Friday, January 30, 2009

Will the Year of the Bull inspire a Bull Market?

This past week Chinese families have gathered to celebrate the beginning of spring, often referred to as the Chinese New Year. Everywhere, upside down “fu” (luck/prosperity/fortune/ happiness) signs hung on doors and walls to ring in the Year of the Bull. The character “fu” hangs upside down every year (the Chinese word for upside down sounds like the word for “to come” or “to arrive”); but this year, the signs seem to be asking for something more. In the economic downturn, everyone is hoping that the year of the bull will usher in a bull market.
The question is how? How do we inspire investor confidence, especially when cash and credit are both dwindling? The media continually points out that nobody seems to know anything about anything in the financial market or where the problems come from. And yet economists are having a field day with their theories on how to fix the problem. Interestingly enough, many of there theories go back to economics 101: is it better to spend or to save our way back into economic prosperity?
China and Japan have been well known for following the “saver” mentality, while the United States and many other western economies have preferred to spend there way into a good economy. Even after the September 11 attacks on the World Trade Center, former-President Bush told the American people to go out and consume. It was probably not the most practical response, but it was consistent with seventy years of American economic policy. What is wonderful is that we got away with it for a quite some time: America has managed to spend its way into more than $10 trillion dollars worth of debt. There are many factors that contributed to the current crisis; one of the biggest is also based on one of our most closely held beliefs: consumerism. Our consumer mentality resulted in a reliance on credit and the overextension of our liabilities on a micro and macro level.
When I finally took a step back to examine my very “American,” capitalistic belief in spending, I realized that it violates common sense. There are many complex economic theories and charts demonstrating why spending is great and will save the economy, and yet, at the end of the day, the bill still comes and someone has to pay for it. So how are we going to pay yesterday’s bill?
Even though alarm bells may be ringing in your head along with words “unpatriotic” or “communist,” perhaps it is time for Americans to start learning from the Chinese and the Japanese. It might be time to start thinking about saving instead of spending.
Let me be clear in what I am proposing. I do not believe that spending and saving are mutually exclusive. What I advocate is for Americans to spend within their means and put some money away for tomorrow as opposed to spending tomorrow’s money today.
Although I do not have the intellectual prowess or credentials of John Maynard Keyes or Befekadu Degefe, I do have a credit card and I know how to shop. Shopping has taught me that if I buy a widget, I will have to pay for it. For a while, I could put off payment of the widget by putting it on my credit card, but I’ll probably accrue interest payments on top of the cost of the widget if I do not pay off the credit card immediately. However, if I wait a while to buy the widget while earning some money, I can pay for the widget in full and not accrue any interest payment, keeping more money in my pocket that I can spend elsewhere, invest, or save for a rainy day. That money will eventually funnel into the economy.
Some economists warn that saving will lead to absolute job loss and further the economic doom. To suggest such a result relies on a proven assumption: we have put ourselves in a vicious cycle. Our entire economy is inflated because we have been spending tomorrow’s money. If we stopped spending tomorrow’s money today, there will be no money today because we already spent it all yesterday. What these economists propose is that we continue to be the rat in the wheel. The credit bubble has already burst and we are seeing the result. It would seem counterintuitive to follow the same path and create another credit bubble, run in another wheel, which will eventually burst and lead to a similar result.
It’s time to try something different. I understand that there would be a difficult period during the transition from a spender economy to a saver economy. In the long term, it seems like a better policy to spend what you have instead of risking spending what you hope to make. Will saving start a bull run tomorrow? No; but it may inspire market confidence in the future, maybe even enough for a bull run. And, then, there might just be real money to back it up.

Wednesday, January 28, 2009

Western and Chinese Perspectives of Corporate Social Responsibility (“CSR”)

In early November I was asked by Professor He Zhiyi, the Director of the Management Case Center of Peking University, to prepare and present a paper entitled: "Western and Chinese Perspectives of Corporate Social Responsibility" at the Global CEO Forum in Beijing on November 15 and 16, 2008.

While researching and preparing the paper, I came to believe the concept of social responsibility, which has many contemporary definitions but is most often considered to be responsible business behavior, was historically founded in Chinese cultural and currently accepted more by the Chinese government than Western governments.

My attendance at the conference validated this belief. All of the speakers representing the government emphasized the Chinese government's commitment to the concept, codified in Chapter 1, Article 5 of the Company Law of the People's Republic of China. This concept mandates that a company shall not only comply with the laws and the obligations of business and social morality but shall also bear social responsibility as well.

Cheng Siwei, a UCLA alumnus, the Chairman of the organizing Committee for the conference, and the Vice Chairman of the Standing Committee of the 10th National People's Congress gave the welcoming address. While recognizing the current global economic crisis, which he defined as a crisis of confidence in Western governments and financial systems, he stated long term climate change is more important to the world than the current crisis. He closed his comments by saying we only have one earth and we need to protect it together.

