A Modern China Trader : In the Steps of Marco Polo, Hong Kong Exporter Alex Blum Swaps California Chardonnay for Chinese Silk

Ever since Marco Polo astounded Europeans with tales of exotic Cathay, Western merchants have viewed the world’s oldest civilization as a nation of potential consumers.

For Renaissance traders, who peddled their goods amid the clash of feuding duchies, China’s codified laws and paper money made it ideal for commerce. Industrialists of Dickensian England were equally enthusiastic. If an inch could be added to the length of every Chinese tunic, the textile mills of Manchester would be busy in perpetuity, they prophesied.

Unfortunately, the reality of the West’s commerce with China seldom matched its potential. When British envoy Lord Macartney traveled to Peking in 1793 seeking expanded trade and a resident ambassador to oversee it, the Manchu Emperor Qian Long, whose domain enjoyed revenues four times those of George III’s England, dismissed him as the minion of a vassal state. “The Celestial Empire,” explained the Son of Heaven, “produces all quantities in abundance and has no need to import the products of outside barbarians.”

Though still circumspect in its dealings with foreigners, China no longer is indifferent to the benefits of trade and Western technology. After 3,600 years of dynastic isolation, warlord anarchy, imperialistic exploitation and Maoist revolution, the country finally is ready to do business.

China’s history is punctuated by radical change. But few shifts have been as abrupt, or as welcome, as the “Four Modernizations” policy that since 1977 has opened the nation to Western traders and financiers. Under the leadership of Deng Xiaoping, nearly 3,000 contracts worth more than $9 billion have been signed. Foreign investment amounting to $4 billion has already produced more than 1,700 joint-equity and cooperative ventures. Most of the new Sino-American enterprises manufacture goods for the U.S. market, but with China’s economy growing at an annual rate of 7%, many are redirecting part of their production to meet domestic consumer demand. Says Premier Zhao Ziyang: “China has opened its door, and will never close it again.”

American business plays a prominent role in China’s long march toward industrialization. Bilateral trade worth $6.4 billion makes Washington Peking’s third largest trading partner and biggest capital investor.

Indeed, U.S. companies, banned from mainland China for more than a quarter century, now seem omnipresent. Sheraton International manages the newly opened Great Wall Hotel in Peking. McDonnell Douglas is putting the finishing touches on a plant that next year will start assembling commercial airliners from parts produced in California. Last month, Atlantic Richfield Co. announced its plan to construct a $400-million pipeline that will link a recently discovered natural-gas field off Hainan Island with the energy-starved industrial city of Canton.

“For the first time in history, a socialist country is trying to develop a free-market economy,” says Burton Levin, U.S. consul general in Hong Kong. “Right now China’s an exciting place to be.”

America’s continued presence in China depends to a large extent on entrepreneurs like Alex Blum. A UCLA economics graduate, Blum, 62, is not yet a taipan (the Cantonese name for the head of a powerful trading company). But within the tightly knit community of Hong Kong-based China traders, he definitely enjoys the status of a mandarin. In a profession where an appreciation of Ming porcelain can be as important as arranging a letter of credit in closing a deal, Blum has built an $85-million export business based on the trade of silk, citrus, cotton garments and California wine.

When President Richard Nixon went to Peking in 1972, Blum already had been shuttling across the Pacific for more than a decade. Even before China and the United States normalized diplomatic relations, Blum was licensed to operate a silk factory in Shanghai. By the time the first U.S. ambassador arrived in 1979, Blum and his business partner, the People’s Republic of China, were producing $4 million worth of silk garments a year. Today, Blum’s nine factories in Shanghai, Canton, Qingdao and Wuxi employ 700 Chinese who produce $30 million in silk apparel for an employer most know only as “the Silk King.”

Blum’s relationship with China has made silk more affordable for U.S. consumers. The silk jerseys that appear in the L. L. Bean catalogue are manufactured in Shanghai or Wuxi. Silk underwear on sale at Oshman’s comes from Canton’s mellifluous Wind and Water Spinning Mill. Shipped through Los Angeles where A. A. Blum International maintains its main U.S. office, Blum’s fashions are sold through 850 retail outlets.

But his greatest contribution to China trade has been in the field of compensation financing, by which Chinese-manufactured goods are paid for in part with U.S. equipment and technology. “China has unlimited raw materials but lacks technology and marketing skills,” Blum says. “The fabric waterproofing from DuPont, the synthetic yarn and special sewing machines that we provide allow China to produce a better product and enables us to cover about one-fifth of our production costs.”

