Experience Not Logic - 不经一事，不长一智

Posts of the Week: 7/6 - 7/12

noreply@blogger.com (Will Lewis) — Mon, 13 Jul 2009 19:36:00 +0000

China Offers More Carrots to Entice Anemic Inflows at All Roads Lead to China

Smart Money In China Knows Limits Of Yuan at China Journal

Cross border settlement - PBOC regulations at China Translated
But I'd still check out dragonbeat from a few weeks ago, and the above China Journal post.

RMB 1.5 trillion in new Chinese lending — can we turn this thing off? at China Financial Markets
What's wrong with making "enormous amounts of bad loans," again?

Hey Sucker, We've Got Your China Trademark And Your're Goin' Down at China Law Blog
Interesting tales of tricky lawyering.

Chinese Tax Rebates Unaffected By Yuan Settlement Experiment at Tax-News.com
Well, that's a good thing.

In China, What Workers Want at China Journal

Strategy for Foreign Companies' Purchase Transactions in China During Financial Crisis at China Law Update

Owe Money To A Chinese Company? No Need To Pay at China Law Blog
A rerun, but with more details and more cases.

Skeptical About the World Bank's Compiled Rankings? How Might China Measure Governance?

noreply@blogger.com (Will Lewis) — Wed, 08 Jul 2009 16:41:00 +0000

twofish left an interesting comment on my post about the World Bank's Governance Indicators, and his skepticism about the rankings. Here's an excerpt:

I should point out that I find that these rankings tell much, much more about the World Bank than about China. One thing that I'd love to see is someone official in China do a ranking of countries in the world. I'm sure it would be very different from the World Bank's, but I'd be interested to see *how* it's different. You can also extend this to individuals. If I ask you to take all the countries in the world and rank them on governance, I can really find out a lot about you.

I thought it would be fun to come up with some indicators that a Chinese official might use to rank the governance of a country, and how those indicators might apply to the US. I think we can all concede that any government official would choose indicators that are important to the governance of his or her own country. I'm making a broad generalization here, of course, but if a Chinese official were to devise a governance ranking system I think it would be designed around two major indicators: 1) stability and 2) the central government's ability to implement policy.

As to stability, China has proven much more stable over the past 30 years than many countries of Latin America, Africa, Eastern Europe, several of which have had violent, military, or major but peaceful transfers of power in that same time frame. And that is impressive on China's part. But when we start using the stability indicator to compare China with representative democracies we get caught on some snags.

Sure, gerrymandering has lessened power shifts in the US legislature, but every 4-8 years there is a transfer of power between individuals and/or political parties in the US executive branch. With its 30 (plus, if you're willing, but I wouldn't be willing to go beyond the Gang of Four to Deng transfer) years of peaceful rule, 5 year plans and its scientific socialism, it seems that Beijing and the CPC would look down upon this level of instability in the US. One year we're waging a holy war against an Axis of Evil, and the next we're all but ignoring those nations with whom we have some differences. Beijing might back down on some laws, but such major swings in national policy seem like they would be unacceptable. This isn't to say that the Party hasn't proven remarkable at reinventing itself, but it is still the same Party.

Beijing's ability to implement national policy is a work in progress. China's status as a de facto federalist state is an impediment. The other impediment is that China is physically large, there are a lot of people to rule over, and the level of corruption suggests transparency issues in the implementation of policy from Beijing to the provinces down to the local. I would say that Beijing has certainly done nothing but improve in this indicator, though. Major evidence is the rooting out and prosecution of that corruption.

The US is a de jure federalist state (though ludicrous interpretations of Congress's power to regulate interstate commerce grind away at the de jure status), and conflict between the federal sovereign and the state sovereigns was designed into the Constitution. Additionally, it is confusing as to who or what exactly is the US sovereign and who or what is trying to implement policy. The head of the executive branch? The head of the legislative branch? Which part of the legislature? And the publicly reported fractures within parties makes this hard to figure out even when one party controls all three. Again, this frustration of a powerful central government was designed into the Constitution.

While China might consider the ability of the central government to implement policy an important indicator of governance, its importance is less clear when measured in a state such as the US where our Constitution is designed around limiting the power of the central government.

When we take a look at the organizations that the World Bank compiled their governance indicators from, we find that they are all "Western" or Western-dominated (yeah, I'm looking at you Development Banks). I don't know how much we could actually learn about these institutions from these rankings other than that they intentionally or inadvertently embrace indicators that are important to the governance of their home countries systems, predominantly representative democracies. And the governments of representative democracies need different attributes to govern well than do oligarchies. Sort of a transparency and accountability thing versus a stability and control thing. Though I am biased in favor of Aristotle I'm not trying to pass a value judgment, and I think it would be difficult to argue that the CPC is becoming a less effective Philosophical Oligarchy.

Posts of the Week: 6/29 -7/5

noreply@blogger.com (Will Lewis) — Tue, 07 Jul 2009 00:14:00 +0000

Capital Markets Poised to Develop/ at Managing the Dragon

China Looks to Undermine U.S. Power, With ‘Assassin’s Mace’ at Danger Room
I have yet to lose my boyhood infatuation with military hardware.

