Understanding China

Shanghai - new city of Pudong as it is today

Those who are concerned about the rise and influence of China need to understand that the Chinese are only doing what we have allowed them to do over the past 25 years!

To fully understand China one also needs consider that the Chinese have lived and survived, and continue to do so, in mass density populations for many thousands of years. Living in an environment of such close and confined proximity can be both a positive and a negative, in that it can limit the thought processes and yet it can also stimulate deep and intensive narrow analysis. 

First Trip

My first business trip to China in mid December 1991, was to the commercial city of Shanghai, described in the 1930’s as the Paris of the East. The population was 12 million (at the time), plus up to 4 million daily visitors, together with what the Chinese authorities used to described as ‘aliens’, or Chinese nationals from the countryside, who did not have a residency permit to live in Shanghai, but were there as a form of illegal ‘cheaper’ labour.

I arrived in the midst of a mild Chinese winter and when I went for a walk along Nanjing Lu, the main commercial street of Shanghai, there were up to a million Chinese people on that street, and what stunned me was that every person that I saw (both male and female), was wearing a blue Mao suit.

When I returned the following April (1992) in the Spring, everyone on Nanjing Lu was wearing green Mao suits.

These days it would be a rarity to see a Mao suit at all, and, when you do, it’s usually on a Chinese politician, or a performer, or at some formal event.

Shanghai Government Auditorium 1993 L to R Peter Epov, David Sumner CEO, Vinidex Tubemakers, Glenn Dudley, CEO Metal Manufactures, Huang Ju, Vice Mayor of Shanghai

Doing Business

Each weekday, the lobby of our hotel, the Hua Ting Sheraton, was literally awash with hundreds of business people, mainly Chinese, looking for western partners with whom to do business and anxiously trying to set up joint ventures. The parade of Chinese business people would start at 9 am and would continue to 10pm. Many major business deals were concluded in the lobbies of hotels in China in the 90’s.

Each night, I watched the rather good Filipino band in the far corner of the massive room, trying to compete with the energy and the buzz of a multitude of highly pitched conversations; Chinese interpreters desperately trying to communicate with business people from France, Italy, Germany, Spain, the United States, Russia, and, occasionally, an intrepid Australian.

In the mornings I would rise early and sit by the window of my hotel room, mesmerised by the waves of tens of thousands of cyclists peddling to work, seamlessly dodging the buses, and the occasional taxis and the chauffer-driven company car – all quite surreal. Now those same streets that I used to watch 25 years ago, are lined with tens of thousands of cars of all makes and cyclists were banned.

At the time, the Chinese Government was under the rule of the demi-god, Deng Xiaoping, who had opened up selected parts of the country and certain  industry segments to foreign investment, and the Chinese nation was set on clearly annunciated objectives of drawing in investment, and most importantly, learning from the West.

Shanghai 1993 – at the Bund, Background the construction of the new City of Pudong
L to R David Sumner CEO Vinidex Tubemakers, Glenn Dudley CEO Metal Manufactures (top 100 company) Peter Epov

The Bamboo Curtain

Mao had been God, having his picture in every taxi cab in China. Deng was a demi-god, he would bring China out of the wilderness from behind the bamboo curtain into the western world. Those that followed would be mere mortal men; Presidents, Jiang Zemin, Hu  Jintao, and now Xi Jinping, would exploit this rather naïve capitalist business concept of “globalisation”, and turn China into, not only the world’s largest economic powerhouse, but into a military power which will rival the United States within a decade.

Between 1991 and 2005, I made over 100 business trips to China where I visited over 1000 different Chinese companies, ranging from top 100 companies like Bao Steel, and Shanghai Chloro-Alkali, and Changchun Railway Vehicles Company, to the smallest little workshops surrounded by rice paddies in hidden villages hundreds of kilometres from anywhere.

Through that process, I did business with very senior Chinese business leaders who controlled tens of thousands of employees, who ruled their fiefdoms as Mandarins, to government and political figures, including the Vice Mayor of Shanghai, and the Vice Governor of the very small, poor rural Province of Anhui, Mr Wang Yang, who, in 20 years, rose to be in the Executive of the Politburo of the Communist Party of China and one of four Vice Premiers of China.

Fast-Track to Future

Throughout this experience it was clear to me that there was a singular focus, and that someone awfully bright had identified and established the path forward to fast track China into the 21st Century. What was happening then, and what has occurred since has been no accident, it was not organic nor was it simply market driven, China’s evolution was clearly thought out, set out and programmed.

