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Irrational Exuberance 4, or, Should You Enter the China Market?

[This post is the fourth in a series designed to help you formulate and evaluate your plans to enter the China market. See this page for links to the audio and text files of prior posts in the series. NB: More recent articles are listed at the top of that page with earlier articles below them.]

In our last post, we looked at whether we could find verifiable and creditable substance in our hypothetical plan to enter the China market. We began by addressing our plan with a critical eye, asking of it some difficult questions.

What is a “critical eye” anyway?

Basically, we said, “Plan, you’re the handsomest bit of documentation we’ve seen in a long time. After all, we dressed you ourselves in the finest silk-wool, three-piece, navy pinstripe suit, spit-polished your black lace-ups, gave you a flash coiff and a stunning manicure. But, even though it may break our hearts to do so, we’re going to pause before we walk you out on the runway. We have to ask the question – are you really that good-looking? Or do we have a case of Dr. Frankenstein smiling at the “beauty” of his own creation?”

Americans may not be used to looking critically at anything. Goodness knows, the public schools hardly teach it. In corporate business, we often err on the side of silence, being too sensitive to political gamesmanship to proffer genuine and useful criticism when it is most needed. But here, silence is not golden, but less than brass: plastic.

To every claim that is made, we ask, “Oh, yeah? Says who?” We then carefully review the answer to see if it is based on sound thinking and a solid foundation of evidence.

As an example, we might purchase a 40 oz. bottle of laundry detergent at the store, upon which it reads “25% More!” Should we accept this claim unquestioningly? No, we attempt to validate the claim through questioning.

We might ask, “25% more than what?” Perhaps the bottle explains. Upon perusal, our bottle, in very small print, reads: “Than the 32 oz. Size!” Well, it should be clear to every dolt on the planet that the 40 oz size contains exactly 25% more than the 32 oz size. What then is the benefit? There is none. “25% More!” is nothing but an empty catch phrase designed to lure the uncritical to part with his hard-earned cash.

What if the copy printed bottle does not explain sufficiently? Upon further examination, there is a toll-free phone number for the manufacturer’s “customer assistance hotline.” Pulling the cellphone from our leather holster, we dial, reaching the friendly Mabel, located somewhere near Columbus, Ohio, one of the friendliest states in the country. A dialogue proceeds.

Mabel: Hello, this is the Perky Soap Bubble Company of Columbus, where your pleasure is our business. How may I help you today?

Rich: Hello, Mabel. I have in my hands a bottle of “Cram,” your laundry detergent specially formulated for soiled college students on a tight budget.

Mabel: Yes, sir. That’s one of our best sellers.

Rich: Is it? Well, I was wondering. Just above, the words “Removes Dried-in Stains You Get in the Chem Lab Better Than Any Other Brand,” it reads “25% More!” More than what?

Mabel: Oh, yes, sir. There is 25% more in that bottle.

Rich: More of what?

Mabel: Oh, let me check…of product.

Rich: (not willing to give up the fight yet): You mean of detergent?

Mabel: Yes, now, is there any other way I can help you.

Rich: Wait, wait. Compared to what?

Mabel: What sir?

Rich: 25% more detergent as compared to what?

Mabel: Oh, yes, I see. Than other bottles.

Rich: Do you mean a competing a competing brand or other bottles of your own brand?

Mabel: Let’s see. It says here… Let me ask a supervisor. (Unintelligible. Sounds like: “but he keeps asking me.”)

Bob: Sir? I’m Bob, an assistant supervisor here at the help desk. I can help you with your request.

Rich (fuming ever so slightly): I just told Mabel.

Bob: Oh, yes. Hold on. There is 25% more as compared to our 32 ounce bottle.

Rich: Of the same detergent.

Bob: That’s what it looks like, sir. Can I assist you with anything else?

Rich: No, you see, my weekend free minutes are just about used up.

Do you think I purchased a bottle? No, what looked appealing was clearly more scam than Cram. I never would have discovered this without an intensive critical examination.

So let’s apply this critical method of questioning to our hypothetical plan and see what answers we come up with. In our next post…

Click the little triangle to hear today's post.

[Editor's Note: The China Institute has asked that this event be posted, which I do with pleasure.]

INTELLECTUAL PROPERTY & PIRACY IN CHINA: THE NEXT CHAPTER

Historically, one of the impediments to U.S.-China business relations has been China’s limited intellectual property (IP) laws. While those laws have been modernized in many respects,

U.S. companies continue to complain about enforcement of their IP rights. What are the latest trends in China’s effort to battle against rampant piracy? How long will it take for China to nurture a strong awareness of IP rights protection? How should U.S. businesses safeguard and protect their IP rights in China?