Forum Selection Clauses. Do NOT Try Those At Home at China Law Blog

China OEM Agreements. Why Ours Are In Chinese. Flat Out at China Law Blog

World Bank's Governance Indicators: China's a Mixed Bag Over the Past Decade

noreply@blogger.com (Will Lewis) — Wed, 01 Jul 2009 19:14:00 +0000

The World Bank just released their latest report on World Governance Indicators. The "six dimensions of governance" are Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Those links will take you to a more precise definition, as well as the sources that the World Bank used in compiling the raw scores. The World Bank also took each country's raw score and converted it into a percentile providing comparison with the other 212 countries that were a part of the study. Here's a look at how China's governance indicators have fared over the past 10 years, from 1998-2008.

One quick note: the results for the earlier years all have much higher standard deviations much likely due to fewer sources being used to compile the raw scores, and possibly due to a lower amount of available information.

Voice and Accountability
"Voice and accountability measures the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media."

Any guesses as to how China fared in this category last year? China ranked in the bottom 5.8%, as opposed to the bottom 9.6% in 1998 and 12.5% in 2000. At the very extremes, the standard deviations can make the raw scores overlap, but the raw scores can still reflect a real change towards less voice and accountability.

Factors that probably weigh against voice and accountability in 2008 as opposed to 2000 include the crackdown on expression and association in the lead up to the Beijing Olympics, restrictions on information out of the Himalayas, and the retracted promises as to the freedom of foreign media in China during the Olympics. Factors that seem like they should have helped China in 2008 in this category include the freedom of press during the earthquake (do you see any rebar in any of the collapsed bridges?) and the general factor of the growth of the internet.

The political rights of China's citizens remain little changed since 1998, so the freedom of expression is probably drove this raw score down.

Political Stability and Absence of Violence
"Political stability and absence of violence measures the perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism."

In 2008, China ranked at the 33.5 percentile, as opposed to the 43.3 percentile in 1998. The raw scores are quite spread, and the 2008 raw score is within one standard deviation from the 1998 score. For comparison, Honduras is ranked at the 32.5 percentile.

I don't think there's much in the way of error here. There are plenty of valid reports of the tens of thousands of demonstrations that occur annually in China, but these get little to no play in the US. The world's media was covering China in 2008 like it never had before, and plenty of Chinese people were thoroughly pissed about some high profile events. The two biggest were the melamine in baby's milk and the deaths of 70,000 in the Sichuan earthquake. Local and State government officials have been charged with or implicated in complicity with both of these which may have helped to decrease the stability standing. But Wen Jiabao was widely credited with distancing the central government from the more horrific of the two.

Government Effectiveness
"Government effectiveness measures the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies."

China does well here ranking at the 63.5 percentile in 2008 as opposed to the 46th percentile a decade ago. Though they're still not as highly ranked as in 1996 when they were in the 64.5 percentile.

2008 gave China plenty of opportunities to demonstrate government effectiveness on an international stage, and this may have helped them reach their highest ranking in 10 years. 2008 saw quick government responses to a harsh winter and a devastating earthquake. And the Games went off without too many flaws (except a stabbing, and the Russians or Georgians apparently trying to steal the spotlight or at least operate in the shadows of a worldwide event).

Regulatory Quality
"Regulatory quality measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development."

China moved from the 40th percentile in 1998 to the 46.4 percentile in 2008. This seems like a big shift, but the raw scores just barely budged.

After two consecutive years of melamine scandals it is amazing that China is ranked so high. Also, after reading Yasheng Huang, it is questionable as to whether we're actually witnessing real private sector development in China's domestic business.

Rule of Law
"Rule of law measures the extent to which agents have confidence in and abide by the rules of society, in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence."

Though China has improved to the 45th percentile from the 41.4 percentile, the raw scores remain largely unchanged.

Disturbing lack of development, and 2007's figures are even worse so we can't conveniently pin this on the Labor Contract Law. Anybody know what percentage of contract disputes are actually decided in court as opposed to arbitration? Is this just because of a poor perception of the courts? Is the quality of the coastal courts substantially outweighed by the quality of the inland courts?

Control of Corruption
"Control of corruption measures the extent to which public power is exercised for private gain,
including petty and grand forms of corruption, as well as “capture” of the state by elites and private interests."

China has fallen from the 45.1 to the 41.1 percentile, and has substantially dropped in raw score.

Though the numbers aren't as bad as 2004-2007 when there were a lot of high profile arrests, there probably was not less corruption in 1998 than 2008. What we're probably seeing in the 2008 figures is a reflection of the memory of the rests, another look at the corruption through trials stemming from those arrests, and the allegations of corruption in the melamine scandal and the aftermath of the Sichuan Earthquake.

Posts of the Week: 6/22 - 6/28

noreply@blogger.com (Will Lewis) — Tue, 30 Jun 2009 02:00:00 +0000

Registering Your Trademark In The US And China On The Cheap at China Law Blog
And commentary at China Hearsay.