While it is easy to be skeptical of statements made by representatives of “beautiful laws" passed by the Chinese government, my attendance at the conference convinced me that both the government of China and the major multinational corporations from China, influenced by the recent earthquake and its effect on Chinese society, are serious about implementing corporate social responsibility in China.

Unfortunately, the event was not as well attended as expected due to the current economic crisis. The chief executive officers of multinational corporations need to diligently attend to their corporate affairs and the heads of both the Chinese and Western governments were attending the G20 summit in Washington hastily convened by President Bush.

Notwithstanding the absence of a strong Western presence at the forum, it was worth attending and definitely confirmed my belief that the government of China, at all levels, realize that the future of sustainable development in China and the world requires recognition and implementation of responsible business behavior emphasizing people, the planet and profits.

Tuesday, January 27, 2009

Censoring Obama

“Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions.”
- Barack Obama,
Presidential Inauguration,
January 20, 2009

It seems that some Chinese state media got a little snip happy with President Obama’s speech. Not only was the “C” word above cut out, but so was another line: “To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist."

Cutting the reference to communism is understandable. After all, China is still arguably “communist,” but cutting the second line is troubling. Steven over at Lost Lao Wai Blog ( asked, does this mean that the authorities in Beijing think that they are “corrupt”, “deceitful”, of actively “silencing dissent?” Although Steven may be that cynical, I cannot join him on that proposition. Instead, I agree with his other proposition, that the removal of the select lines was knee-jerk paranoia.

By watching the video and the reaction of startled journalist and commentators, the decision to cut those lines was not a decision from “above” (a.k.a. the Government). Instead, the decision seemed to be an immediate reaction by whoever was in control of the video feed. That man or woman was not likely to be a governmental official. Instead, it was probably some media director/executive who did not want to get the state station in trouble for broadcasting rhetoric that was not agreeable to the Party: Better safe than sorry. Just this once, I believe the Chinese Foreign Ministry when they said that they did not have anything to do with the editing.

Furthermore, I doubt that there was reason to cut the lines. The editing of the speech illustrates the beliefs and self-awareness of Chinese executives’ more than it demonstrates American views of China. Just yesterday, the Chinese Ambassador to the United States, Zhou Wenzhong, congratulated Obama on his inauguration, and said in a speech at NYU, "It is the common aspiration of the Chinese and American peoples, and it serves our fundamental interests, to ensure healthy and steady development of the China-US relationship in the coming years and beyond.” Perhaps it’s a little na├»ve, but this time, I think that the American media is just having a field day over another Chinese censorship issue.

Plus, I don’t think the lines were meant to be insulting to China. Maybe I’m still in mindset of Obama Mania and he still can do no wrong in my eyes, but I don’t think Obama meant the line to be a cheap shot at China. US-China bilateral relations will be too important for his presidency to start it off on the wrong foot. Plus, he doesn’t seem to be one to proclaim fighting words meant to insult another nation.

Monday, January 26, 2009

Happy Chinese New Year!!

Happy Chinese New Year from USA China Law Blog!!

Sunday, January 25, 2009

A New China? Ethnic Minorities, Immigrants, and Hapas

Sam Crane at The Useless Tree posted two very interesting articles on multiculturalism in China, available at and This newly vibrant topic is not limited to the blogging world. The Economist also pointed to the growing Brazilian population in Dongguan in its article “Brazilians in China” at

Crane highlights several different issues of multiculturalism: (1) The existing nationalities within China including the Han Chinese and the 56 officially recognized minorities. (2) People of mixed race who will likely appear in the future. These include the children of “mail order brides” from neighboring countries which has started to become popular to a growing, male-dominated population, as well as those children with a parent from the West or Africa and a parent from China. (3) The increased immigration of laborers, for example, the Brazilians discussed in the Economist article. In a culture which separates within its rhetoric the ‘people of the Middle Kingdom” (Chinese) and “outside people” (foreigners), the thought of acceptance might seem difficult. Crane asks the question, “How will China deal with the pressure to expand the racial and cultural definition of Chinese-ness?”

I am reminded of a book by Pearl S. Buck, Peony, wherein the famous writer tells the story of a Jewish merchant family who had made its way to China after the Diaspora. The novel tells the story of a young Chinese servant in the house, watching as the Jewish son assimilates with the Chinese population against the wishes of his mother, who is disparately attempting to keep the family separated from their Chinese neighbors. The son must make a choice. He chooses to be part of the only culture he knows while retaining parts of his mother’s culture. As time goes on, the son and his sons become more and more Chinese, mixing with the Chinese around them until they have almost forgotten their own history. Peony is based on the true story of Jewish merchants who entered China as early as the 8th century via the Silk Road.

