As you may have read in our other articles, blogs and reports, there is much dishonesty, fueled by greed, in China.  There are fake DVD’s, software, LV bags, and teapots, to name a few.  Every time, I go to a store or market, most of which do not put price labels on their items, the price can sometimes be as much as ten times the actual price.  Indeed, many Chinese business owners charge too high prices, even to Chinese customers, because they believe that the higher the price, the sooner they will be able to retire: the truth is, usually, the sooner they will be out of business.

Moreover, the rules for establishing a business are tilted heavily against foreigners.  For example, to register a corporation, a foreigner needs to have ¥1,000,000, while a local needs only ¥30,000, and a local can even go lower by doing the equivalent of a DBA for a total cost of around ¥2,000 for fees only.  The red tape, in the case of a foreigner, can take as much as three quarters of a year, too.  Moeover, even if you look at the companies that are listed on the exchanges, in China, the weight shifts from private to government enterprises with less than 50 of about 1,500 listed companies from the private, as opposed to government, sector.

Over the years, we have heard many personal accounts of those who have done business, in China, and some recent experiences cause to write this blog entry.  The first comes from a Chinese person that we work with, in our Leona Craig Art business.  That person had given up a previous partner and entered a new partnership with a friend whom was believed to be in a position to promote the business.  They both did separate things, and our friend believed that there was some synergy.  This week the friend called my protégé and told her that she had discovered that her partner, whom she had taken to the art studio where she gets her art, was going behind her back, getting art, and secretly selling it to her customers.  The same day we read an article (http://bit.ly/89Mez)  about a German advertising company that had set up an outpost, in Beijing, and discovered that seven of its key employees had set up their own company and were siphoning off all of the best contracts.  There have been many similar cases, over the years.

At Red Hill Capital, we have been involved in investing in underdiscovered and inefficient markets for several decades.  We have never been fans of the Chinese stock markets because of the lack of transparency of information, in China, to begin with, and because of the multi-tier stock scheme for Chinese listed companies that gives the least rights to foreign owners, in addition.  Being in country for half a decade, we have heard first hand stories and we have seen those that have made the news, like the Sanlu milk scandal that left their foreign minority owner, Fonterra of New Zealand, out several hundred million.  Just last week, GM would not sell a division to a Chinese company because they did not want to have their intellectual property stolen, in the bargain.  Also, within the last several week, there have been news reports about Chinese spies trying to steal information and technology, in both the U.S. and Germany.  On the other hand, China recentlt arrested the lead engotiator from Rio Tinto of Australia, which supplies China with much needed iron ore. He has been charged with spying and, at the time of publication of this blog entry, has been held in custody for about a month, and the offical charges still haven't been released to the public.  Moreover, his arrest just happens to come after Rio Tinto rejected a bid by the Chinese to buy a large stake in the company. 

As we have said, in a number of reports, we believe that China will not be the economic giant that some think they will.  Those opinions are based on what we see, here, in education and in ethics.  What we do acknowledge is that China will be a big market, and, if they ever open up, in both information flow and fair playing field for foreign businesses, it will be a place for many foreign businesses to set up plants and to give all of these people jobs.  However, the more we see and hear, the more we believe that day is far off, but China should really change their attitude and let it come because we can help, if only they would let us.

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