Pleasures of touring Guizhou

I have frequently written about Chinese Americans victimized due to racial profiling by American law enforcement agencies. Dr. Su Haiping was one such victim. As reported by the San Jose Mercury News, his case has finally come to trial after nearly 6 years. Some of the proceedings in court has been reported by the World Journal, the national daily in Chinese, and I have provided a translation below. Court Case on (violation of) Privacy Rights Opens, Su Haiping Asking $5.2 Million Compensation. Lawyers for UCSC agriculture scientist Su Haiping on December 6 accuse US government of invasion of his rights to privacy, pointing out that after FBI concluded that Su represent security risk, the management of NASA Ames reveal the findings to Su’s co-workers and at the same time took away Su’s access to Ames Research Center. (Thus) causing heavy damage to Su’s professional reputation and his psychological wellbeing. Representative for the plaintiff is asking compensation of $5.2 miillion from the federal government. Su’s invasion of privacy case occurred in 2008, at the time when he was working as one of expert analysts for UCSC’s University Affiliated Research Center. The principal source of funding was from NASA. At the time, Su had already been working at the Ames Research Center for nearly 3 years. Government attorney countered that the difficulty of determining the invasion of a person’s privacy is very high, because such cases involves under what circumstances, to whom and what was said. According to court documents, defendant denied invasion of Su’s rights to privacy. Furthermore, the government attorney believes that disclosures by FBI and NASA were not very harmful to Su, because even though he can no longer go to Ames to work, he remained employed by UCSC. Su’s case began in July of 2007 when he filled personal information on e-QIP for the purpose of getting NASA approval for facility entry in 2008. After submitting to NSA, he received the entry pass in January 2008 uneventfully. According to Su’s attorney, e-QIP was a new tool used by the government to check on staff after 9-11. Michael Reedy, Su’s attorney, pointed out that NASA never obtained Su’s permission before turning over the completed e-QIP form to FBI. Defense objected and Davila, the presiding judge, ruled that the hearing does not include the e-QIP matter. Beginning February 2008, FBI agent Sherman Kwok along with NASA personnel interviewed Su twice, both times in a windowless room at the (Ames) research center. On March 21, 2008, Su went to Oakland to undertake a FBI administered lie detector test. Su was distraught after the test. According to court documents, FBI agent Kwok told Su that the lie detector results were not good, but there were no means to do a retest. The results were sent on to NASA. According to Su’s testimony on December 5, June 24 2008 was a unforgettable day in his memory. On that day, Robert Dolci, head of NASA Ames security gave Su a letter signed by Dolci. The letter stated that according to results of investigations, the center considers Su a security risk to NASA’s intellectual property and thus is revoking his access to Ames research center (and the right to work there).

Book Review: The Chinese Dream by Helen H. Wang

For three decades, since China began its reform in 1978, its economy amazed the world by growing in double digits, doubling roughly every seven years. When it first doubled, most pundits pooh-poohed the growth as coming from a small base. When the economy doubled again, some say it couldn’t possibly go on. Then it doubled and some predicted a pending collapse. Despite the dire forecasts, it doubled yet again.

Finally, China’s economy stopped growing in double digits, but it was not because of any of the reasons given by the western pundits and economists. The economy slowed to below 10%/year because of the global slowdown triggered by the bubble created by America’s Wall Street in 2008.

The credit default obligations and repackaged subprime mortgages brought the American economy to a virtual ruin while the European and Japanese economies actually contracted. China managed to grow at “only” around 8% per annum, which means doubling every ten years instead of seven.

Suddenly, the world’s equity markets began to take notice of China’s economy, by now the second largest, second only the U.S. Today when China’s manufacturing indices decline slightly, all the stock markets take a tumble. Conversely when China’s indices changed positively, all the world’s equity markets brightened.

Despite the obvious linkage of China’s economy to the well being of the global economy, there remain naysayers that maintain their skepticism and believe that so long as China does not become a democracy, its economy cannot defy gravity indefinitely. It would be terribly tactless, of course, to point out that so-called democracies were the first to tumble during the crisis triggered by the collapse of Lehman Brothers.

Many mainstream economists now share the widespread belief that not enough of China’s economy is coming from consumption, that China needs to rebalance economic priorities away from too much dependence on fixed assets investments such as infrastructure building and to spend more and save less.

