Read All About It

Allow me to engage in some (more) self-promotion: The International Trade and Business Law Review will publish my study of letters-of-credit and the UCP 600 in their next volume (December 2010). Moreover, they will publish my master's thesis regarding the use of electronically stored information (ESI) in international commercial arbitration in their 2011 issue.

Needless to say, I am thrilled and honored, and thank my colleagues and professors for their support. I would especially like to thank Professor Juscelino Colares of the Syracuse University College of Law, who advised me on the UCP 600 paper, and Mr. Lars Perhard of Wersén & Partners, whose Stockholm University lecture inspired my work on ESI. Thanks also to Ms. Gentiana Dedaj of Stockholm University for serving as my thesis opponent.

What does any of that have to do with China? Well, you don't ever want to import something from China without using a letter of credit, and your sales agreement had better include an arbitration clause.

Follow the Money, Part II

In the wake of China's (late 2001) accession to the World Trade Organization, some U.S. leaders feared a major relocation of R&D muscle from the United States to China, as U.S. and other multinational firms were expected to look for low-cost engineering talent abroad. Those fears were overblown, as most foreign firms lacked any confidence whatsoever in China's ability to protect intellectual property, be it foreign or domestic. Early technology transfers were generally limited to localization efforts, i.e., those steps necessary to make existing technology functional for Chinese users. Only where absolutely required by a joint-venture agreement, or the like, were foreign firms willing to share proprietary knowledge or establish major R&D centers outside of their home countries.

That decade-old struggle may soon become an historical footnote as China threatens to blow away the rest of the world in corporate R&D spending. While China may stand on the shoulders of giants with respect to its technological foundations, it is aggressively seeking to become a world leader in everything from high-speed rail to space exploration.

Apple is still the most innovative company in the world, but these trends should throw gas on the fire that is the U.S. debate over math and science education. Where will the next billion-dollar "garage" business be founded?

Heavy is the Head that Wears an $80,000 Diamond Encrusted, Platinum Tiara

The Hurun Research Institute has released its twelfth annual listing of China's billionaires, i.e., those with fortunes in excess of one billion Chinese yuan (roughly US$150 million). There are 189 that the institute "knows of" who qualify as U.S.-dollar billionaires, and the report estimates there are likely 200 to 300 more, which would make China home to more dollar-denominated billionaires than any other country in the world.

Other interesting tidbits include the appointment of 173 on the list to "significant government advisory posts," which should come as no surprise given the Chinese Communist Party's continued willingness to bring "capitalists" into its ranks.

With great wealth comes great responsibility--at least one might like to think so. Among such curses of affluence as obesity and divorce, China must now debate the role of its wealthiest citizens with respect to socio-economic stability. Welcome to "our" world.

Follow the Money

Business Week has a great piece on China's hidden inflation. I would not go so far as to call Beijing and Shanghai Potemkin villages, but their growing opulence masks complex fiscal policy and uneven economic development.

The important thing to remember about China's two crown jewels is that they are truly international cities--and wholly otherworldly in comparison to the rest of the country. Beijing has a political pulse to rival that of Washington, DC. The seat of the PRC's political power is flanked by the international diplomatic community on one side and the government affairs reps of the Fortune Global 500 on the other. The fact that few embassies spare any expense on perks and amenities, and the absence of anything like a Honest Leadership and Open Government Act, means expense accounts drive a large portion of the city's economy. The demand for all manner of luxury goods and comforts of home is booming, and for those with the means, Beijing has not been a "hardship" post for over a decade (I've been to Brussels twice, and loved it, but the best Belgian meal I've ever had was served in Beijing--and depending on the route, I could pass a Ferrari, Porsche, or Rolls Royce dealership on my way home from work).

As for Shanghai, what it lacks in political muscle it makes up for in money and glitz. But more than that, the sheer vastness of the city cannot be overstated. What I enjoyed most about living in Beijing was that a 60-minute drive was enough to get out of the city for some (relatively) fresh air (it can take a bit longer today). By contrast, Shanghai is virtually inescapable; one must surrender to it or drown in the concrete.

Give Me 小康 Or Give Me Death!

Of China's population of roughly 1.3 billion, at least 700 million live in the country's rural areas and as such have not participated in the PRC's two decades of growth in any meaningful way (which is not to say that urbanites have necessarily held a winning lottery ticket). 小康 is a critical issue because the rates of China's growth and the distribution of its wealth have been markedly uneven. China's peasant farmers, for example, are squeezed ecologically and politically. Those lucky enough not to be pushed off "their" land by urbanization or desertification are often victimized by local bureaucrats. Chinese construction workers and miners have similar tales of woe.

