China's Transformation

Peter S. Goodman
Washington Post Foreign Service
Thursday, December 8, 2005 10:00 AM

Washington Post staff writer Peter S. Goodman was online from Shanghai to answer your questions about developments in China.

In recent months, Goodman has addressed issues including China's wave of privatization, its emergence as a magnet for foreign investment and trade negotiations with the U.S. A collection of his recent articles is online here .

A transcript follows.

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Peter S. Goodman: Greetings from Shanghai. I'm eager to take your questions. Please fire away.

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Beijing, P.R.China: Mr. Goodman: What do you think about the Chinese media industry? From the viewpoint of business, not political. Will foreign invest media companies like Forbes, Fortune, etc., prevail in China? What is your commentary on Chinese native media business?

Thank you very much.

Zhao

Peter S. Goodman: Media is a particularly interesting and risky business. Newsstands are now full of glossy magazines devoted to business, fashion and sports, and some of these are local versions of major international brands. Some are reportedly doing pretty well. But anything that has to do with media content is a very sensitive issue here, and foreign investors can trip the wires without warning. This is particularly so in broadcast, where Rupert Murdoch recently got an unpleasant dose of Chinese reality: He had done a content deal with a television station in the far western province of Gansu, which was then transmitting the programming throughout much of the country. Then the state shut it down. Magazines generally have to joint venture with local partners, who have a way of demanding full control when the profits emerge.

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Washington, DC: Hello, Peter:

How is the air pollution in Shanghai? I remember Shanghai often had bad air in the winter when I was there 5 years ago.

Thanks,

Peter S. Goodman: Nobody would move to Shanghai for the clean air. The skies are a little too easy to see for my taste, if you know what I mean, and people with respiratory problems suffer. Things are improving a fair bit as the government gradually limits the use of coal for heating and electrical generation. A pipeline now crosses the country bringing in natural gas from way out west. But there's a long way to go.

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Silver Spring, MD: Some scholars have predicted that the government in China could collapse within 15-25 years. What might be some of the signs now that China is developing too quickly for its own good?

Peter S. Goodman: Well, who knows how long the Party can go on, whether it will fall to external challenge, reform itself or live on. And who's to say whether an economic crisis would bring the government down. But there are definitely signs of unhealthy economic growth, investment bubbles and imbalances. Much of this results from the fact that the bulk of this giant economy now operates according to market priciples, while the Party still distorts markets by pumping credit to favored companies, controlling energy prices and protecting key industries. There is growing concern over excess factory capacity, with too many goods piling up, prices falling and corporate profitability down. This good be a big problem in the years to come, and not just for China: Some of that excess inventory is likely to get exported, depressing prices and profitability elsewhere, which would diminish the incentive to invest and grow.

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Annapolis, MD: Lots of press about large corporations doing business in China. What's the Chinese reaction to the uptick in the number of small/emerging US companies entering China? In the last month our Annapolis firm has helped 10 venture-capital backed high growth tech companies enter China, so it seems a China operation has become de rigeur for growth. Yesterday's official opening of Silicon Valley Bank's Shanghai subsidiary is also pretty telling. As a permanent hub for tech companies expanding into China, the bank's move tells me that entrepreneurs of all sizes are entering those markets. All of our clients have a "China Strategy" these days. Any thoughts on the Chinese reaction to this?

Peter S. Goodman: College grads are happy for more chances to work for multinationals and foreign companies in general, which tend to pay better and offer chances for special training and travel. Local governments are happy for extra tax revenue. Local officials are happy for the chance to get wined and dined -- and sometimes bribed -- by the foreigners needing land and permission to set up shop. Developers are happy that more people in coming in needing places to live and work.

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Arlington, Va.: There was an item on NPR this morning that U.S. companies are so eager to do business in China, and factories there are so eager to take the business, that many poorly planned partnerships are falling apart. Have you seen evidence of that? Thanks

Peter S. Goodman: By and large, the term "joint venture" provokes fear and loathing among seasoned foreign investors in China. Local partners simply have two many ways to profit personally without the business making any profit. They can use joint venture operations to do low-cost work for their wholly owned factories. They sometimes run illegal night shifts that make counterfeit goods that are then sold in direct competition to the joint venture's wares. They funnel the construction and maintenance biz to their unemployable cousins, then share the spoils privately. When foreign investors can, they pretty much favor wholly owned operations to avoid the minefield of jumping into a mysterious system with a partner whose motivations may be hard to discern. Joint ventures gone awry: It's a rich vein in the China biz literature.