China's Anti-Monopoly Law. One Year On at China Law Blog

Google’s China Rift Hints At Challenges Ahead at Epicenter

The Futures Market in China at Managing the Dragon

US & EU File WTO Complaint Vs. China at China Journal

Pace of financial reform will only accelerate in China at Dragonbeat

Posts of the Week: 6/15 - 6/21

noreply@blogger.com (Will Lewis) — Tue, 23 Jun 2009 02:11:00 +0000

Defective Product Recalls In China. What's That? at China Law Blog

Rule of Law: ‘Harmonious’ Result in Deng Yujiao Case at China Hearsay

What’s Your Real Value in China? at All Roads Lead to China

New Tax Rebates: Full List of Commodities at China Sourcing Blog

Familiar Beijing Différance in Managing Large Enterprise Corporate Tax Risks and Compliance

noreply@blogger.com (Will Lewis) — Thu, 18 Jun 2009 18:23:00 +0000

“Deconstruction is not a dismantling of the structure of a text, but a demonstration that it has already dismantled itself. Its apparently-solid ground is no rock, but thin air." - J. Hillis Miller

Crucial to deconstructionism is Jacques Derrida's concept of différance. The essence of différance (if you'll allow me to ignore the paradox) is that the "complete meaning is always postponed in language; there is never a moment when meaning is complete and total" because "words and signs can never fully summon forth what they mean, but can only be defined through appeal to additional words" (shamelessly quoted from the above Wikipedia article). A recent article from the BNA Daily Tax Reports shows that the meaning of words in SAT Circulars, Circular (2009) No. 90 in particular, are always ready for a new interpretation.

Circular (2009) No. 90, "China SAT Guide for Large Enterprises to Manage Tax Risks," makes several recommendations for the internal enterprise establishment of tax control mechanisms. The controls range from the comprehensive, for significant tax risks, to the reasonable. And the circular recommends creating tax departments in various areas of an enterprise to manage these controls. The purpose of this circular is to increase compliance with China's tax code, and presumably increase tax revenues. Increasing tax revenues and combating tax evasion are high on a lot of governments priority lists right now in order fund fiscal stimulus packages.

The BNA Report points out that there are two things in this Circular that require a bit of deconstruction: "Large Enterprises;" and "suggests"/"should."

As for the "Large Enterprises" contained in both the title and body of the Circular, this ostensibly refers to the 45 enterprises overseen by the Large Enterprise Administration Department (LEAD). "Ostensibly" because under Chinese there is no limit on the types of enterprises that this Circular is making suggestions to, which includes "all companies, whether foreign or domestic, public or provate, and regardless of their size or legal structure." Eventhough the Circular might apply to foreign SMEs, if it's only a suggestion, it can't have too big of an impact foreign SMEs, right?

If only it were that simple. BNA reports that LEAD posted a memorandum on the SAT website saying that if LEAD companies don't follow the suggestions in the Circular, they'll probably "attract the attention of regional and local tax authorities." So, you don't need to follow the rules, but if you don't follow the rules you will get audited? I think someone wrote a book about this... Something to do with vague bureaucratic excess...

SMEs probably don't need to worry now, but the complete meaning of this law looks like it will be deferred until the future when even a small enterprise will need to implement internal tax controls or at least, as also provided, seek the qualified advice of China tax professionals.

Posts of the Week: 6/8 - 6/14

noreply@blogger.com (Will Lewis) — Mon, 15 Jun 2009 22:16:00 +0000

Copyright Administrative Punishment Implementation Rules at IP Dragon

Think You Have a Well Known Trademark. Think Again at China Law Blog

China’s Food Safety Law and Tort Reform at China Comment

The Chinese puzzle: why is China growing when other export powerhouses aren’t? by Brad Setser

Is China ready to ‘empty the bird cage’? at Dragonbeat

Form Contracts In China. You've Got To Fight The Powers That Be..... at China Law Blog

Let's Face It - Business Is Not As Usual at China Law Update

Return to Direct, Onshore PRC Investment at China Law Update

Fitch Analysts Sees Risks For China’s Banks Where Most Others Aren’t Looking at China Journal

US House to China: Hands Off Our Climate Technology at China Environmental Law

Which Comes First, The China Trademark Or The China OEM Contract? at China Law Blog

Top IP Firms in China

noreply@blogger.com (Will Lewis) — Tue, 09 Jun 2009 02:33:00 +0000

China Law & Practice published their list of the top IP firms in China in their May 2009 issue (I couldn't find a link to their web version of the article). Here's the breakdown by region for China Law & Practice's top IP firms in China.

International Firms
Baker & McKenzie
Bird & Bird
Lovells
Rouse
Wilkinson & Crist

Beijing
CCPIT Patent & Trademark Law Office
China Patent Agent
Kangxin Partners
King & Wood
Liu Shen & Associates
Zhongzi Law Office

Chongqing
Chongqing Overseas Law Office
Exceedon & Partners
Solton & Partners
Zhonghao Law Firm

Guangzhou
GFE Law Office
Kingson Law Office
Scihead Patent Agent
Wang Jing & Co.