I remember in 1993 being taken with the Ceo of Vindex Tubemakers to what was described at the time as a, “highly confidential” location. In a display room was a massive model plan / layout (10m x 5m) of the future city of Shanghai, and, by 2005 it had all been achieved.

All those massive skyscrapers that now overcrowd the Shanghai city skyline, regularly displayed in TV clips to demonstrate the growth of modern China, were just little cardboard models 23 years ago, and some-one with the power and the vision to turned them into reality.

Actually, it was not one singular person that achieved it all, but a shared vision, clearly programmed and translated meticulously into reality.  In the mid1990’s there were more cranes working on construction projects in Shanghai than in the entire world.

In 1991, the Chinese Government introduced shrewd business incentives and laws to attract western investment, such as Sino-Foreign Joint Venture Law, where the Joint Venture company did not have to pay any tax on profits for the first three years of trading (only calculated from the first year that the JV company actually began to make a profit). After this period, there was a further discounted two-year tax holiday calculated at 50% of the normal rate.

The Chinese Government established “special economic zones” for trade and export and a range of other incentives for foreign investment, and so western companies flooded in (except from the UK, due to the issue of the Hong Kong hand over).

These incentives brought in financial investment, advanced technology, expertise and know-how, which all served to fast track China’s evolution into the modern world.

Kept Control

Yet all along, China maintained stringent controls, which the “greedy” western companies, eyeing off the massive potential Chinese market, were all to happy to kow-tow to them.

As a foreigner in China, it was not possible to buy nor to own land, neither as an individual nor as a company, it could only be leased for a fixed term!  This is still the case. Very convenient justification was used to explain away the fact that all land was owned by the Chinese Central Government, and could not be sold. Of course, in reality, it was the “People’s Republic of China”, which owned the land, that is, the people of China.

One often wonders why the people of Australia could not also own all the land and benefit from its resources?

In manufacturing joint ventures, as per the regulations, Chinese (Government controlled) Design Institutes were used to design factories, which had to be located in Special Economic Zones where land costs were very expensive. In this way the foreign companies were drawn into investing hard cash, technology, IT, expertise and knowhow, all used to rapidly grow and up-skill Chinese manufacturing.

Joint Ventures

Foreign joint ventures also gave Chinese companies instant access to foreign markets (and knowledge and expertise). They did not have to battle, nor break into international markets, nor invest millions and fight for market share.

Most Sino-Foreign joint venture companies were set up for short terms of 15 to 25 years, after which, the companies could re-negotiate and extend, or they could conveniently terminate the JV. (Joint venture.)

Many of the JV’s signed in the 1990’s are now up for re-negotiation, with the Chinese companies sitting in the box seat; now cashed up, up-skilled with the latest technology and expertise, no longer needing the foreign partner.

All through the 1990’s China continued to learn from the West.

Watch and Learn

They also watched and learnt, with some amusement, and trepidation, about the demise and break up of the Soviet Union between early 1990 and December 1991. The USSR had been the beacon of socialism throughout the world and its break up occurred at a very time convenient manner for China.

Through the 90’s, China flooded the world with business groups sourcing commercial intelligence, and developing state-of-the-art manufacturing expertise. They sent Parliamentary groups to study each nation’s, political structure (strengths and weaknesses) and they continued to learn.

Ultimately, they developed an acute understanding of the strengths and the weaknesses of the western capitalist system, and they started to build up and accumulate massive foreign trade surplusses (and foreign cash reserves) with most major countries in the world.

Once again, this was not accidental, rather it was strategic; it was very deliberately programmed and targeted. China was very clear in selecting and targeting countries for trade and business. They scrupulously balance trade and business relationships.

This gave them superiority and cash reserves, to further target key areas of interest and ultimately buy up major companies around the world.

They learnt very quickly to capitalise on the weaknesses of capitalism in a loose and “free market” globalisation environment.

Ignorant and Naive

The opportunities came very easily and very clearly in a sphere of western ignorance and naivety. To the Chinese the opportunities became particularly obvious to them, growing out of a socialist environment, where looking for weaknesses was a natural thing to do.

The West has very naively allowed China to rise rapidly, and has provided it with all the resources and available tools and finance to do so all too quickly.

