China Model in Overseas Setting (Two)—International Community Stops Believing the Dishonest China

By He Qinglian on February 6, 2012
(Translated by kRiZcPEc)

The obstacles that Chinese enterprises encounter when they invest overseas result from their rent-seeking approaches being rejected by the people under regimes similar to the Communist Party and distrust from the people in democratic countries because of the lack of integrity, an innate disease of Chinese enterprises and the products they made.

That Chinese enterprises and the products they make are not trustworthy should be a statement China finds difficult to refute. According to the relevant credit information released in August 2011 when China’s Ministry of Commerce set up a credit record database, about four billion contracts are signed in China each year, the compliance rate was only 50%. Every year the direct and indirect economic losses caused by credit deficiency in Chinese enterprises amounted to 600 billion yuan; the rate of bad debts in these enterprises is up to 1-2% and shows the sign of year by year increase. In comparison, the bad debt rate of enterprises in mature market economies is usually at 0.25% to 0.5%.

Before late 2006 when the five-year “observation period” after its admission to the World Trade Organization was over, China had two separate sets of quality standards for goods sold domestically and abroad. Goods for foreign markets were subjected to more stringent quality inspection. Therefore, although goods “made in China” were of low quality, such safety problems as toxic, or harmful "additives" did not exist. But as soon as the observation period was over, the Chinese authorities immediately relaxed its regulation. Starting from 2007, Chinese-made products that had at one point enjoyed very high overseas market share became notorious because of their being toxic and harmful; once attracted numerous consumers in the United States and Europe with low prices, now they are to these consumers what need to be avoided. No matter how the Chinese authorities consoles itself, there is one truth that it can't deny: 2007 was a turning point that marked the beginning of the decline of Chinese-made products.

“Made in China” has become a byword for low quality, unsafe and harmful. The Chinese toy manufacturing industry, which enjoyed at one point as high as 80% of the global market share, had to recall in this very year over twenty million of their products around the world because of excessive lead found in their painting. In August 2007, Zhang Shuehong, vice-chairman of Foshan-based Lida Toy Co., Ltd, was forced to commit suicide due to the massive losses of thirty million dollars resulted after Mattel, Inc. announced the recall of nearly one million pieces of lead-laden toys manufactured by Lida. To this day the Chinese toy industry has yet to step out of the shadow of death.

Chinese food products make overseas consumers feel afraid. The melamine scandal, the lingering nightmare for China's dairy industry, came to light in 2007 in North America. That year in North America alone there were over 8,500 cases of cats and dogs died because of ingesting tainted feed. After that, inside China thousands of babies developed kidney stones because of consuming melamine-tainted milk powder produced by Sanlu. China's dairy industry suffered a blow all the more deadly after media brought this to light. A company with cooperative relationship with Sanlu, Fonterra was implicated in the scandal which led to serious distrust of China among New Zealanders. In 2008, the incident of China exporting poisonous dumpling to Japan resulted in the total discredit of Chinese food in Japanese society.

Called the world’s biggest pilferer of intellectual property, a country with huge demand for high-speed rail equipment, China made a hodgepodge of high-speed rail technologies from Japan, Germany, and Canada, risking their accusation of technology pilferage and “came up with” what it said to be its own “independent innovation”, a “high-speed rail technology” which raised concerns from Japanese rail manufacturers Japan Railway and Kawasaki Heavy Industries about its potential safety issues. They protested against that and handed to their Chinese partner an “at your own risks” memorandum. All this was ignored. With the technologies appropriated from various parties, China proclaimed its ambition to export it own high-speed rail technology, a dream that was shattered by the July 23 train crash.

Many Chinese companies listed on the US Stock Exchange involved in financial fraud, almost all of them went bust. Since 2004, over 350 Chinese enterprises made use of Alternative public offering (APO) in the United States, and launched “China concept stocks” on the US stock market to wantonly misappropriate funds. Backdoor listing companies in the United States ranged from agricultural, food, engineering to chemical industry. But because the financial situation of these companies are opaque, in 2005, of the seventy-odd enterprises listed in the United States, over 90 percent saw their shares degraded into trash stocks (with share price of less than one dollar), it is common that these stocks recorded no transaction for several days on end. In 2009, hundreds of US-listed Chinese companies ended up being delisted after the regulatory body investigated their financial suspicions. The several Certified Public Accountants firms responsible for auditing these companies suffered severe damage to their credibility.

The Chinese way of construction insourcing too is being questioned. Chinese construction companies have tendered numerous projects in Middle East and Africa. The hallmark of these contractors is that they won the project with a low quotation (or bribery) and then charge at a price higher than the bid, or they would reduce the construction cost by means of doing shoddy work and using sub-standard materials, methods that clearly violated the agreement. In 2010, China Overseas Construction Engineering Group(COCEG) offered a low quotation and won the contract to build the A2 motorway in Poland, a project that would help it enter the EU market. 
During the tender negotiations, COCEG offered a quotation of 1.3 billion zloty, equivalent to 52% of the Polish government's budget, or 26 million zloty per kilometer. The company's Polish counterpart believed that “no one in the world could construct a motorway at a meager price like that”, a fact that COCEG was fully aware of when it bid for the contract. However, the company was convinced that it could easily overcome the problem with its secret formula: “project kickbacks” and “building the motorway quickly, badly, with bad materials”. But in the end, COCEG was caught into trouble in Poland, a country already democratized. In early 2011, the project entered its construction state after more than five hundred Chinese workers arrived in Poland. Yet because COCEG failed to pay the Polish sub-contractor for its goods and related costs on time, the sub-contractor refused to deliver construction materials. As a result, the projected had to announce a suspension of work from May 18. At the time, COCEG undertook to settle outstanding payment by May 30, and the sub-contractor agreed to resume work twenty-four hours after it had received the money. However, the deadline came and COCEG didn't pay, and so the standoff escalated.

In the end, the Polish Government terminated the contract with the Chinese company and, according the contract, requested the Chinese side to compensate 741 million zloty (188.5 million euros).
The decade of China’s rise is the ten years that the world saw the true color of the Chinese government; it is also the ten years that China lost the trust of the international community. Trustworthiness, for any country, government, organization, or individual, is a one-time resource. Once the trust from society is gone, then no matter how nicely one says things, others would not be so easily believe in those words.