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Rockville, Maryland: Right now, is it a good time to invest real estate in ShangHai or other China city? How is the house price over there? What about the living environment, like water, pollution. Thanks.

Peter S. Goodman: Prices are wacky at the high end, and less so in the middle. There is clearly enormous demand for new housing in China, hence the mutiplying prices. But there is also little discipline on the lending side, with the banks historically funding whoever walks in the door with land. That has analysts worried about a bubble. If it were my money to bet, I'd also be really worried about poor maintenance in China. The paper value of real estate has climbed sharply, but will you really be able to sell that apartment two years down the road, when it turns out the contractor did a rotten job, and when a whole crop of new stuff has been built in the interim? Clearly, people have made huge sums on Chinese real estate, but you better have a good stomach.

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Nanjing, China: I feel the only two Chinese cities known by foreigners are Beijing and Shanghai, but you know China is bigger than that.

Peter S. Goodman: I'm not sure I know what you mean. In the past year alone, our paper has written stories from Guangdong, Anhui, Heilongjiang, Xinjiang, Yunnan, Hunan... you get the point. I don't get the feeling there is a great grasp of the finer points of Chinese geography among the average American community, but we're certainly trying hard to give you a comprehensive view.

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washingtonpost.com: A collection of Peter's recent articles is online here .

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Ft. Meade, MD: Do you see China's booming economy as a threat to take the place of America as world super-power?

Peter S. Goodman: Not any time soon, no. Bear in mind that about two-thirds of China's exports are coming out of foreign invested factories, and a lot of the higher value components that get folded into China's wares are imported. You hear that your laptop is made in China and you might think, wow, the Chinese have moved into high tech. But it's worth remembering that the chip inside the computer maybe came from a factory in Taiwan or Malaysia and was designed in Europe or the States; the design work was done elsewhere, too. Like-wise, the glass panel maybe came from Korea. All this stuff was brought in to coastal China, where a bunch of farmers making $75 a month did the basic assembly, slotting electronics into the circuit board and putting it all together. In some sense, China's supposed economic miracle is really about multinational companies renting Chinese labor at rock-bottom prices. There is a very small percentage of research and development done here, very little innovation. China is a huge force in the world economy, to be sure. China's appetite for raw materials, China's impacts on global wages and labor standards -- these impacts alone make the country supremely relevant and worth understanding. China's quest for energy and raw materials is altering security relationships, fueling China's drive to modernize its Navy in particular. But China faces gteat challenges at home. It must find jobs for hundreds of millions of farmers. It has to fix its banks, which are wasting huge quantities of capital. And it has to find a way to keep developing without triggering environmental disaster.

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Waltham, Mass.: What examples have you observed of Internet communications -- email, websites, discussion forums, etc. -- undermining local, provincial, or central government authority in China?

Thanks, Ian

Peter S. Goodman: Check out my colleage Ed Cody's recent work dissecting peasant revolts, in which he has shown how text messaging on mobile phones has been key in organizing people, with farmers running to confront police as they arrive to break up actions aimed at protecting land against development. In Shanghai, people arguing that they are getting ripped off by developers who have pushed them off land without fair competition have been able to research and organize via Web sites and e-mail. Of course, they also leave a trail that then allows the government to find them and shut down the leaders. This is a key question here: Is technology a tool of subversion or a tool of repression wielded by the state? Obviously, it's both, though I'd argue a little more of the former.

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Wheaton, Md.: Will the recent toxic spill into the Songhua River cause increased pressure on the government to improve environmental enforcement?

Peter S. Goodman: Seems like it, yeah. The state press has been full of denunciations in recent days about the misinformation by local officials who lied about the extent of the trouble. But this is how things often go here. The government in Beijing is all for cleaning up corruption, shutting down dangerous coal mines, shutting down dirty factories, etc. The local officials have different interests. They feel pressure to keep people working and development happening so they have something to tax since they are the ones needing the revenue to pay for services. They are the ones who can exploit their regulatory authority for cash in hand, and such is the normal course of life in much of the country. So they tend to tilt for business over enviro protection. That tension is surely here for a long while, though maybe the balance has shifted an inch.