Although well written, the articles at The Useless Tree make it sound as if multiculturalism in China is something of a novelty that should be expected to become common place in the future. Although the population of multicultural people might be growing or expected to grow at a faster rate than it has in the past, the Chinese have had immigrants come to their country for thousands of years. The interesting aspect of historical immigration to China is that it has usually ended with the foreigners’ assimilation into Chinese culture. This is what has happened in the past, and this is probably what is expected to happen in the future.

So, what is different now? Has technology changed the way that individuals identify themselves? Has a global society changed the way that individuals identify themselves? I would argue that nothing has changed in the department of immigration.

Although Crane says that China’s experience will be different from the experience of western colonial powers who have allowed the immigration of their colonized people, I would argue that China is not very different when it comes to immigrants because the immigrants are not very different. History will repeat itself. As time goes by and families stay in a country, they will become more and more “Chinese.” We could take America as an example. You could ask most people in New York City, “What are you” in reference to their ethnicity. You might get “Italian”, “Irish”, “Egyptian”, anything really. However, if you ask, “have you ever been there?” The person might get offended, but the truth is many have not been to the country from which they state they come. Or if they have traveled there, it is typically a quick visit where they had the experience a typical American tourist would appreciate. (I am not only generalizing, but I am speaking of people whose families have been in America for two or three generations.) Although they have held onto bits of the culture within the family, the truth is they have become American and do not really know anything else.

There are people who have moved to China with no plans to return, who have children who are born in China and plan to stay in China. Those children are Chinese. They will no doubt hold on to pieces of their parents’ culture, which will get handed down, but they are culturally Chinese. Even if one parent is American, European, African, or Middle-Eastern, their children will be Chinese if China is all they know as home.

What the government classifies as “Chinese” is always different than the cultural expectation. However, even if classified as a “minority” in China, strictly legally, that individual should not be treated any differently than a Han Chinese. The Constitution of the PRC guarantees equal rights to all ethnic groups in China. It also promotes the economic and cultural development of ethnic minority groups. It might even be a perk not to be labeled a Han Chinese because ethnic minorities are not subject to the One Child Policy.

The point is that China is no different than other countries in their experiences with immigrant populations. There are some immigrants that will come and go. There are some that will stay. Most of those that will stay will most likely assimilate. The level of the assimilation might make a difference to the government when it comes to how “Chinese” one must be before the One Child Policy is applied. However, that is a policy that the Chinese will no doubt come up with when it is time for it to be considered. Perhaps China will take its turn with the 1/16th rule.

Friday, January 9, 2009

Commercial Banks Got an OK for M&A Lending

China Banking Regulatory Commission (CBRC) issued Guidelines on Risk Management of Loans Extended by Commercial Banks for the Purpose of Acquisition (the “Guidelines”) on December, 9th, 2008. The Guidelines overturn a long-standing restriction on the granting of bank loans for equity investments in China. The initiative will expand the financing channels available to Chinese enterprises and is expected to boost both onshore and outbound mergers and acquisitions (M&A) activity.

“Chinese government has announced a series of macro-adjustment measures recently, promoting industrial upgrade and encouraging promising M&A transactions. More and more companies are involved in M&A activities recently with greater demand for M&A financing. Commercial banks also demonstrate their willingness to make M&A loans. In the meantime, Chinese government has promulgated more policies on boosting domestic demand, and extending stronger support to M&A transactions. It’s just the right time for CBRC to introduce such guidelines. The main idea of the guidelines is to require qualified commercial banks strike the balance between the market demand and their risk appetite. For commercial banks, M&A financing is not only a credit tool to support strategic M&A, but it should also be put under sound risk management framework.” China Banking Regulatory Commission, December 2008.

Under the Guidelines, a commercial bank is required to establish its loan management procedures and information system for the acquisition loan business based on the principle that such procedures and system for the acquisition loan business must be more stringent than other types of loan business.

stipulates that the following requirements must be met for banks to be qualified for M&A lending: good risk management and internal control mechanism; adequacy ratio of loan loss provision not less than 100%; capital adequacy ratio not less than 10%; and professional teams on M&A due diligence and credit risk assessment.

The Guidelines point out that commercial banks must require the borrower to provide adequate guarantees, including but not limited to asset-backed, equity pledge, and third-party guarantees and other forms of security in compliance with the law.

The Guidelines are expected to be a boost to the local M&A market and would help domestic companies undertake overseas M&A activities. Industry insiders explain that an M&A loan is similar to a bridge loan, which is used as a short-term transition loan. The issuing of an M&A loan is to promote “small risk to large”. The “snake eating the elephant” approach to M&A transactions contends that once it is backed by funds, is more likely to be successful. However, the actual implementation of the Guidelines remains to be seen.