How to Invest in China (A talk with Ronnie Chan.)

Ronnie Chan is an outspoken, friendly Chinese-American tycoon and philanthropist. When you go to Hong Kong, he is a man you are told to try to meet. Although a U.S. citizen, he has high contacts in Beijing, and it usually turns out that he has just had lunch with Henry Kissinger.

I had the good luck of spending a fortnight with him recently on a trip in China, and was able to collect his views on conditions in that country.

RC: Foreigners make two big mistakes when they think about China. They can't believe its tremendous growth, and they don't realize how lousy its economic and social system is. As to growth, by early this century China will consume half the world's raw materials and produce half the world's goods. Already China has become much more hi-tech than most people abroad realize. The cell phone is at least as ubiquitous, even in the most remote areas, as in any Western country. There are about 160,000 Chinese students studying abroad, 80,000 of them in America, and domestically, English is gradually becoming a second language. It is often taught in schools, and is appearing in commercial establishments.

In past years foreigners were an object of curiosity in the street, but today, thanks to a flood of tourists, that's no longer true. Even ten years ago, when there was a zone of prosperity along the coasts, much of the interior was impoverished. China's tremendous growth rate means that the really poor area is constantly shrinking, and today comprises probably no more than ten percent of the population. Remember, 250 years ago China was the richest and most advanced country in the world. It may well join that club again.

RC: I give tremendous credit to Deng Xaoping. Thanks to the vertical -- Confucian -- structure of Chinese authority, when he decided that Maoism was ruining the country he could change course very fast. Of course, the country was ready for the decision. Mao's crazy and disastrous experiments, notably the so-called Great Leap Forward -- which was actually a leap into an abyss -- and the Cultural Revolution -- which was a war against culture and, indeed, civilization -- not only cost us ten or fifteen million lives but set back our development by decades. As it was, though, when Deng said, "Enough," and turned the country toward free enterprise, he improved the livelihood of more people in a shorter time than anybody in history.

JT: How well can China maintain this course? There are constant demonstration of one sort or another around the country, I understand.

RC: There are bound to be setbacks and reversals, but the long-term momentum of growth seems unstoppable. The energy and the savings -- and investment -- rate is almost unbelievably high.

JT: You mentioned as the second thing foreigners didn't understand, how "lousy" -- your word -- the economic and social structure was. I gather one should write into any contract an arbitration clause providing that disputes should be settled in Singapore, for instance. On the other hand, there is a problem of getting this clause enforced! So, the choice of any Chinese partner, if that is contemplated, must be extremely careful.

Also, the enormous oversupply of bureaucrats is essentially parasitic. Only the strong and extremely skillful can flourish here. But given these qualities one can indeed succeed.

RC: Their bad debts are tremendous, perhaps $800 billion, but private and corporate savings are much more -- perhaps $2.5 trillion. And the Chinese banking system isn't like the U.S. banking system. Think of the Chinese banking system as the "cashier" of the Chinese government, the way the U.S. Post Office is the government's courier.

JT: People like to compare China's prospects with those of India, often to India's advantage, on the grounds of India's democracy, its use of the English language, and of the Anglo-Saxon legal system.

RC: I don't buy that. Unlike China, India has not got its population under control. By 2050 they'll have more people than we will. Illiteracy stands at 42%, compared to our 21%. Women are kept down by inadequate education and poor job opportunities. And as to the legal system, it's Dickensian. An Indian court case can drag on for decades.

JT: Napoleon said that each of his soldiers carried in his knapsack the baton of a field marshal, and it seems to me that in the pocket of most Chinese is the handheld computer of an entrepreneur. But I've noticed that to many Indians there's still something unsavory about getting rich.

RC: Yes. Their general point of view is still quite antipathetic to private enterprise. India's progress is based largely on its thriving software and call center outsourcing, but to prosper, India needs a lot of heavy and light manufacturing, which I don't see happening. And India's infrastructure is terribly antiquated.

Here's a paradox: India is a democracy, which helps hold it together. However, the great Asian success stories -- South Korea, Taiwan, Hong Kong and Singapore -- achieved their astonishing takeoffs under autocratic government, while India and the Philippines, the most democratic countries in the region, have made unsatisfactory progress. Maybe a country, like a company, needs a lot of control at a certain point to get going even though that opens the door to bad mistakes, the way Mao plunged us into disastrous troubles. The Chinese Communist Party, five or six percent of the country, may no longer be Marxist, but it still controls all the key elements of the government, so when Deng turned the party toward economic freedom he had in effect turned the whole country around. You can't do that in India.

RC: The incorporation of Tibet is probably irreversible. China sees its presence as a liberation from theocratic servitude, rather than an occupation. A tiny part of the whole population -- nobles and lamas -- gave orders to huge population of illiterate serfs and indeed slaves. That couldn't last. The Dalai Lama accepts that Tibet is part of China, and its independence was never recognized by the U.S. or Britain, for example. Over time an appropriate degree of a cultural and religious accommodation will have to be worked out, not only in Tibet but for the more numerous Tibetans in the neighboring provinces. In the meanwhile, China is pouring development money into the region and developing a modern infrastructure.

JT: How, then, should an investor hope to make money in China? I gather that below about a hundred million dollars, a project cannot assemble the influence, resources, skills and staying power required for success.

RC: Yes. The first thing is, as always, not to lose money. And the way to lose money is to believe what you read in the Western papers -- the New York Times, or whatever. The current news cannot give you a real insight into the big picture. It has been rightly said that China is a civilization masquerading as a country. There is so much to get your arms around! To grasp the underlying reality you need to understand Chinese history, Chinese culture, and the background and organization of Chinese communism. That's the totality the investor is working in, and he won't get it from news stories.

Incidentally, one thing you must understand about Chinese communism is that the leaders never respond to foreign pressure. They simply stonewall. Then, when the issue has dropped off the front page, they may give a little, and then a little more. But not under immediate pressure.

John Train's many books include Money Masters of Our Time and Famous Financial Fiascos.

I gather one should write into any contract an arbitration clause providing that disputes should be settled in Singapore, for instance. On the other hand, there is a problem of getting this clause enforced! So, the choice of any Chinese partner, if that is contemplated, must be extremely careful.

The person asking this question shows their ignorance of China, as does any company that (1) relies on a contract in China for business security and (2) seeks out a Chinese partner (thinking they need one to do business in China).

The best business security is not to put your company in a poor position in the first place. For example, a contract for goods and quality is not what you seek to insure you get your goods and they meet your quality standards. You inspect the product - as it is being produced - with your own people doing the quality control during production, followed up by normal load and count inspection.

On getting a Chinese partner, many a company has paid a dear price to get out of such joint ventures - few know that even a minority Chinese shareholder has veto power of disolution of the joint venture. And, most Chinese partner companies will come with huge liabilities in the way of pensions (worker literally lined up at the gate waiting for their payment).

The later may have changed as many new private Chinese companies free of such pension obligations have taken off. But the question remains, why partner up with them? There had better be a darn good reason - and "they will help me deal with China" is not one of them.

"China's tremendous growth rate means that the really poor area is constantly shrinking, and today comprises probably no more than ten percent of the population."

Yes, now much of the country is only "poor." And geographically that poor area is massive, the majority of the country. Between this and the "half of all materials/good" comment this smacks a bit too much of the kind of hyperbole that a successful-in-China businessman with recognition has to ply westerns with in public.

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