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washingtonpost.com: China Confronts Contradictions Between Marxism and Markets (December 5, 2005)

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washingtonpost.com: Just in: Police Open Fire on Rioting Farmers, Fishermen in China

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Waltham, Mass.: I've seen reports of thousands of "mass incidents" across China. Are these mostly taking place in rural or poorer industrial areas, or even in the economically booming areas of the country ... Shanghai, Beijing, Giangzhou, Shenzhen, Xiamen, etc.?

Peter S. Goodman: They seem to be happening all over, including -- and maybe especially -- in booming coastal areas, where land values are at a premium. Generally, these uprisings are over land use, with local officials turning farm acreage into golf courses, factories, science parks, villas. The villagers, many of whom have seen incomes slip during China's boom, demand compensation or an end to development or a limit to pollution. The local officials keep going and sometimes bring in police or goons for hire to break things up. If the stakes are high enough, things can get very ugly. Again, have a look at Cody's really excellent run of stories on this.

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Arlington, VA: Peter, thanks for doing these chats. What do you see from the fourth tier leadership in terms of their development of the NE provinces and the Central to Western provinces as well? Can China expect to see a growing industrial base in these provinces in the near future (5 years or so)?

Peter S. Goodman: Definitely a lot of attention on the Northeast now. This is where Chairman Mao directed much of China's early industrialization, and it's a gloomy rust belt these days, with tens of millions of people laid off from now bankrupt factories. The central government is pumping money in, and foreign investors are being courted to take over what's left. But it's a hard go. Ports are far away, making exporting a tough proposition, and skill levels are low. As for the west, there is talk that the so-called Develop the West initiative, which has targeted funds for infrastructure building, is being quietly scotched, as it becomes clear just how much of the money has been poured into white elephant projects or outright stolen.

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Detroit, Michigan: Has there been any tangible improvement in the past few years in China for the protection of intellectual property rights?

Peter S. Goodman: Let me put it to you this way: Within a three block radius of where I now sit typing, I can buy the latest Harry Potter movie on DVD for $1 in a store that everyone in town knows. I can buy the latest Seinfeld season for about $10. I can buy a fake North Face Gore-tex parka for $35, and I can buy no end of fake handbags -- Gucci, Prada, LV -- or Rolex watches or Microsoft Windows software. And I'm talking with no effort whatsoever. In fact, I have to run the gauntlet of peddlers just to walk two blocks. In the tech realm, the state last year lavished hundreds of millions of dollars of credit on Huawei, a Chinese telecom gear maker that paid a settlment to Cisco in a suit in which it was accused of stealing source code. As a friend of mine likes to say, stealing intellectual property is effectively state policy. China doesn't have that much of it yet and it wants it and it doesn't feel like paying.

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Leominster, MA: Thank you for taking my question. In your judgment, at what point in China's current development cycle will they enact laws consistent with environmentally friendly growth?

Peter S. Goodman: There are laws, plenty of them. But enforcement is generally a local issue, and development interests trump environmental concerns most of the time.

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Rochester, MN: Mr. Goodman, You better keep a balance. You comments are concentrated on the minus side but little the other side of China, such as 'no innovation, just an assembly line of foreign components, etc'. Is this really the true face of today's China, or even the China in your eye, or just speaks selectively? I hope your comments serve the questioners' time and interest, not just scare them not going to China to do business or simply feed some's political preference.

Peter S. Goodman: The lack of research and development is an issue that China's own government is concerned about, hence some very directed investment in recent years. There are clearly lots of extremely bright and motivated people in China today, and the country should not be taken for granted as a potential competitor in almost every area. But I was speaking about whether China will truly become an economic superpower in the near term, and a lot would have to happen. I think people are sometimes intoxicated by the scale of China and the great potential and they lose sight of the immediate reality.

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Washington, D.C.: Polls show that most Americans believe this country to be heading in the wrong direction? If such a poll were conducted in China about China's direction, what do you think the response would be?

Peter S. Goodman: Educated, urban Chinese seem quite optimistic, and for good reason: They have seen incomes and living standards improve dramatically, fantastically exceeding what their parents might have hoped for. Rural, less-eduacted people, I'd guess a mixed bag. Farmers far from the coast have seen costs rising for everything and few of the benefits, and they are apt to complain. Those losing land to development feel very insecure about the future.

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Baltimore, MD: Personaly, do you love China? If you do, what do love the most? If not, why?