On the other hand, retail sales in China’s cities have been increasing at a rate nearly double that of GDP. We see young urban professionals living the life of conspicuous consumption; travelling overseas and sweeping the luxury goods clean off the shelves of high-end, name brand shops.

How can we reconcile the seeming contradiction of China’s need to have more of its GDP coming from consumption and the obvious over the top consumption behavior of certain socio-economic groups? One explanation comes from “The Chinese Dream” written by Helen Wang.

This book is an intensive study of China burgeoning middle class and how it came to be. The bulk of the book is devoted to personal interviews in China, from migrant workers to entrepreneurs, from laid off workers to those that got the jump start by taking over parts of state owned companies in the process of being privatized. By way of examples, the author illustrated that China’s private sector “is really neither private nor public” but a peculiar blend of capitalism with Chinese characteristics.

It’s not possible to explain the complexity of today’s China in any single book, but by her wide-ranging interviews and personal stories along with careful research and extensive footnotes, Ms. Wang has made an important contribution to understanding the attitudes and mindsets of upward and mobile young Chinese.

By understanding this social and trend setting group of largely urban professionals, it is possible to project China’s consumer behavior into the future. Just as China has become an integral part of the global economy, the Chinese customer will become an increasingly important buyer for all kinds of goods and services.

Whether you are interested in understanding today’s China as part of business planning exercise or for personal enlightenment, this book would be an excellent primer and starting point. 

China’s Minister of Defense Visits the U.S. to Build Common Ground but Japan Stands in the Way

This commentary was first posted on New America Media.

How will Japan’s recent policy shift to offensive weaponry affect the U.S.-China ongoing dialogue between their respective defense chiefs?

General Chang Wanquan’s visit to the US this week as minister of defense is the latest of a continuing series of exchanges between China and the U.S, aimed at building trust between the military of both countries. Both sides agree that sharing information and discussing issues of common interests will enhance understanding and cooperation.

Whether meeting on common grounds will lead to recognition and mutual respect for the differences still outstanding between the two counties remains unanswered. Moreover, aside from existing differences that have bedeviled the bilateral relations, a new development has come to the fore: Japan’s pronounced shift to militarism.

The newly elected Abe government, elected on a platform of nationalism, is threatening to revise Japan’s constitution and disavow the peace covenants that were inserted to remind the people of Japan of the atrocities committed by their military--hideous acts of inhumanity that repelled the people in Asia. At the end of WWII, Japan was to never again mount offensive military capabilities but limit to pacifist self-defense forces.

The Abe government picked August 6, the anniversary of the atomic bombing of Hiroshima, to launch a new super destroyer, named “Izumo,” big enough to launch helicopters and, with a bit of modification, fighter planes. The deck was festooned with the war flag of the old imperial army and the helicopters were emblazoned with the number 731.

Much of the symbolism associated with this launch went over the heads of the American public but certainly had the desired affect by arousing the anger of the people in China.

Japan’s official position has always been to point to Hiroshima as a reminder to the Japanese people that they were victims of WWII and American aggression, contrary to the idea that Japan was the aggressor.

Unit 731 was the secret research station located in the outskirts of Harbin where live human beings were subject to injections of toxins such as bubonic plague and anthrax and then cut open while alive to monitor progress of the ravages of the diseases—all without administration of anesthesia. Use of anesthesia, the reasoning went, may distort the test results of the trial weapons of germ warfare.

The victims of these biological experiments were not just Chinese civilians but included American POWs captured from the Bataan death march in Philippines. In the waning days of the War, most of the biological testing camp was destroyed.

General Shiro Ishii, the commandant of Unit 731, secretly negotiated with the American occupation force to turn over the research data in exchange for escaping from prosecution for himself and his research team. The Americans accepted Ishii’s terms and thus the activities of Unit 731 were never exposed to the limelight of a military tribunal and prosecution.

Thanks to Ishii and America complicity, members of his research team died of natural causes and never felt the sting of having to explain their heinous activity and the disgrace of public condemnation; some even walked tall in their post-war careers as respected members of society.

The bombing of Hiroshima and Nagasaki that ended the war was just a bit too soon for Ishii. He was experimenting with the use of high altitude balloons to drop germ-laden bombs on the west coast of the U.S. Had he succeeded, America would surely not be so ready to forget Japan’s role in the war.

President Obama likes to tell despots that they are standing on the wrong side of history. In siding with Japan on any disputes Japan has with China, the U.S. is clearly on the wrong side and perhaps the blind side of history.