The scheme benefits both sides. The modern machinery not only hastens China’s development but also allows it to efficiently deliver pre-sold orders to a guaranteed market. For the United States, paying with equipment instead of dollars partially offsets what otherwise would be a gaping trade imbalance. In practical terms, compensation trade, when combined with revenues from oil and construction equipment sales, allows the United States to import more than $1 billion in Chinese textiles, yet still enjoy an overall $400-million trade surplus.

Ten years ago there was no foreign investment in China. What trade existed was conducted at biannual trade fairs in Canton, where Chinese export corporations would display their products on a take-it-or-leave-it basis. There were no special orders or volume discounts, and refund was not in the Chinese vocabulary. Though Western merchants officially were designated “foreign friends,” caveat emptor was not bad advice.

“I once bought $250,000 worth of white goose down for a company making ski parkas for J. C. Penney,” Blum remembers. “Unfortunately, when the jackets arrived at the stores in California, they contained mostly chopped-up chicken feathers. There are precautions to be taken here. Chinese often call rayon ‘synthetic silk,’ and they sometimes forget the adjective when stitching on the label.”

Even after Nixon’s 1972 trip to China and the resulting Shanghai Communique, in which both sides agreed the “essential differences” in their “social systems and foreign policies” should not prevent increased commercial and diplomatic contact, politics limited trade. “During the Cultural Revolution, when most senior factory managers were party officials, U.S. businessmen constantly were being lectured about China’s world view,” Blum says. “After the opening toast at a banquet, the question always was asked: ‘Why won’t you give us back Taiwan?’ This went on for years until I finally told one official with the China Textile Corp. to give me a pen and paper. At that point I ceded Taiwan back to China and had no more problems with him.”

Trading with China more often requires logistical skill. Until 1978, the silk trade between Shanghai and Hong Kong was controlled by a powerful cartel of Maoist merchants. Blum broke the monopoly by devising a $1-million-a-year triangular trade by which silk went from Shanghai to Long Beach, was transshipped back to Hong Kong without going through U.S. customs, and then made into finished garments for re-export to the United States.

It pays to be flexible in China. Until Mao’s death in 1976, Chinese heeded his Red Book of maxims, which warned: “If the U.S. monopoly capitalist groups persist in pushing their policies of aggression and war, the day is bound to come when they will be hanged by the people of the whole world. The same fate awaits the accomplices of the United States.” Those same Chinese were recently informed by the Communist Party’s People’s Daily that “getting rich and buying consumer goods is not decadent--especially if it makes life more pleasant.”

Some in the U.S. business community worry that China may be changing too rapidly. As evidence, they point to the intellectuals who surfaced in 1956 when Mao Tse-tung proclaimed, “Let a hundred flowers bloom, let the hundred schools of thought contend” only to be denounced as “poisonous weeds” a year later. “China needs to slow the pace of change if only to bring more people into the system,” says Gage McAfee, president of the American Chamber of Commerce in Hong Kong. “There must be a lot of army, Communist Party and Cultural Revolution thugs out there who are just waiting for the opportunity to reverse things.”

But traders like Blum, who spend more than a fifth of the year in mainland China, believe that the benefits of capitalism will be difficult to reverse. “I don’t think China will ever turn back,” says Ira Kaye, a 60-year-old merchant from San Pedro, whose Hong Kong-based company, Lark International, supplies China’s tourist industry with beef and dairy products produced outside Canton. “This is an industrial revolution where everyone is after their piece of the pie.”

What is undisputed is the extent of China’s social transformation. Six years ago, commuters passing through the Wuxi train station in the province of Jiangsu were greeted by a huge banner exhorting: “Endlessly struggle for revolutionary change.” In its place today is a sign that reads “Getting rich is glorious,” a message all Chinese seem willing to accept. After Communist Party Secretary General Hu Yaobang recently announced that “reform often begins with life style,” a group of workers in the special economic zone of Xiamen in Southern China hoisted a banner with their less erudite but equally expressive slogan: “Work your butts off in the office; make enough merry in the streets.”