Moderator:

Prof. James Feinerman, Georgetown University Law Center

Confirmed Panelists (others pending):

Cui Xiaoguang, Beijing Sanyou Intellectual Property Agency

Dr. Albert Wai-Kit Chan, DeHeng Chen Chan LLC;

Elaine T.L. Wu, U.S. Patent and Trademark Office

Sponsors: The China Institute, Georgetown University Law Center, Finnegan Henderson Farabow Garrett & Dunner LLP, DeHeng Chen and Chen, and Shangri-La Hotels and Resorts

Date: Thursday, October 27, 2005 ~ 9:00–11:30 AM

Place: Georgetown University Law Center, 12th Floor, Gewirz Student Center, 120 F Street, NW Washington DC

Cost: $25 China Institute Members / $35 Non-Members
FREE to Corporate Members and Georgetown University Law Center Students

Continental Breakfast Included ~ Reservations Required ~ No-Shows Will Be Billed

RSVP: 212-744-8181 x125

After a summer of comment spammers, we've upgraded the blogging software and, we hope, to greater protection. Comments have been re-enabled. You're welcome to comment, as long as you sign in through the Typekey authentication system. Register for Typekey here.

Quick links to Rich Kuslan's "Irrational Exuberance, or, Should You Enter the China Market?" series:

Number 1: Should You Be Doing Business In China? (Text only)

Number 2: What Do You Wish to Accomplish? (Text / Audio)

Number 3: Where's the Beef? (Text / Audio)

Number 4: A Handsome Bit of Documentation (Text / Audio)

Number 5: Says Who? (Text / Audio)

[Editor's note: Howard Jiang, partner at Baker and McKenzie in New York, has graciously provided today's post, a review of the overall legal and regulatory framework for the Chinese financial system.]

Financial Services in China – Opportunities and Challenges for International Players

by Howard H. Jiang

Introduction

Boosted by more than two decades of reform and growth, China has emerged as a major force on the world economic scene, with one of the fastest growing economies in the world and strong trade performance. China has now approximately $440 billion foreign exchange reserves and has attracted hundreds of billions of foreign direct investment. Despite the strong growth, China also faces tremendous challenges in its economic, social and political transformation in terms of unemployment caused by industrial transformation, and distribution of wealth.

Private bank savings in China now exceeds US$1 trillion. Over 160 foreign banks presently maintain branches or representative offices in China. In Beijing, Shanghai and Shenzhen, more than 3,600 companies are engaged in the private funds business. These companies control approximately US$84.6 billion of capital. Aggregate revenues for China’s insurance industry will reach approximately US$33 billion by the end of 2005. China now has more than 1,200 listed companies between its two domestic stock markets with a combined market cap of more than $600 Billion, roughly half the value of its annual gross domestic product. In 2001, initial public offerings of state-owned enterprises raised US$43 billion on Hong Kong's stock market with another US$17 billion raised in initial public offerings in the domestic markets of Shanghai and Shenzhen.

With China's recent entry into WTO and its commitment to open up its financial services market for foreign participation, the financial services sector has become a new growth area for international players. In its agreement to enter the WTO, China has promised to gradually open its financial services market. It will allow foreign investors to take various minority and eventually majority stakes in Chinese entities in the financial service sector and even establish wholly owned subsidiaries in the field of insurance, banking, investment banking, management and other fields.

Financial Services in China under the WTO Protocol

The protocol for the accession of China to the WTO was adopted by the Fourth Ministerial Conference of the World Trade Organization and came into force on December 11, 2001. Although the WTO agreements include approximately sixty agreements and annexes, three agreements are fundamental: the General Agreement on Tariffs and Trade covering goods, the General Agreement on Trade in Services, covering services, and the Agreement on Trade-Related Aspects of Intellectual Property Rights, covering intellectual property. Financials services are controlled by the services agreement (the GATS). The GATS Agreement imposes a most favored nations treatment obligation on all trade in services within China with several exceptions. The GATS Agreement requires that over time the PRC government treat non-PRC services and service suppliers firms in the same manner it treats Chinese service firms. This includes allowing access to relevant markets.

For its admission into the WTO, China has made significant and unprecedented market opening commitment as a developing economy. In addition to the drastic reduction of its tariffs on imported industrial and agricultural goods, it will liberalizes foreign participation in its internal distribution systems and key industrial sectors such as telecommunications and construction. Among the most striking market opening commitments is the commitment to open up China’s financial services market. China agreed to gradually allow more branches of foreign banks to operate in more regions and to allow foreign banks to conduct yuan (local currency) business. China agreed to allow more access to foreign insurers, to make it easier to for foreign insurers to invest in domestic insurers and set up joint venture insurance companies and to open up more geographical and services areas for foreign insurers. China also agreed allow foreign participation in its rapidly expanding investment banking and fund management industries by initially allowing significant foreign minority stakes.

In the article, we would like to analyze the opportunities and challenges as well as the means available to foreign players and investors in the financial services market in China. In particular, we would explore, in four separate sections, investment banking, fund management, the banking industry and insurance industry. In each section, we will provide an overview of the general market condition, the status of foreign participation and the means available to foreign investors in that particular industry and followed by the regulatory environment for foreign players.