Hangzhou
Capital Equity Legal Group
Grandall Legal Group
High Mark Law Firm
Zhejiang T&C Law Firm

Nanjing
Jiangsu Way-to-Justice Law Firm
Jin Ding Partners

Qingdao
Deheng Law Firm
Qindao Law Firm
Shandong Qingtai Law Firm

Shanghai
Allbright
China Patent Agent
Creatop & Co.
HFG Intellectual Property
Kangxin Partners

Shenzhen
China Commercial Law Co.
Deheng Law Firm
Kingson Law Office
V&T Law Firm

Tianjin
Join & High Law Office
Mingzhou Law Firm

Interestingly, several of these firms are members of the Sino-Global Legal Alliance which was launched by Lovells in 2007.

Posts of the Week: 6/1 - 6/7

noreply@blogger.com (Will Lewis) — Sun, 07 Jun 2009 17:16:00 +0000

China Environmental Law Blog on the Copenhagen Countdown:
China's Climate Change Position
T-6 Months Wrap Up
No Climate Deal Without China?

Survival and Growth of Chinese PEs and VCs at China Law Update

Current Situation and Anticipated Trend of Foreign Investments in China's Real Estate Market at China Law Update

What is Up With the Taxation of SOEs? at Experience Not Logic
Made it here by virtue of the excellent comments.

China Contract Protections And It Ain't Just Scrap at China Law Blog

Foreign Real Estate Development In China. Long Term Leasing As A Way To Go at China Law Blog

Hot Water In China? Don't Get Burned: The Conclusion by Aimee Barnes

Interview with International Lawyer and FCPA Specialist, Richard Cassin by Aimee Barnes

Trade - it's not just the currency at China Financial Markets
And commentary at China Hearsay.

China Contract Law: Going All Clear On Us Now at China Law Blog

New Special Section from Knowldege@Wharton on Manufacturing in China

noreply@blogger.com (Will Lewis) — Fri, 05 Jun 2009 01:07:00 +0000

Knowledge@Wharton has just released a Special Report prepared in conjunction with the Boston Consulting Group which is all the future of manufacturing in China, New Challenges for "Made in China." Here are some very brief summaries of the articles.

Rising Giants: Industrial Clusters Are Changing the Face of Chinese Manufacturing
The thesis of this article is that China's industrial sectors are geared towards clusters, a theoretically strong driver of industrial and economic growth, and foreign investors might just want to take advantage of clusters. But the authors warn that you better do your research on region the cluster is located in, and the specific cluster itself.

China's Growing Talent for Innovation
The thesis of this article is that companies can do their R&D in China, but they face some specific challenges. The main benefit includes a lot of raw and inexpensive engineering talent. Challenges include:

Research capabilities are still weak compared to other areas.
Inflationary pressure on wages might exceed growth in productivity.
IP protection is still to weak.

The challenge analysis could have been longer... Maybe a little to "ra-ra."

Raising the Bar: Can China Meet the Quality Challenge?
The thesis of this article is that the quality "issue" is really just "misplaced assumptions and perceptions on both sides." Dude, the Chinese build iPods. The real issue is that parties on both sides just aren't understanding the quality specifications in the manufacturing contracts. I've only had the pleasure of working on contracts with tight specifications, but the report says that too often MNCs are using the exact same sourcing contracts in China that they use in the rest of the world.

Chinese Manufacturing in an Age of Resource Price Volatility
The thesis of this article is that expected future volatility in the energy market will have a positive effect on competition. As manufacturing becomes more expensive, low-value WILL move inland and abroad, and China's manufacturing sector MUST move up the value chain.

The Dragon Turns Green: China's Manufacturers Adapt to a New Era
The thesis of this article is that China will be promulgating and enforcing tougher environmental regulations, and foreign companies will be scrutinized more early and more often. The article suggests ways to start going about complying.

The Special Report is nice. Maybe a bit too optimistic, shying away from the controversy and negativity. Oh, well, there are still things to learn.

And Asia is Now the #1 Source of Foreign Earned Income for US Taxpayers

noreply@blogger.com (Will Lewis) — Tue, 02 Jun 2009 23:45:00 +0000

Recent report in the BNA Daily Tax Report on the just released Spring 2009 Statistics of Income Bulletin from the IRS announces that Asia eclipsed Europe in 2006 as the continent where US taxpayers had the highest amount of foreign earned income. The $14.7 billion of foreign earned income in Asia represents a 29.1% real dollar growth over 2001. Though the increase in income in Iraq from $0 in 2001 to $1.8 billion 2006 drove a lot of this increase, foreign earned income in China also made a contribution to growth with a real increase of 110.2% to $1.7 billion. With regards to China, this must mean one of five things:

1) US citizens working in China earned 110.2% more in 2006 than in 2001;
2) There were 110.2% more US citizens working in China in 2006 than in 2001;
3) There were less US citizens working in China in 2006 than in 2001, and they earned proportionally more than 110.2% in 2006 than in 2001;
4) There were more US citizens working in China in 2006 than in 2001, and they earned more per capita in 2006 than 2001; or
5) There were more US citizens working in China in 2006 than in 2001, and they earned less per capita in 2006 than 2001.

