Can China Win The Battle For Respect?

The two recent economic scandals involving Chinese companies, Volkswagen-FAW and Nexen-CNOOC, confirm that statements made by Jeffrey Immelt, CEO of General Electric, regarding the business climate in China were anything but spontaneous. In 2010, during an informal dinner in Castelgandolfo with Italian top managers, Immelt criticized the state of business affairs in China, pointing a finger towards the political leadership for failing to uphold good business ethics and for being unable to guarantee a level playing field for both Chinese and foreign companies. Freed from the constraints of protocol, Immelt voiced concerns that were already widespread among US multinational corporations: Washington does too little to protect them and is worried more about the political relationship with China than their economic interests. Even starting the discussion about the balance of commerce with China seems to be too much for American leaders, who apparently would rather endure the violations of market law by Beijing.
Immelt’s comments, despite subsequent efforts to minimize the impact, resonated far and wide, enough to still be heard this past June, when two major economic events rocked China. The ink had hardly dried on the purchase of Canadian oil and gas group Nexen by Chinese state-owned energy exploration giant CNOOC, when the SEC accused the Chinese of insider trading. American involvement was possible due to several companies in the Nexen group being headquartered in the United States. The US courts froze $38 million in assets held in Singapore and Hong Kong banks by a Chinese company connected to the CNOOC, who is suspected to have made illicit gains through the purchase of Nexen stock before the sale and then dumping them immediately afterwards for nearly $15 billion, after shares in the company had risen by 52%.
Echoes of Immelt’s comments were heard again when German daily Handelsblatt published an article accusing Chinese automobile and auto parts maker FAW of stealing engine and transmission technology from German automaker Volkswagen. Ironically, the two companies have had a joint venture for production of vehicles in China for years but have recently become competitors in other markets with their respective brands. Having formed the most important joint venture in China to date, Volkswagen has been downplaying the news to avoid repercussions in the Chinese market.
The climate of uncertainty has recalled attention to the case of Sino Forest, a Chinese company that listed on the Toronto Stock Exchange before being suspended for alleged fraud and reverse-takeover tactics (the practice of acquiring previously listed companies as a means of avoiding the rigorous administrative requirements for going public) following an investigation by Muddy Waters. The result for Sino Forest was disastrous, with share price plummeting after the results of the investigation were published, and the company is now in bankruptcy protection according to Canadian law. The Sino Forest case was not an isolated one, and it has made it much more difficult for Chinese companies to be listed on foreign stock markets. These events foreshadow the irregularities that will be duly judged by the courts.
Nevertheless, the business climate with and within China is most strongly indicted by the organizations representing businesses and governments. These organizations present accurate research and thought-out institutional evaluations. European and American Chambers of Commerce have been publishing increasingly gloomy evaluations of their registered companies. Yearly reports decry the administrative decisions that put their companies at a disadvantage, continuing violations of intellectual property rights (and the slippery justice systems that are supposed to protect them), the persistence of unjustified obstacles, and the continued prevalence of Chinese companies in international contracts. It is a common, and growing, sentiment that some ascribe to economic nationalism, even though China has grown too important for individual companies to risk taking their business elsewhere. China’s greatest strength is having become indispensible, and also its limiting factor: the disadvantage of only knowing how to do business using every available method.
An unusually direct resolution adopted by the European Parliament in Strasbourg last May confirms the overall sentiment. The document notes that China has yet to apply the standards of a market economy and urges the European Commission to apply the principle of reciprocity to guarantee better competition. It laments barriers and discriminations against European companies, particularly in the telecommunications, finance, and insurance sectors, confirms the presence of export subsidies, and voices concerns about the partiality of the Chinese judiciary system.
It is therefore possible that instead of an improvement of the business climate, China may harden its position and accentuate its faults. The goodwill with which China was welcomed into the international assembly was equal to the advantages it could have brought, but now this correlation seems to have been reconsidered, placing Beijing at an advantage, as if the country needed the technology and experience of industrialized nations less and less. China is instead banking on its irreplaceability and its ability to retaliate economically. China is by now so deeply ingrained in globalization that it cannot be cut off, the creation of value is still hinged on the Middle Kingdom.
This does not mean that the situation is irreversible, nor that it is necessarily to China’s advantage. Flexing its muscles can win China’s commercial battles, but it cannot win the quest for respect. A country cannot assert a social model or course of development by staying within the limits of accounting and profits. Because of its very success, China could convince other countries of the virtue of its choices, and not just those countries still in development. China would do well to project an image of trustworthiness, instead of seeds of apprehension and relationships of convenience, and its current stance may not even be that of maximum profitability. Twenty-two percent of corporations interviewed by the European Chamber of Commerce stated that they would be willing to consider transferring their investments to another country; critics in Africa, where just a few years ago everyone was keen on a relationship with Beijing, are lashing out against Chinese economic supremacy. Even the other BRICS, with which China has an unofficial alliance, are feeling the effects of China’s one-way protagonism.
The root of the issue lies not in the existence of certain issues, but in the lack of will, or perhaps ability, to solve the problem. It is natural for such a meteoric rise to have widespread collateral effects, but it makes far less sense to continue down a road of sino-centricity that may reveal itself to be disastrous for China itself in the end.