Hard to know if General Chang would have the opportunity to discuss with the Secretary Hagel of the significantly different attitude about Japan between China and the U.S. America has been quick to forgive Japan but China could not because Japan has yet to own up to their role in the war and make a heart felt apology and amends.

China and the U.S. were wartime allies when Japan was the mortal enemy. Japan should not now become an obstacle to China and the U.S. becoming partners to world peace.

The U.S. Senate Hog Wild over the Chinese Bid for Smithfield Pork

When Shuanghui, China’s largest pork producer, made an offer to buy Smithfield, it should have been a straightforward business transaction. Smithfield is America’s largest pork producer.  By acquiring Smithfield, Shuanghui would be positioned to fill China’s rising demand for more pork.

Chinese living in America have been long familiar with the premium priced Smithfield country ham; the cured meat reminds them of the taste of “Jinhua” ham famous throughout China. Through Shuanghui’s distribution channels, America stands to export a lot of pork to the most dynamic growing market in the world—not incidentally, exporting is an activity encouraged by President Obama for job creation.

What should have been a simple win-win deal is becoming a lot more complicated thanks to Congressional review. As presented at the hearing, the humble bacon has suddenly risen to become an ominous threat capable of imperiling the security of the United States.

According to the testimony of one alleged expert on China, Usha Haley, pork is a strategically important industry for China. Therefore even if heretofore pork consumption is declining in the US, suddenly because the Chinese desires American pork, the US should think hard about denying them access.

Then Daniel Slane, a member of the U.S.-China Economic and Security Review Commission, artfully blackened the Chinese tycoon behind Shuanghui by labeling Mr. Wan Long a high-ranking member of the Chinese Communist Party at the beck and call of the Beijing government. The day after Mr. Slane’s testimony before the Senate Agriculture Committee, the Wall Street Journalran a profile on Mr. Wan that supported none of his allegations.

While the per capita American consumption of beef is around 7 times that of per capital Chinese consumption, China’s per capita consumption of pork is roughly 20% higher than in the US. Since China’s population is more than four times greater, the claim that China consumes a lot of pork is not in question. As China’s middle class continues to swell, demand for their favorite meat will only increase.

Hogs in China are raised mostly in small family-owned farms and could never match the productivity of factory farms in the US. Thus demand will continue to exceed domestic supply. That the Chinese hog farmers won’t be swamped by the import of American pork is only because some Chinese consumers prefer the more robust flavor of “free range” pork than the more consistent but blander tasting meat from the US.

There isn’t any question that Smithfield represents the standard that Shuanghui aspires to attain. Without a significant economic comparative advantage, there wouldn’t be any reason for Shuanghui to tender for the American company.

Part of the motivation for acquiring Smithfield would be to learn from the Americans in raising healthier hogs and producing more consistent quality of meats. Even if the Chinese improve their productivity using American technology, why should the US object to having more pork to go around? It’s not as if pork has suddenly become a material for the weapons of mass destruction.

In fact, such a development would be a good thing for the world as a whole. Americans may eat more than that’s good for them, but the rest of the world wouldn’t mind having a bit of meat once in a while. In a world of burgeoning population facing perpetual hunger, for the august members of the US Senate to look at this deal as a zero sum game—where Chinese dietary gain is somehow equated to America’s loss--reflects small minds of petty consequences.

But leave it to the politicians to make a pig of themselves and raise the threat of national security at every imagined shadow even when cast by a dangling ham. “Shuanghui” could be loosely translated from Chinese as “both win.” If Senator Debbie Stabenow and her committee have their way, it seems only a “both party lose” outcome can satisfy their proclivity for xenophobic paranoia.

A version appeared in New America Media and China-US Focus.

China enters first bilateral swap agreement with G7 countries (UK)

I have not been tracking swap agreements as closely as I once did. But China has just entered such an agreement with UK for up to 200 billion RMB over a three year period. This is the first with one of the G7 countries and could be considered as part of China's movement toward having a convertible renminbi. A fuller explanation can be found in the Wall Street Journal.

The French Also Wants RMB Swap Business

No sooner than Bank of England having proudly announced that London will be the newest swap center for RMB, China's currency and the only one in Europe, Bank of France expressed the intention of becoming the RMB swap center for the Eurozone.

Noyer, governor of Bank of France, expressed confidence that RMB will soon become one of three major international currencies next to the dollar and euro.

