concrete. These are the usual signs of rural wealth. The birthrate in the country side is high, which means there will no doubt be plenty of laborers down the road to work in the textile, shoe and furniture factories being planned for the Phnom Penh area. Let’s hope they get the electricity situation figured out by the time these kids are ready to go to work.

? I visited for the first time the National Museum in Phnom Penh. This museum houses most of the fragile sculpture from the Angkor Wat temple complexes. This museum is one of the best I have been to in Asia and is well worth a visit. It is very laid back, like the rest of Cambodia. The exhibits, however, are world class.

? My overall impression is that Cambodia is not trying to compete with Viet Nam for American business, nor would it be likely to succeed if it did. ?At this point, most foreign direct investment in Cambodia is coming from China and from overseas Chinese and I do not see that changing in the shot term.?

What are you seeing out there?

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Exploding The Myths Of China's Foreign Investments.

The China Economic Review published an article by CLB Co-blogger Steve Dickinson?in its November issue. Steve's article is on the myths of China's foreign direct investment and is entitled, Exploding the Myth:?China has emerged as a global FDI power, giving birth to a few misconceptions in the process.

Steve's thesis is that the bromides that China is focusing its foreign investments on "pariah" regimes and investing for political purposes during the economic downturn are simply not borne out by the facts:

The rise of China as a player has given rise to two varieties of myth. First, Beijing is using its FDI muscle to make politically motivated investments in "pariah" regimes as a bulwark against the West. Second, it is taking advantage of the global economic crisis to snap up key assets around the world at bargain prices.

Sudan is routinely flagged as the example of Chinese investment in undeveloped and repressive regimes, but it hardly represents a consistent theme. Chinese outbound FDI is disproportionately?focused on highly developed modern financial centers such as Hong Kong (63%), Cayman Islands (9.5%), Australia (4.3%), Luxembourg (4%), British Virgin Islands (BVI, 2.9%), Singapore (2.5%) and the US (1.6%).?

* ? ?* ? ?* ? ?*

Neither is the Chinese FDI program a land-and-resources grab focused on underdeveloped regions like Africa. Only 2.6% of total Chinese investment reached Africa in 2009, the lowest for any region in the world. The figure of US$1.44 billion was down 73.8% on the previous year. Asia was the overwhelming target, attracting 71.4% of FDI, followed by Latin America (13%, primarily in the Caymans and the British Virgin Islands).

The major investment trend in 2009 was the about-turn on Africa, which was compensated for by a marked rise in capital entering Europe (up 280% year-on-year) and North America (up 320%).

China foreign investment is also not nearly as focused on grabbing land in the undeveloped world:

As for claims that China is engaged in a land grab in the undeveloped world to secure access to land and other food resources in order to feed its growing population, again they are not borne out by the statistics.

Chinese investment in 2009 in agriculture, forestry, fisheries and animal husbandry amounted to US$340 million, a mere 0.6% of the total. This compares with 51.2% for finance and commercial services - largely investment funds in tax havens such as Hong Kong, Singapore, the Caymans and Luxembourg. These sophisticated financial investments are worlds away from purchases of raw land for farms that is a centerpiece of a common myth about Chinese FDI.

It is, however, true that China FDI has involved substantial investments in natural resources:

It is true that China does emphasize investment in mineral assets. Last year, FDI targeting minerals and mining amounted to US$13.34 billion, concentrating on petroleum, natural gas, and ferrous and non-ferrous metals. Though this is a tiny amount compared to the investments of the Western energy and mining giants, it does constitute 23.6% of China's FDI for 2009.

Though We can expect China to compete with the West for natural resources, "there is no evidence whatsoever that Chinese companies have made any moves to acquire key productive assets and real estate around the world during the global financial crisis: Investment in these areas is remarkably low: real estate (1.6%), manufacturing (4%), research and development (1.4%), energy production (0.6%)."

Steve concludes his article by stating that figuring out what is really behind China's FDI strategy will be "more productive than pursuing the myths that seem to be occupying most analysts."

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China's Upcoming Five Cities For Foreign Investment.

A loyal reader emailed me a Fortune Magazine list this morning of "China's 5 Best New Cities for Business" and asked me what I thought of it. ?

If one ignores the fact that none of the five cities is new, it is a great list. The list was developed as follows:

Fortune China recently conducted its fifth annual Emerging Business Cities survey, hearing from 1,278 Chinese senior managers who ranked 50 selected cities based on the overall business environment, the cost of doing business, the local talent pool, and the quality of life. They think the following sites have the potential to become the next generation of mega-cities.?

The following five Chinese cities made the cut, in the following order:

1. Suzhou
2. Qingdao
3. Shenzhen
4. Ningbo
5. Dalian

I was delighted to see Qingdao at number 2 because it is one of our favorite cities as co-blogger Steve Dickinson is based there and because so many of our food-related clients have set up their China operations there. ?We are also big fans of Dalian and have done a considerable amount of work there related to the software/hardware and shipping industries. ?Shenzhen and Suzhou should need no introduction because both cities have been manufacturing centers for a considerable time (particularly Shenzhen which was essentially China's first foreign manufacturing center for foreigners). I have been to Ningbo but once and my firm has done but a very few deals there so I am not terribly familiar with it, though I usually hear nothing but great things about it. ??