If we assume that the number of US citizens working in China increased during this time, then we can eliminate 1-3. I'm going to pick number 4 for bubbalicious reasons (as 2001 was a year after one bubble burst and 2006 was the year in which another burst) and because I can't find good data on the number of US citizens living in China in 2006 and 2001 which would give us the correct answer.

It should be noted that foreign earned income refers to income earned by US citizens performing personal services in foreign countries.

What is Up With the Taxation of SOEs?

noreply@blogger.com (Will Lewis) — Tue, 02 Jun 2009 04:36:00 +0000

Have you ever wondered if SOEs get taxed? If they do get taxed, why? I knew that SOEs were owned by the state, but I had never made the leap to think about how the state benefits. If you asked me, I guess I would say through distributions... But how can shareholders, even a government shareholder, compel distribution? Well if these questions have ever taxed your mind, even if a newly promulgated tax on thought, I'd recommend reading Income Taxation of State-Owned Enterprises: Theory and Chinese Evidence by Professor Cui Wei of China University of Political Science and Law. I'm going to briefly summarize Professor Cui's description of the traditional theories on SOE taxation, and then summarize his theory of why SOEs are taxed. But first, some threshold issues.

SOEs in China, and in many countries, are subject to income taxation. In China, they are subject to the same tax as private enterprises under the EIT, though SOEs do tend to be among the most aggressive in seeking favorable tax treatment. Tax on SOEs might be conceptualized as a distribution by the SOE to its shareholder, the government. This carries one major caveat: the shareholder does not pay any tax on its constructive distribution which eliminates considering the important tax planning issue of structuring distributions to best advantage the shareholders' tax liabilities.

The first theory for SOE taxation is that "SOEs are taxed because they have mixed public and private ownership." Professor Cui does not think that this explains SOE income taxation because there is no good reason why an SOE with mixed ownership should be taxed in the same way as a private firm.

The second theory for SOE taxation is that "SOEs are taxed because the government that owns them is not the government that taxes them." In federalist countries such as China, SOEs can be subject to a dual layer of provincial and national taxation. Even though an SOE might be owned at a provincial or municipal level, part of its constructive distribution is withheld in Beijing with the rest distributed to the local governments to cover the SOEs tax liability at and below the provincial level. Professor Cui argues tha this explanation fails because there are much better ways than the income tax system for equitably distributing an SOEs profits.

The third theory for SOE taxation is that "SOEs should be taxed because that is necessary to ensure that they are competitively on an equal footing with private firms." Professor Cui notes that this view may be prevalent in developing countries. Professor Cui concedes that competitive reasons are a fair explanation for other taxes such as VAT, but "the price affected by the corporate income tax is the price of capital, and SOEs and private firms generally do not compete for the same investors, unless the SOEs are being privatized." Thus any income tax is simply a burden borne by the government because different tax rates for SOEs' profits would have no effect on SOEs' ability to attract more government capital.

Instead of relying on these theories, Professor Cui proposes that SOEs are taxed, at least in China, for the sole purpose of ensuring (and forcing) periodic distributions to the government shareholder. Professor Cui argues that for his theory to prevail, SOEs must be averse to the payment of income tax. Despite their tax paying braggadocio, Professor Cui points to substantial evidence that China SOEs are as averse as their private enterprise counterparts to paying tax, thus substantiating his theory.

All in all a fine read, and I look forward to further refinements to Professor Cui's analysis as many of the questions he leaves unanswered for lack of evidence are fielded.

Posts of the Week: 5/25 - 5/31

noreply@blogger.com (Will Lewis) — Sun, 31 May 2009 23:57:00 +0000

I went jet-skiing on a stand up 701cc two-stroke jet ski today. That ranks as one of the most fun things I've ever done. Back to studying for the bar tomorrow!

China Plans Environmental Rules for Companies Investing Overseas at China Journal
Is this going to be enforced? China's standards are pretty high, and they're not well enforced in China.

Time to stop talking of renminbi as reserve currency at dragonbeat
A sober and informed voice on what it actually means to be a reserve currency.

From DLA... at asia tax blog
A couple of links to DLA's detailed reports on the new China M&A tax rules.

Built to Fail – Case Studies on Chinese SME Companies Damaged By Greed, Deception and Crooked Investment Banking at China Private Equity
Case studies from Peter Fuhrman's experience in the "opportunity" that OTCBB listings and reverse mergers can bring to the SME Chinese clients of overly opportunistic VC and PE funds, and investment banks.

Chinese Sausages at Silk Road International
When and where the numbers get a massage in China.

A G-2 Mirage? If You're Thirsty, You Should Double Check for Water

noreply@blogger.com (Will Lewis) — Thu, 28 May 2009 23:17:00 +0000

In The G-2 Mirage (subscription only, support your local library), Elizabeth Economy and Adam Segal argue that the US should avoid engaging China bilaterally, and focus on a multilateral approach to China. As a mirage is a real optical phenomenon, I assume that the authors are instead alluding to a Looney Tunes-like, heat stroke inspired hallucination of an oasis in a dangerous desert. Though the authors make several erudite observations about conflicting foreign policy goals between the US and China, their ultimate recommendation for a "sit down with Japan, the EU, and other key allies to begin coordinating their policies toward China" is dangerous. Coordination between the "West" + Japan without China at the table has a high probability of alienating and antagonizing Beijing, and without an effective EU leadership it is very difficult to coordinate anything.