To my knowledge, China has entered into bilateral swap agreements with about 20 trading nations. You can follow my observations in reverse chronological order starting with this blog.

India gets into the currency swap game

India and Bhutan recently announced a currency swap agreement amounting to $0.1 billion to "further economic cooperation." 

This swap agreement allows the Royal Monetary Authority of Bhutan to withdraw tranches in dollars and euros as well as rupees. 

The same piece goes on to say that in May 2012, the Royal Bank of India had announced intention to enter currency swap agreements to the aggregate total of $2 billion with SAARC member countries -- Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. 

The piece did not say whether Bhutan is the first or only member country to have accepted the invitation. The Bhutan central bank gave a clear and comprehensive explanation of the advantage of the swap agreement from Bhutan's point of view.

China has been entering into bilateral swap agreements with a large number of countries involving significantly larger amounts. These agreements involve their respective local currency and is a way of avoiding exposure to and cost of having to convert to dollars before settling their trade accounts.

Singapore just doubled their swap agreement with Bank of China to a total of 400 billion yuan or $48.2 billion. Singapore will be the third offshore centers (along with Hong Kong and Taiwan) to include the Renminbi in their foreign currency exchange market. London is expected soon to become the fourth offshore center to include the Chinese currency.

I have been tracking China's swap agreements as shown on my blog.

Caterpillar's Latest Stumble in China

Recently Caterpillar announced having to write off $580 million investment in ERA Mining, a Chinese mining equipment company Caterpillar acquired less than a year ago. Reason given for the charge to earnings was the discovery of "deliberate, multi year co-ordinated misconduct" at the Chinese entity--in other words, somebody cooked the books.

This would not be the first time the Peoria multinational has stumbled in China.

Around 17 years ago, Caterpillar proclaimed amidst great fanfare that they have a formed a JV with Shanghai Diesel to make Diesel engines for the China market and for export.

At the time, the Chinese regulations did not allow for foreign entities to own majority controlling interests in ventures in a pillar industry. But Caterpillar insisted and persisted in their negotiations until they came away with controlling interest in a 55/45 JV.

Then Caterpillar informed their US based suppliers that to continue their business relationships with CAT, they would need to supply from China as well.

One of CAT's major supplier, a Wisconsin company, proceeded to retain me to help them find a manufacturing base and a Chinese partner that would become a qualified supplier to the Shanghai JV.

The entire process from identifying potential partners to signing MOU to drafting the letter of intent to completion of the feasibility study and sitting down to serious negotiations took a little over one year.

For a variety of reasons my client found China's way of doing business, especially getting around the then notorious triangular debt dilemma* daunting and was wavering about making the final commitment.

By then the CAT/Shanghai JV was coming apart which in effect took my client off the hook. The need to supply CAT from China became moot and they decided to backed away from investing in China.

While we were visiting China conducting various due diligence work, we invariably stopped in Shanghai to pay our respects to CAT and thus I had an up-close view of how the CAT JV was failing.

As the majority owner, CAT provided most the senior management team. At the time, CAT in the U.S. was on strike and thus CAT had plenty of idle executives to send to Shanghai.

As we toured the new JV plant under construction, we noted the presence of many American executives, each one with a young bi-lingual Chinese assistant in tow. The senior Chinese official accompanying us on the plant tour, confided to me that it was going to be very difficult for the JV to break even with such a costly top heavy structure.

Our host also told me privately that the CAT management insisted on hiring only bi-lingual graduates and engineers, which meant many skilled and competent professionals could not be employed because of their lack of English fluency. Conversely, he said that English proficiency did not equate to proficiency in their technical discipline.

Within a year of our last visit of the JV, CAT renegotiated and reversed the equity split giving the majority control back to their Chinese partner. That reversion was too late to save the venture and CAT eventually shuttered the JV and wrote off the entire investment.

The Shanghai JV failed because CAT insisted on the American way and made no attempt to localize their practice. The latest failure was apparently due to careless or insufficient due diligence before making the acquisition. One of the principals of ERA Mining was an American living in China and one time president of the American Chamber of Commerce.

Did the patina of American ownership cause CAT to take too much for granted? 

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* In the mid 1990's China underwent a severe credit crunch and cash flow was reduced to a trickle. Companies delayed paying their bills, sometimes with IOUs and other times with all sorts of in-kind payments. The sales force frequently were charged with collection as well as getting sale orders. It was not an environment for the queasy.