| Random Character |
|---|
|
| Crouching corruption, hidden fraud |
|
|
|
|
Ensconced in a high-rise office suite as a manager at a Shanghai start-up firm, I frequently looked out of my window to watch the frantic activity outside. As construction cranes traced new outlines in the sky and ships carried goods down the river and out to sea, I always had the feeling of sitting in a luxury box at a sports arena, watching the 21st century's economic main event unfold outside. Unfortunately, the game I came to watch was one of fraud, deception and general incompetence. Though I left Shanghai feeling humbled and naïve, I realized that I was in good company as some of the world's most experienced businesspeople have also made the mistake of ignoring basic business principles when chasing China's seemingly limitless potential for profit. When I got to Shanghai, I was caught up like everyone else in the staggering statistics and undeniable growth potential. While trying to get financing for the company, I wondered about the validity of our firm's assets but ignored these morsels of doubt because of the ever present promise of a big payoff at the end. Not until the evidence was overwhelming did I finally extricate myself. The more I reflect on what happened to me, the more I see elements of my experience playing out on larger scales. Riding on a wave of China frenzy, the China Life Insurance IPO was the largest in the United States in 2003, gaining 80 percent in its first few days of trading, before allegations of large-scale fraud and corruption surfaced and brought the stock back down to earth. Preceding China Construction Bank's successful $10 billion IPO in 2004, the Chinese government executed four bank employees for defrauding the company of $15 million. Now it is the Bank of China's turn to launch an IPO, and two officials at the bank were indicted in the United States this month for embezzling $485 million. Despite the Chinese financial sector's continued struggles with establishing corporate controls, history shows that the Bank of China will have no trouble raising their $8 billion target. Fraud and corporate governance are even greater problems at the mid and small market levels. As Anthony Saich, a China expert at Harvard's Kennedy School of Government, says, many Chinese define capitalism as every man for himself. Having grown up jaded by political upheaval and hungry from hardships suffered, it is natural that many clever people find that with so much opportunity and money floating around all of a sudden, they should try to grab their share through any means possible. Despite the frequent lip service paid to the need for caution when investing in China, it is clear that many are still not careful enough. I learned that foreign investors should not only be aware of the risks of doing business in China, but also of the psychological pitfalls that come with speculation in such a Wild-West type of market. The first pitfall was when my American colleagues in Shanghai would often complain about problems at their companies and attribute them to "the Chinese way of doing business." Though often correct, these sentiments are extremely dangerous as they provide a convenient blindfold against real management problems and effectively exonerate a company by shifting blame to a higher, intangible force. The wrong ways to do business are often universal, so blame should be assigned where it belongs. Another problem is that performing a risk/return analysis in the Chinese business environment often shows that the risks are impossible to ascertain while the possibilities for return seem boundless. Many investors just decide to not think about it and others get completely caught up in the returns. People doing business in China should focus a disproportionate share of their efforts on exploring the risks. When risks are tough to pin down, they should be avoided and not just mitigated. While the optimists are right that China presents great opportunities despite its problems, anyone can get burned when optimism gets out of hand. In order to keep that optimism in check, I should have focused less on the excitement going on outside my window and more on what was going on inside my head. *James Ku is a graduate student at Harvard University's Kennedy School of Government. www.iht.com March 2nd, 2006 |
| < Prev | Next > |
|---|