A brief summary of shared US-Sino foreign policy goals according to the authors:

"Kickstarting economic growth and maintaining an open global economy." Ending this crisis.
"Maintaining peace and stability in East Asia." Not just Korea, but Myanmar, India, Pakistan, and Afghanistan. China shares borders with many of the most dangerous places in the world.
"Halting climate change." Agriculture has the chance of being significantly impacted by climate change (p19) if the availability of water resources declines.

And a summary of foreign policy problems:

"Opposing perspectives on sovereignty and humanitarian intervention." China takes a more hands-off approach, while the US prefers to sponsor UN Sec. Council resolutions and other methods of intervention. Angola, Democractic Republic of Congo, Iran, Myanmar/Burma, Sudan, and Zimbabwe are specifically mentioned as countries where China has taken the side of the oppressive and abusive regimes.
"China's authoritarian but decentralized political and economic system." 天高皇帝远。China's ability to implement laws on product safety and environmental safety is frustrated by both the disconnect between Beijing edict and local government implementation, and a lack of transparency and accountability across bureaucratic spectrum.
"Cooperation on climate change may prove even more challenging." The authors are concerned about the lack of transparency in emissions reporting, and the US true willingness to share clean technologies with China.
A disconcerting military relationship. China's secrecy is intentional to shield its true (and most likely weak) capabilities, and the capabilities China does reveal suggest that they are focusing on weapon systems that can attack US aircraft carrier groups.
A "contentious" economic relationship. "Washington insists on currency reform, more open markets, and the protection of intellectual property rights. Beijing, by contrast, generally wants to be left alone to conduct its business as it sees fit."

I think these are all valid points. It is truly amazing that the US and China are so close. But just because we have so many points of contention with China does mean that we should risk damaging our relationship by going behind their back and forming a monolithic and coordinated policy to deal with China. China, Japan, the US, and the EU member countries have all historically been and/or all have great potential to become rivals. When blocks of potential rivals too conspicuously team up against another, it conveniently sets the stage for conflict (okay, maybe the link is a little dramatic...).

The approach needs to be multilateral with the major stakeholders at the table. I'm thinking the US, Japan, the EU, maybe the UK, Russia and China are the ones that need to meet and work towards that future that Hayek wrote tends toward human and societal development. This group includes all of the permanent members of the UN Security Council, plus a couple of the WWII losers that have rebounded so well.

The authors do argue for a multilateral approach, but the EU's impotent power structure needs to be reformed first. The G-2 solution is so attractive because agreement among fewer parties is typically easier to reach than agreement between more parties. Before we can work with the major stakeholders, the EU needs a strong leadership position. If the EU doesn't have a seat at the table, and France and Germany each do, there will be no end to the nationalistic European whining we'll be forced to endure, and this will weaken any policies the group arrives at.

Though the G-2 might indeed be a mirage, we need to take a multilateral approach from the beginning to avoid alienating China, and work together in digging a well to create an oasis in the desert the world is currently passing through.

Baker McKenzie's "China Legal Developments Bulletin"

noreply@blogger.com (Will Lewis) — Wed, 27 May 2009 00:16:00 +0000

Baker McKenzie just released a new version of their China Legal Developments Bulletin. It is 27 pages of analysis of new laws, summaries of new laws, and a list of new laws. This is has been a year heavy in tax laws, rules and regulations for China, and this bulletin reflects that with several articles on tax.

My favorite is John Eichelberger and Brendan Kelly's article on "New Challenges to Special Purpose Vehicles for Investing in China." The article is about the SAT's recent push to combat tax avoidance and the abuse of tax treaties through the use of SPVs through SAT Notice 81 on Issues Relevant to the Implementation of Dividend Provisions in Tax Treaties, and through a pair of tax bureau cases. The Chongqing Case and the Xinjiang Case are sober reminders that Beijing is serious about curbing tax treaty abuse, and they are an interesting look into how the local tax bureaus will analyze cases to make a determination of wheteher or not there is abuse going on. Hey, China's gotta pay for their RMB 4 trillion stimulus package somehow . . .

Posts of the Week: 5/18 - 5/24

noreply@blogger.com (Will Lewis) — Mon, 25 May 2009 02:46:00 +0000

Falling in Love With China . . . And Your Career by Aimee Barnes

Sarbanes-Oxley and US Businesses in China at China Briefing

When Not To (And When To) File Your China Trademark at China Law Blog
Commenting on a post by Stan Abrams at China Hearsay from last week.

A Moribund Chinese Bond Market Springs to Life at Dragonbeat

Kaixin001 v. Kaixin: Social Networking Goes to Court at China Journal

Coming Soon: More Antitrust Rules and Regulations at China Journal

Mixed Feelings on Microsoft's IP Deal With Hangzhou at China Hearsay

Apple Responsible for Reseller Copyright Infringement? at China Hearsay

Taxation of Corporate Restructuring (II) at China Law Update

Outbound M&A (From China) at Managing the Dragon

Spending the Stimulus: Where China's Money is Going at China Journal

The Heavyweights Chime In . . . by Brad Setser
From everybody on a new reserve currency.