So whilst they are building up their military power (for a range of reasons, more so for domestic issues and self defense) they are also on a track of prodding and poking western weaknesses and exploiting them, such as in the South China Sea and the Pacific.

In the old days, when the USA wanted to invoke some response from China, it would play the Taiwan card, causing China to spring into action with aggressive rhetoric. Nowadays, Taiwan is no longer an issue, it is not in the equation, it has totally disappeared from the radar, perhaps due to the fact that almost ten years ago, 25% of Taiwan’s entire capital was invested back into mainland China.

These days, the shoe is on the other foot. If China wants to provoke the US, all they have to do is give North Korea a gentle poke and it’s world- wide news.

Buy Out!

Most importantly, China has worked out, and they now understand all too well, that they don’t need international sabre-rattling, nor international hostility, nor to make war. Through this outdated western ‘free market’ capitalist democratic system, they can simply buy everyone out!

They have learnt how to exploit the “American democratic capitalist system”, which Australia slavishly follows, and how to exploit it.

Purists might jump up and down and say that we follow the Westminster system of government, and not the American system, and that our governments and political systems are very different, but in reality, ultimately it all boils down in the end as to how people get elected into positions of power in the 21st century.

The cost of getting elected is the core issue, from Local Governments right up to Federal Government; the problem is the same. It is also the issue that is the easiest to exploit. And frankly, has been exploited for centuries, albeit perhaps not so overtly. Political donations, particularly from foreign nations, and not just China, will always be a major problem until the issue is properly dealt with and resolved.

The key twist is that traditionally, when people went into politics, it became their final career step, after which they would disappear into some form of retirement and/or obscurity. Now politics is a career step to somewhere else, to a company board or as an ‘advisor’ or ‘consultant’, an opportunity for a former politician or a senior political staffer to cash in, based on the access and connections that they have developed in their government roles.

Brown Paper Bags

Grooming politicians and senior political staffers is the 21st century business response to brown paper bags full of money. Sure, the brown bags may still happen at some levels, but it is better business to contribute to the election of a friendly politician and set a hook for him or her, based on a “post” politics career.

In the last five years there have been a number of very high profile political leaders such Martin Ferguson, Ian MacFarlane, Andrew Robb, Mark Vaile, John Anderson, who have spring-boarded from politics into very lucrative positions. Whilst I hasten to add that there is no evidence of any form of impropriety on their behalf, nor that they are not qualified for those positions, but there is still the issue that the opportunity to accumulate the relevant experience and establish significant high level contacts, may not have been possible for these people if they were not in politics and in Government.

In the “old days” there was a need for massive pensions for politicians, at the end of their careers, because it was hard for them to go back to a previous career, after politics.

Now, the politicians are wanting to cash in, and earlier, particularly as they see corporate execs running companies badly, but still being paid tens of millions of dollars each year.

Government Overthrows

So, the Chinese are not doing anything new or different, they are just following previously established precedents. Look at how the United States has influenced and brought about the overthrow of governments, in South America, and in Asia and the Middle East. How they have funded and supported dictators and puppet governments.

The Chinese are merely exploiting the rules that we have set. Or should I say, the rules our pollies have set.

Remember, Malcolm contributed several million dollars of his own money to the Liberal Party last election in order to help get re-elected.

The underlying problem is how to evolve the costs of modern day democracy.

In the United States, if you can’t secure over half a billion dollars in campaign donations, you haven’t got much hope of being elected President.

Election funding is not an issue that our pollies want to address nor resolve. As with media laws, the pollies don’t understand (or can’t work out) the consequences so they won’t take any risks for fear of losing access and support.

Why is it that any sitting Prime Minister (or the Leader of the Opposition), that visits New York, must always call on and pay homage to Rupert Murdoch?

Influence or Meddling?

So, whilst we are horrified about claims of Russia influencing the US election and Chinese persons donating to political parties in Australia (and in the US), they are just doing what we allow them to do.

It’s like allowing them to buy our land! There is this stupid naive arrogance, compounded by the fear that is now traded on by foreign investors, that there will be no investment if they can’t buy our land or houses or businesses.

Once again we have undersold ourselves, our country, our commodities and resources.

We can’t buy land in China nor Japan.  So why don’t we have reciprocal rights on a bilateral basis? If we can buy land in your country, you can buy land in ours.  Otherwise you can lease on a fixed term.