While Mao Zedong's effusive praise of China's peasantry was largely lip service, he knew that the Chinese Revolution would not have succeeded without their support. The country's socio-political calculus has changed little since 1949 and the current leadership recognizes that rural-centered social upheaval could undo all of the Party's gains since 1989. "Inclusive growth" is the new mantra. Although rural development has been a stated goal for more than a decade, it is now tied to the country's overall economic objectives, as the developmental tactics of the last decade have been deemed "unsustainable".

Playing the Blame Game

When the Xinhua News Agency can see through your campaign rhetoric, it is probably time to develop some new material. The Chinese media are never shy about highlighting perceived attacks or slights by U.S. leaders, but the fact that such posturing and political grandstanding can now be discussed in the context of electoral politics is refreshing.

No News Is Good News. Unless It Isn't.

Apart from an obvious difference in headlines, the New York Times and China Daily have similar takes on the recent meeting between the U.S. Secretary of Defense and his Chinese counterpart. That may simply be because the meeting took place behind closed doors. In the absence of new developments, stories about U.S.-China security issues always break down as follows: 1) Taiwan's status, 2) China's defense spending, and 3) the "chessboard" that is the Asia-Pacific region.

China's record of human rights abuses is an open sore, but painting the country as an "evil empire" doesn't work when transnational terrorism is the issue of the day, nor when the PRC borders a country best described as a criminal syndicate. As a result, the United States cannot easily rely on the Cold War playbook of taking the purported high road against an immoral enemy. For its part, China has couched its ambitions as a "peaceful rise," (和平崛起) and more recently as "peaceful development" (和平发展). After all, who could deny one's fundamental right to better oneself? That would be downright un-American.

Of course, the U.S. Defense Department would not be doing its job if it didn't keep a jaundiced eye on China's military, whose spending has more than tripled in the last ten years. Such a statistic is helpful when courting Congress during appropriations season but does not tell the whole story. For instance, China's military budget is still roughly one-sixth that of the United States. The question becomes one of strategy: can you envision a future in which the United States and China peacefully coexist in a world of dwindling natural resources, or would you rather plan for the possibility of war over food and energy security? Both countries, but particularly China, must consider the consequences of becoming net-importers of food. The United States has never been shy about using government subsidies in the name of "farm income stabilization" to ensure that U.S. agriculture is not priced out of existence. China, in addition to the pressures of international trade, is losing arable land from urbanization and desertification, and as it has with energy investments in Africa, is looking beyond its borders to address its basic needs.

As an aside, one of my favorite stories on the subject of China's military (the kind that makes me long for the Beijing cocktail parties I used to frequent) is how China got serious about its military technology after the first Gulf War, when the country's old guard--many of whom had been with Mao Zedong on the Long March--was shocked by the array of U.S. smart weapons it saw on CNN. The estimates on China's defense spending do nothing to contradict that rumor.

Steal a Better Mousetrap

Allow me to be both apologist and castigator. The New York Times has an interesting piece on the fraud that is "rampant" in China's academic and scientific communities. This phenomenon is a corollary of the country's obstinance over intellectual property rights. China is the world's leading producer of counterfeit and unlicensed goods, and has spawned a global supply chain for knockoffs. Fake perfume, for example, might be made in China, bottled in Eastern Europe, and packaged in Italy before being sold on a street corner in Milan.

While the good faith of Chinese manufacturers should not be overestimated, there are nonetheless some vestiges of an entrepreneurial naivete that believes it is simply "good" business to copy the bestselling mousetrap (or golf club, or sneaker, or erectile dysfunction medication...) than to build a better one. But by "vestiges" I mean only the thinnest veneer, and by "naivete" I mean the sort of ignorance of basic IP laws that, in the West, could only be excused in a child.

It has been just 20 years since the PRC initiated meaningful economic reforms and large sections of the country's interior remain underdeveloped, but the consumer tastes of China's upper-middle-class have grown remarkably sophisticated and Chinese industry has had to accept certain legal realities in the wake of the country's accession to the World Trade Organization. In short, any "veneer" that still exists is sandblasted on a daily basis--and not for the sake of the foreign business community, but for China's own long-term interests in becoming an industrial pioneer, not merely the world's factory. While technology transfer--be it in the form of joint-venture agreements or IP violations--helped China (by some measures) catch up to the industrialized world, its underdeveloped rule of law leaves domestic entities equally vulnerable to piracy. Too often naivete is replaced by willful blindness.