KPMG on Outsourcing to China

noreply@blogger.com (Will Lewis) — Sat, 23 May 2009 23:43:00 +0000

KPMG recently produced a report on the growth of outsourcing to China, including information on the benefits of outsourcing to China and the formation of outsourcing businesses in China, A New Dawn: China's Emerging Role in Global Outsourcing. The focus is on IT outsourcing in software development. The report is solid and neither sugarcoats the advantages of outsourcing nor shies away from the disadvantages to outsourcing to China. There are also a handful of in depth case studies on Chinese outsourcing companies serving the domestic market, other Asian markets, and the Western market.

The two greatest advantages that China has as an outsourcing destination are high number of college graduates with the necessary technical skills, and a relatively low salary for those graduates. China graduates 600,000 college students per year with engineering degrees, compared to 400,000 in India and 70,000 in the US. This provides industry with a "massive pool of engineers at the entry level." China still lacks the necessary amount of senior-level program managers, though. The salaries for entry level engineering graduates is much lower than in India, at $250-$350 per month compared to $750-1000 per month.

The greatest disadvantages to outsourcing to China include limited English language skills compared with India, highly fragmented market, high variation in local strengths and weaknesses, and ye olde IPR protection problems. China does lack the English language skills of India, but China is improving, and China does have the advantage of relatively high numbers of Korean and Japanese speakers. The report notes that though market fragmentation creates huge opportunity for consolidation, it is hard currently hard for foreign companies to make an informed choice for outsourcing service provider. Of the 20 cities identified on page 20 of the report as strategic sourcing locations, there is wide variance in education and infrastructure, which is just not the case in the relatively more "monolithic" levels of education and infrastructure development in India.

This is a really good report, and it's worth the read even if you just stick to the excellent case studies.

Why Do American Companies Avoid Africa?

noreply@blogger.com (Will Lewis) — Fri, 22 May 2009 00:06:00 +0000

Africa has a population of about one billion people, and the land is extremely wealthy in natural resources. The strong European business presence makes sense because of the colonial legacy. Without a modern colonial impact in Africa, the Chinese have been making strides in Africa to secure access to natural resources. As the beneficiaries of early colonialism, Cold War political meddlers, and the richest (and most opportunistic?) country in the world, why are American companies so hesitant to invest in Africa? This is the question that Baird's CMC and the US Chamber of Commerce tries to answer in a recently released study, The Conversation Behind Closed Doors.

It doesn't seem that the question of investment is specifically focused on the extraction of natural resources. Baird's is talking real investment for growth such as the establishment of local factories to produce for the local market.

Through interviews with top management in "30 leading U.S. multinational corporations," Baird's identified the top 5 factors that influence the decision to invest in Africa:

Rule of Law - In corporate, civil, and criminal fields.
Attractive Market - Not only currently, but promise of future development.
Risk Adjusted ROI - Risks are pretty high in Africa.
Supportive Business Framework - With logistics as a key elements.
Welcoming Environment - Including the health and education level of the local workforce, as well as supportive policies for FDI.

Of these, they identify the three biggest hangups for American management in investing in Africa.:

Difficult Business Case - The risks simply outweigh the rewards of the African markets.
Corruption and Uncertainty - "Do you see that bridge over there?"
Opportunity Cost - Africa is not selling itself, and no other US companies are competing aggressively, so there is no sense of an opportunity being lost.

The study is very interesting, but I have my own theories about why American companies are not investing in Africa. But first, not content with my own thoughts, I posed the following question in my gChat status:

Why don't American companies invest in Africa? Thoughts?

I received three responses:

"cause africans will steal our crap if we bring it over there" - The report brought this up too. I agree that African IPR is weak to nonexistent, but is the education of their workforce and sophistication of their manufacturing base even close to high enough to steal IP at a relatively Chinese level? I doubt it, but it is still a strong concern.
"isn't africa notorious for being especially unstable?" - The report brought this up, and again, I agree. But that hasn't stopped the US from investing in Latin America. "Latin America?" you say. Yes, Latin America. Argentina's only had free elections since 1983, Chile since the end of Pinochet's reign in 1990, Nicaragua since 1990. Meanwhile, Mobutu Sese Soku ruled that poster child of African violence, Zaire, for 32 years, al-Gaddafi has ruled Libya since 1969, and Tanzania has been relatively stable since 1964. Am I cherry-picking? Sure, but political stability is only a piece of the puzzle when money is involved.
"because africa sucks" - I agree, but see final sentence above. Additionally, I can see Lagos, Mombasa/Nairobi, and Dar Es Salaam becoming the Pearl River Deltas of Africa at some point.