Peter S. Goodman: China is an amazing place, constantly full of surprises. If I had to name one thing: The food.

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Arlington, VA: Does China have a national energy policy that you could summarize ? For example, in electricity are they pursuing nuclear aggressively and for transport fuels are they striving for self-sufficiency or are they mostly securing import sources. Do they compete or conflict with the US in this area? Thanks.

Peter S. Goodman: They're doing a lot of nuclear as they look for ways to boost production and improve air quality at the same time. The central government is keen to limit use of coal, hence the drive to develop natural gas and pipe it to the coast. There is also a great push to lock up foreign oil fields, which has taken China to Sudan, Iran, Indonesia and Kazakhstan. There's now a big push for greater conservation. Long way to travel there.

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Washington, DC: You wrote, "Local partners simply have two many ways to profit personally without the business making any profit."

Is there a sense in China that corruption and a lack of transparency in business practices (or simple rule of law) may slow down investment or growth? Do these concerns significantly deter foreign investors, or do they hold their noses and invest anyway?

Peter S. Goodman: China Fever is alive and well, the dream of getting a tiny fraction of 1.3 billion to buy your product. It's a tough place to do business, but the rewards are potentially limitless, so the foreign money keeps coming. That said, it is slowing a little bit this year, in what analysts take as a sign that overcapacity is a serious problem that will hurt profitability.

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Alexandria, VA: I recently returned from China, having visited Beijing, Shanghai, and Hangzhou. My feeling about their transformation is how much is focused on commercialism/consumerism versus transformation for political freedoms that support critical thinking, a world view, and the ability for local communities to organize. Are local groups able to organize to save their homes from being razed? And in Beijing there were just caverns of apartment buildings -- it was like nothing I have ever seen.

Maybe I am way off-base on my perspective having only been there for 9 days. But it is always interesting to compare and contrast our societies. And I would certainly visit again to experience more of an intriguing nation.

Peter S. Goodman: By and large, those with a stake in China's economic progress -- the educated and skilled -- are too busy getting a piece of the spoils to concern themselves with abstractions such as democracy. It's when someone loses something and discovers they have no redress -- their land, their job, their pension -- that they develop a not abstract interest in rule of law. For now, the ones benefitting are in the driver's seat.

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Hi there: Hi I wanted to know your thoughts personally on the huge level of corruption, and "greasing of palms" that business people seem to have to go through in China.

I am not saying that doesn't happen elsewhere, but it seems the culture of corruption and "connections" is so prevalent in China and parts of Asia as well. Is this ever going to change or be lessened in the new China? What do you think?

Peter S. Goodman: There seems little doubt that the central government is genuinely concerned about corruption. It squanders capital and damages the credibility of the state. The problem is at the local level. As we journalists run across more and more examples -- many cases published in the Chinese media -- the question we tend to ask: Are there more cases as in China is getting more corrupt, or are more people getting caught, hence this is progress? Tough to say.

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Woodbridge, VA: Mr. Goodman, World AIDS day was last week and the only thing I've read about China was the shameful HIV outbreak from poor farmers donating blood using infected needles, AND the trend of paying big bucks for medications. What's the status of HIV prevention in China and what is the local feeling about this disease?

Peter S. Goodman: There's been progress here, though -- broken record tonight -- long way to go. Three years ago, AIDS was taboo. Local doctors wouldn't diagnose it for fear of tainting the area. Central government wouldn't talk about it for fear of acknowleging the reality of a massive sex industry throughout the country, often sanctioned and even operated by local governments. Now, both the President and Premier have visted AIDS patients in hospitals and billboards can be found around the country discussing prevention. But resources remain scant and discussion of sex still very, very sensitive. It's potentially an enormous problem in China, one that could undo so much economic progress.

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Bethesda, MD: Greetings. I read or heard something recently about Chinese businesses "outsourcing" to other countries. Have you observed this? If so, which countries are receiving this "outsourcing" business?

washingtonpost.com: China Ventures Southward (December 6, 2005)

Peter S. Goodman: I just did a piece in Vietnam looking at this very phenomenon. Just as American companies have looked to Latin America for lower wages and fewer workplace standards, Chinese firms are headed south of their border, to Southeast Asia, where wages are roughly one-third cheaper.

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Peter S. Goodman: Well, it's after midnight here in Shanghai, so I'll call it a night. Many thanks for your fine questions. Peter

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