The Government is now afraid (and perhaps it’s too late) to call their bluff.

The reality is that the Chinese (like other foreign investors) will invest in Australia, if the commercial benefit stacks up. The key is to effectively demonstrate and sell the benefit.

The stark certainty is that Australia has extra-ordinary capacity into the future to feed the world, and we need to both control and manage this opportunity or we lose out! We cannot allow foreign investors to manipulate us, based on a fear of losing their investment, fear that they are all too familiar with and regularly trade upon.

If the sell-off of key resources to foreign powers continues, what will happen in the future, when our Government decides to change sensitive policies? Will we see a dozen battle ships arrive at our doorstep determined to protect that  country’s national interest? Will we turn our begging bowl to the United States, and will they respond in the way that we hope they will? The world is a rapidly changing place and last century’s enemies are supposedly our best friends, and could last century’s best friends turn into enemies?

Too often, our foreign relations and economic policies have been re-active rather than pro-active. We are not as big as the United States, and we cannot get away with continually being re-active and simply allowing the market to drive reform.

No Fix

Sadly, it seems that our pollies are too conveniently enmeshed in the grubby partisan politics of today to think about the future.  Whilst they throw mud at each other about political donations, what are they really doing to fix the problem?

Whether it is foreign investment, energy (and electricity prices), climate change, cyber warfare, trade and export, or primary industries, we always seem to be behind and reacting through crisis management. Perhaps we should now be learning from some of the lessons which fast-tracked China’s meteoric rise to world prominence.

It may be controversial, but I believe that the Australian people should own the land and our precious natural resources, as well as clearly designated industries of key national strategic importance such as: a commercial bank (ie like formerly, the Commonwealth Bank). This would help control interest rates and credit card fees, where the reserve Bank is unable to do so, telecommunications (previously Telecom) the electricity network (or the generation of electricity), water, and even have an interest in certain key primary industries.

Investment could be attracted and achieved through Joint Ventures, and / or Public Private Partnerships (PPPs), with Australia always being the major shareholder. In that way our national interest and the welfare of this nation could be secured.

As the Chinese have revealed, and history tell us, they are patient, with long term plans, prepared to follow the ten, fifty, hundred year plan they’ve mapped out. We underestimate them at out our peril.

Peter Epov

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2 Responses to Understanding China

  1. TianHu says:

    I cannot applaud Peter Epov enough….EVERY POLITICIAN SHOULD BE “FORCED” TO READ IT….AND ACT ON THE RECOMMENDATIONS……well known environmentalist David Suzuki advised Australia years ago…..DON`T SELL YOUR LAND….LEASE IT AT A HIGH PRICE….FOREIGN POWERS WILL PAY….AS THEY WANT IT.
    As Peter advises copy the Chinese & USE the foreign investment TO OUR ADVANTAGE.
    We only have a small population of about 25 million of whom 1.25 Million are Chinese…..let`s face it…get over the racist views…WE NEED THEM…..we are ALL citizens of PLANET EARTH….& like it or not WE HAVE TO GET ALONG…..Google Singapore`s reclaiming water efforts….world leaders in producing CLEAN DRINKING WATER FROM SEWAGE….no matter what you do….you need clean drinking water….foreign money could be used to build & run these plants in every city….the problem at the moment is qualified people to run them but that is being addressed….by the way….don`t think billionaires don`t have problems or are all happy…you might practice CONTENTMENT & contemplate ETERNITY….get things into perspective.

  2. TianHu says:

    Just re-reading Peters in depth story & my tuppence worth & thinking of the recent dam disaster in Lao,
    A dam is constructed to block the natural flow of water,but if a huge volume comes along before the dam is completed…..Whammo.
    Australia is way off being substantially developed & there`s already 1.25 million Chinese here,with so many more waiting for visas….so much for the White Australia policy…..the flood WILL come…..hopefully to everyone`s benefit
    Nobody OWNS the EARTH…it`s all only on loan…..we are but caretakers….so be prepared….Hey…how about offering the Israelis Central Australia…..they turn desert into pasture & think of the bloodshed it would save….I think that`s a winning double…Chinese Jews….Chinese are also turning sand into soil….we have over 1 million sq.km`s.of desert…converted..think of the food it could produce…the magic words CARETAKERS…lets be CARETAKERS…OH & China is the largest producer of Alternative Energy by a long way…..do some Googling.

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