That third comment also led into a discussion about what I think makes US companies hesitant to invest in Africa. The optics are totally off. First, Africa does suck and I think that there is the perception that Africa is Europe's problem because it was largely a European colony that turned into a dangerous place. Second, America benefitted greatly from European colonialism, and I think there is a guilt involved in hiring Africans at low wages to do raw material extraction and to work in factories. These are two things that we need to just get over. Africa needs investment, and if American companies can figure out how to invest in Africa, then the situation in Africa will imporve, plus I think there is an absolute killing to be made (at least at some point).

This is a high hurdle to cross, and as one of the interviewees in Baird's intriguing report, which you should certainly review, makes clear:

"We are a stock market-listed company, so the first thing is return on investment. Can we make money?"

As opposed to companies that are beholden to shareholders, the Chinese have a competitive edge in Africa that US companies do not. Chinese companies can invest with an eye to the future, whereas US companies must keep their shareholders happy in the present. Hopefully this report will open US eyes further to the possibilities in Africa.

Posts of the Week: 5/11 - 5/17

noreply@blogger.com (Will Lewis) — Mon, 18 May 2009 07:49:00 +0000

Das Birds and Das Capital at Whatever Gets You Through Your Day
I can one hundred percent say that this was the best thing I saw on the internet last week.

From China Law Update: China Combats Tax Treaty Abuse at AsiaTax Blog

When Not To File A Trademark (yes, you heard me) at China Hearsay

The Party is Over for China’s Logistics Firms at All Roads Lead to China

Posts of the Week: 5/4 - 5/10

noreply@blogger.com (Will Lewis) — Mon, 11 May 2009 04:32:00 +0000

China’s State-Owned Banks’ Missed Opportunity Opens the Way for Some Global Banks to Prosper at China Private Equity
Beijing decreed, "Lend." But just who is getting credit and what does it all mean? More at WSJ.

China And The Foreign Corrupt Practices Act (FCPA). Sometimes You Just Have To Step Away.... at China Law Blog
Fun time with every foreign minister's favorite American law!

Taxation on Corporate Restructuring at China Law Update
A look at soon to be finalized rules for the tax treatment of certain reorgs under the Enterprise Income Tax law. Asiatax blog has also been full of links to corporate literature on these rules.

Posts of the Week: 4/27 - 5/3

noreply@blogger.com (Will Lewis) — Mon, 04 May 2009 01:45:00 +0000

Chint China and strategic implications at IP Think Tank

Wangzhihe Trademark Case: More Media Sins at China Hearsay

Coca-Cola/Huiyuan: Majority Ownership or Anti-Monopoly? at Managing the Dragon

China Real Estate Strirring? at China Law Blog

Voidable Chinese Contracts at China Success Stories

Posts of the Week: 4/20/09 - 4/26/09

noreply@blogger.com (Will Lewis) — Mon, 27 Apr 2009 00:54:00 +0000

Beware foreign bluster about tapping the Chinese consumer at dragonbeat
Missed this post (and blog) earlier. Important topic, especially in the face of the recent McKinsey report, and all the talk surrounding it.

Quality Control Basics, Part 4/4: Putting It All Together at China Sourcing Blog
I've enjoyed this series. Thank you!

China v. United States: A Visual Comparison at Mint.com

Chinese Drywall Cases. Show Me The Money! at China Law Blog
Don't take a contingency fee on this litigation...

Wanna Get Sued In China? Your Ex-Employees Can Help at China Law Blog
Plus, Part II.

Who Says Tax Incentives in China Are Dead?

noreply@blogger.com (Will Lewis) — Mon, 20 Apr 2009 19:07:00 +0000

Well . . . Maybe not that China . . .

In a push to better compete with China's ports and to reverse the declining volume in Taiwan's ports, the Council for Economic Planning and Development of Taiwan is proposing significant tax incentives to foreign companies that establish logistics and distribution centers in Taiwan.

The proposed incentives are:

business income tax exemption on exports;
business income tax exemption on domestic sales limited to 10% of total revenue;
faster customs clearance; and
lower domestic employment requirements.

Establishing your HQ in Taiwan could lead to even bigger tax incentives.

I can't help but question the scope of impact of this proposed legislation. I think the global impact will be limited. But with the recent opening of direct transportation between Taiwan and mainland China, these incentives could have a significant impact on businesses focusing on regional distribution and logistics between Taiwan and the mainland.

Posts of the Week: 4/13 - 4/19

noreply@blogger.com (Will Lewis) — Sun, 19 Apr 2009 20:18:00 +0000

Bets on China Growth: Slow at China Journal
A list of estimates of China's first quarter GDP growth. We can see who won when Beijing releases the first half stats.

Tradeshow and News Round-up at Silk Road International
Take a look at David's notes on the Chinese economy.

Working With Chinese and Korean Lawyers. The Big Four Issues With Each at China Law Blog
My bosses have had foreign JDs which I think did a lot to diminish or eradicate these issues.

A Couple of Posts on the new McKinsey Report on the emergence of a wide class of wealthy consumers in China
At China Business Blog
At China Solved
I read the report, and the main I thing I got out of it is that is a superficial (not in the pejorative sense) guide to consumer behavior and how to begin crafting advertising campaigns to have an optimal impact on your target consumer group. For the real deal they're offering their services at Insights China.