These are all excellent cities for business, no doubt, but none of them are exactly undiscovered or "new" and none of them are cheap either.

What do you think?

?

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China's 12th Five Year Plan: The Coming Storm On Wages

By Steve?Dickinson

The 5th Plenum of the 17th CCP Central Committee completed its meeting in Beijing on October 18. here is the full text of that meeting. Aside from various political issues, the major task of the plenum was to adopt the outline for the 12th Five Year Plan that will guide China's economic development of China from 2011 to 2015.

The plenum approved the outline for the plan, entitled The Communist Party of China (CPC) Central Committee's Proposal on Formulating the Twelfth Five-year Program (2011-2015) on National Economic and Social Development. The Chinese version of that document was published on October 27. The formal plan will be drafted on the basis of the Proposal and will be submitted for approval at the next meeting of the National People’s Congress, scheduled for March 2011. One wonders what China will do in the first quarter of 2011 when there is no formal plan in effect. I am reviewing the Proposal and will publish some reports on its contents shortly.

Though there has been much speculation and discussion in the foreign press regarding the probable contents of the 12th Plan, I have been looking more at the the concerns of the local Chinese. In preparing for my review of the Proposal, my research assistant and I gathered several hundred pages of local Chinese language internet news reports on the 12th Five Year Plan. I was surprised to find that over 80% of the concerns were about a single issue: income disparity. The following concerns were constantly expressed:

• There is a growing disparity between the highest income earners and the lowest income earners (the GINI coefficient).

• There is a growing disparity between the incomes of urban residents and rural residents.

• There is a growing disparity between the incomes of residents of the coastal provinces and the residents of the rest of Western, Central and Northeast China.

These are common complaints of “uneven development” that have been the subject of concern in China for some time. We also saw the following new, more troubling, concerns consistently expressed:

• The percentage increase in the wages of Chinese citizens has not grown as fast as the percentage increase in China's overall GDP.

• Though China has a high savings rate, the percentage increase in the savings of Chinese citizens has not increased at the same rate as the percentage increase in the Consumer Price Index. This means that even though the Chinese save, they are actually falling behind in terms of wealth accumulation.

Overall, the feeling is that "if China is now the second largest economy in the world, why don’t we feel better off?" The underlying theme is that "clearly China has made a lot of money over the past 10 years, but where did all that money go?" It certainly did not go into the pockets of the Chinese urban factory and service workers and it certainly did not go into the pockets of the Chinese farmers.

This theme is the basis for the new book by Lang Xianping 郎咸平 (Larry H.P Lang), a?distinguished Hong Kong University Chinese economist. Lang’s new book, published in September, is entitled “Why Is Our Life So Hard? Why Is Our Income So Low? Why Are Our Prices so High? Why Do Our Businesses Struggle So Hard?” (我们的日子为什么这么难) (He apparently likes long titles). This book has only been out for a month and is already the number 2 best seller in Qingdao. This shows how its theme resonates with the local public. Professor Lang also has a blog (in Chinese) here.

In the first chapter of the book, Lang points out the strangeness of wage structure with the following key numbers:?

• In 2009, China's domestic consumption as a percent of GDP was 29%. No modern country has ever achieved such a low number. The number for the U.S. is about 70%. Even the number for Africa is about 50%.

• The percentage of wages in China as a portion of GDP is 8%. This number is so low that it really cannot be understood. The number in the U.S. is 58%. The number in Mexico is 33%. The number in the Philippines is 27%. In most of Africa, the number is 20%.

• China has the lowest average wage in the industrial world at $.80 per hour, with the highest number of hours worked at 2,200 per year. Compare this to Brazil, for example, where the average hourly wage is $2.25 and the average hours worked per year is 1,841.

Given this data it is no surprise the average Chinese worker feels left out of China's economic miracle. That is, the “economic miracle” was created by sacrificing the Chinese wage earner. Lang’s point, stated more forcefully, is that these numbers show there has been no Chinese miracle for the average Chinese.

I will leave the obvious social and political implications to others and just examine what this all means for foreign businesses in or involved with China.

Clearly, the pressure is enormous in China for an upward push in wages in every segment of the economy. This means that for foreign businesses outsourcing product in China, making product in China and operating service businesses in China the party is over. All companies operating in China will see sharp increases in wages over the next five years. This trend simply cannot be avoided. This sharp increase in Chinese wages will then have a knock on effect, pulling up wages in places like Vietnam and Cambodia that look to China for a lead in manufacturing wages and costs. This is the future. Get ready for it.?

Professor Lang answers the "why" question he poses in his book's title by asserting it is all a European/American imperialist plot explicitly designed to exploit China on an imperialist model. This answer is why he is permitted to publish his gloomy books: all of China’s many problems can be attributed to foreign plots. Lang is an interesting character: a Wharton School PhD who is an avowed student of Lenin’s views of Western imperialism. He is by far the most popular economics writer in China today and must be taken seriously. Though I question his mono-causal analysis, I agree with much of what he says in this and other books about the structure of the Chinese economy.?

China's wage storm is coming.

What do you think??

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