WHITHER CHINA? Part 2

By John Tulac

In this installment, I will begin to analyze the many significant actions being taken by the Chinese government and how these impact U.S. businesses.

China directly and indirectly impacts us. What happens in China affects all of us, wherever we may be and whatever we may be doing. Even Mom-and-Pop main street businesses are connected to China by the products they sell. Thus, it is vitally important for U.S. businesspeople and policymakers to know what is going on in China and to keep up with rapidly developing changes.

China is a $10 trillion economy. China is also carrying approximately $30 trillion in debt. In contrast, the United States is close to $17 trillion and is carrying just over $19 trillion. Many are alarmed at the size of the U.S. debt relative to the economy. The Chinese debt to GNP is three to one. This is unsustainable, but China has yet to develop a coherent policy to cope with its debt.

China will attempt to control the devaluation of the yuan. In the short run, the deliberate devaluation of two percent in August 2015 stimulated Chinese exports, making goods from China cheaper for U.S. buyers at both wholesale and retail levels. Of course, U.S. goods destined for China are now more expensive for Chinese buyers. This trend will likely continue in 2016. There is some risk that the yuan will devalue rapidly as China’s economy worsens. China lacks sophisticated methods for dealing with its currency and is likely to be ineffective, while at the same time incurring wrath of pundits in other countries (including the United States) for currency manipulation. Overall, the effect will be minor. In any event, U.S. buyers should make purchasing decisions for good business reasons, rather than speculate or attempt to time the purchases based on fluctuations in the exchange rate.

U.S. and Chinese companies are both plagued by the opacity, manipulation, and outright falsity of Chinese economic data. Of course, our own official economic indicators are themselves flawed, but in the United States, most underlying data is readily available, either for free or for fees that are often modest. We can also turn to alternative indicators that cure the flaws of our official indicators, such as can be found at shadowstats.com. Access to accurate Chinese data is difficult and often expensive, when it isn’t impossible. Thus, making informed decisions involving China is hampered by the inaccessibility of reliable data. No U.S. company should consider relying on a Chinese manufacturer or logistics without thorough investigation, which must include personal site visits. Engaging a local expert to assist is also essential prior to making significant investment decisions.

Lack of transparency also permeates Chinese politics and business culture. Unless and until a U.S. businessperson develops a good relationship and establishes trust with its Chinese counterpart, it should not expect full and fair disclosure of things we take for granted in the United States. At a minimum, this means face-to-face meetings, preferably in China, and visits to business facilities prior to contract. This process requires patience. While Chinese companies that export regularly have gotten more comfortable with contracts used in international trade, don’t expect them to be comfortable with our long, complicated contracts. They view these contracts with suspicion. They believe if the relationship is good, there is no need for long legal documents. Of course, this often makes U.S. businesspeople uncomfortable.

Over the years, beginning with the Foreign Investment Law of 1979, China has enacted laws that have made it easier for a foreign company to do business in China or cross-border with Chinese companies. China is a signatory to the United Nations Convention for the International Sale of Goods. Its arbitration tribunals for resolution of international business disputes is mostly free of outside influences. Believe it or not, there is a well-regarded body of civil procedure and evidence for use in Chinese courts. Unfortunately, China does not embrace a rule of law, where the law is consistently and fairly applied. Instead, China uses a rule by law, which means the judiciary is not truly independent and will follow the wishes of the government in terms of deciding outcomes. The same holds true for regulatory law. So long as outcomes are subject to arbitrary and capricious determinations by the government, all economic activity is subject to political interference.

In the wake of the economic crisis in China, true political reform is on indefinite hold. Given the steady accumulation of personal power by Premier Xi, political reform appears dead. In Xi’s wake, China is experiencing a crackdown on dissent that is far reaching and is hitting human rights advocates and free speech advocates particularly hard. China’s oppression has also escalated against minority groups, particularly Uighurs, and others who follow Islam, and Christians. Hong Kong Chinese citizens have been seized and brought to China where they are coerced to confess to (political) crimes against the state. More than a handful of foreign businesspeople visiting China have been detained on flimsy charges, although they are usually quickly released. All and all, expect political oppression to continue and likely escalate in 2016. The prospects for protests and other forms of unrest that could disrupt the supply chain will grow.

In the next installment, I will continue to analyze the significant actions being taken by the Chinese government and how these impact U.S. businesses.

John W. Tulac is an international business attorney practicing in Claremont, adjunct professor of law at University of La Verne College of Law, and Lecturer Emeritus (retired) at Cal Poly Pomona. He is peer recognized as preeminent in international business law and holds the highest ratings for competence and ethics from the Martindale Hubbell National Law Directory.