As for academic fraud specifically, I will say that the competition for admission to top-tier universities is brutally intense. Cheating on entrance exams, TOEFL tests, and other standardized exams is widespread, largely because most Chinese students (and their parents) see such exams as their one and only chance for a better life. At that still-impressionable age, status replaces merit as the key driver of success. Once in school, large numbers of students are willing to coast their way to graduation, believing their career prospects are largely predetermined (irrespective of any attempts at emigration they may make on the side).

Academic fraud in China might even be characterized as a way to game a hopelessly corrupt system. China's youth stand at a remarkable crossroads in history. They are the first generation never to know famine and they benefit from a technological age that their parents, and certainly their grandparents, can view only as miraculous. At the same time, however, they must question their role in a country wrenched by social upheaval and uneven economic development. China's communist leadership has been adept at placating the middle class since the Tiananmen massacre, but the Party is in a continuing state of flux, as public notions of patriotism collide with genuine concerns over the country's leadership. Only occasionally was I able to explore such issues with my students when I taught English at a Chinese university. Students were always on their guard in a classroom or group setting, and generally willing to echo the Party line, but even in private conversations I found a reluctance to discuss openly the motherland's dirty laundry, especially with an American.

I will stop short of a Horatio Alger-inspired rant for China's youth to pull itself up by its collective bootstraps (for their sake and ours--and for that matter, you do not want to hear my rants regarding the state of higher education in the U.S.), but ignoring the problem or lamenting that some Chinese "just don't know any better" smacks of paternalism. In any case, I will take the train whenever possible the next time I'm in China.

Work-Life Balance. Sort Of.

One of the best perks of working as a foreign national in China is that you can usually double-dip all the major holidays. The U.S. Embassy, for example, observes both Chinese and U.S. holidays. When I was at the American Chamber of Commerce in Beijing (an NGO), we stuck to the Chinese calendar but major U.S. holidays provided an excuse for a half-day, or at least an office party. Getting one week each for the Lunar New Year, May Day, Mid-Autumn Festival, and National Day was sufficient consolation for having an unorthodox Thanksgiving and Christmas.

There is a catch, however, for Chinese employees. At least a portion of one's vacation time needs to be paid back, typically over the subsequent weekend. This was the case when I taught English at Liaoning University in Shenyang, a large but obscure city in northeastern China. My students loved that I ignored the make-up requirements. Call it civil disobedience, but my thinking was that a holiday was just that and any attempts to offset the loss of productivity were themselves counterproductive. I had the same attitude while with the Chamber, but our deadline-driven projects meant that I was in the office for at least a part of most weekends, holiday or not.

Things get really tricky when the lunar calendar (which sets most of the traditional Chinese holidays) and the Gregorian calendar (which marks the National Day of October 1, among others) conflict to create an on-again/off-again work schedule that can confuse even the staunchest bureaucrat.

All the Spin That's Fit to Print

If you are not in the habit of reading Chinese op-eds, you really are missing out on some fantastic spin. China's propaganda apparatus is nothing new, but its external propaganda (外宣) has grown more sophisticated in the last decade. Whereas China Daily was once content to translate editorials of the major Chinese-language publications--i.e., material designed for domestic consumption--current works reflect a more nuanced style for the intended benefit of overseas Chinese and other foreign nationals. The results are frequently stilted but mark China's increasingly proactive approach to public communications. For example, instead of engaging in secrecy or playing an entirely reactive PR game with respect to its investments in Africa, China's leaders have couched them as much needed financial and technical assistance, while op-eds use the opportunity to knock the warmongering style of U.S. foreign policy.

97% Is Not Necessarily a Scary Figure

The AP reports that the world's high-tech manufacturing hubs are on "high alert" in the wake of China's temporary halt of exotic metal shipments to Japan. According to the AP, China accounts for 97 percent of the global supply of the metals known as rare earths, which are vital to the production of everything from televisions to wind turbines.

Although the next great cold war will most likely be fought over energy resources and the like (with Africa as the eventual flash point) the "good" news is that two-thirds of the world's reserves of rare earths are outside of the Middle Kingdom. Unfortunately, those two thirds are scattered worldwide, and China has pushed its advantages of scale by relying on a familiar playbook: cutting prices until the competition disappears.

The rest of the world's rare earths aren't going anywhere, not until they are worth more than their cost of extraction. Doomsday scenarios of China cutting off the world's supply are enough to make a stock like Rare Element Resources (AMEX: REE) jump, but only a sustained increase in market prices can bring smaller producers online (and push industrial R&D to discover synthetic alternatives). China is not above playing the brinkmanship game, but in the end it knows what is good for its bottom line. Short of a war across the Taiwan Strait, nothing will prompt China to upset its virtual monopoly in the rare earths business.