The signs of bourgeois decadence are everywhere. At the Beautify Canton Exposition earlier this year, women in the Ornaments Pavilion lined up two deep to have their ears pierced. In the sacred valley of the Ming tombs outside Peking, work already has begun on a golf course, and bids are being considered for an amusement park. Even the People’s Liberation Army seems to be falling in line. When one disgruntled platoon in Xinjiang’s isolated capital of Urumqi complained that they didn’t know how to dance, eight instructors were hired to teach them how to boogie.

“Eating, drinking, playing and merrymaking are neither extravagant nor degenerate,” explains Wang Zhihua, a columnist for the China Youth Daily. They are “the very picture of the blissful life of the masses.”

The most dramatic changes are in Shanghai, where the Communist Party was born and radicals were strongest during the Cultural Revolution. There the big character posters along Nanjing Road have given way to billboards advertising Japanese televisions. At the venerable Peace Hotel, tourists belly up to the old British long bar to watch a 1940s swing band run through a medley of Glenn Miller classics. The old airport, which was dominated by a heroic mural of Mao, has been replaced by a new terminal, the main feature of which is a well-stocked duty-free shop.

The one thing that has not changed is the business acumen of the Shanghainese. China’s most sophisticated urban center has again come into its own, and nowhere is the entrepreneurial skill more evident than at the silk knitwear department of the China Silk Corp.

For Renaissance traders who crossed over “the roof of the world” in yak caravans, the Silk Road ended amid the mist-shrouded peaks of Jiangsu, where the Yellow River meets and briefly parallels the Great Wall. Today, its terminus is a Victorian-style building just off Shanghai’s Bund, the river-front promenade built by British colonists. There, in a sparsely decorated room that once served as the office of a European bank manager, Alex Blum has come to discuss a personnel problem concerning the manager of Shanghai Factory No. 6, who won’t let Blum’s Hong Kong overseer make quality-control checks.

On one side of the conference table sit Blum and two horn-rimmed employees from Hong Kong; Madam Sun Yu, manager of silk knitwear for the Shanghai Silk Corp. and her assistant, a man with a rice bowl haircut and nicotine-stained fingers, anchor the other.

“I spend $2,000 a month to keep an employee in Shanghai, but Factory 6 won’t let him in the door,” Blum laments. “We’ve sent machines, new styles and orders to Factory 6. I can’t understand why the factory is so negative to our staff.”

Madam Sun Yu replaces the porcelain cover on her steaming mug of tea and sighs in mock despair. “Let’s be frank, Mr. Blum. If the quality is acceptable, why complain about the way the factory operates?”

“But some of the sleeves we measure are too long,” Blum retorts with an edge to his voice but a smile still on his face. “In return for $3 million worth of business, your factory manager should accept our suggestions.”

“Why do you consider only your benefit and not that of Shanghai, where you have many friends?” asks Sun Yu, her narrowing eyes boring in on Blum.

“Haven’t you ever heard that the customer is always right?”

“Yes, but I don’t agree with that theory,” she snaps.

Everyone at the table sips tea. Silently.

Last year most of China’s state trading companies switched to an incentive plan in which 10% commissions are earned on new factory orders. The prospect of a year-end bonus is not lost on Madam Sun Yu. “Mr. Blum, you are an old foreign friend of Shanghai, but I know everything you do in this country,” she cajoles. “If you were to stop doing business with Wuxi and give all your orders to us, I’m sure you would have no problems in the future.”

With 15 cities, three delta regions, four special economic zones and Hainan Island competing for Western investment capital, negotiating a contract can be a complex and exhausting task. The dramatic Central Committee reforms of 1984 that decentralized most economic decision-making also created a multiplicity of ambiguous options for would-be taipans. Goods now can be readily produced, shipped and insured, but different state corporations handle each function, and their actions are not always coordinated. Neither does being the foreigner in a Sino-American co-partnership mean equal access to financial data. Labor costs and factory overhead are kept secret, a nuisance that becomes even more irritating since Americans invariably are forced to pay more than their African or Asian counterparts for the same product.

“I have a client in Hawaii who silk-screens comments such as ‘Maui Wowie’ on cotton T-shirts,” Blum says during a quick lunch of steamed buns and bean curd. “Earlier this year, he ordered 5,000 dozen shirts at $12 per dozen. Yesterday, the price was $20 a dozen. I asked why and was told that was the new price for Americans.”

China’s booming economy sometimes magnifies its lack of development. Though the 432 million people in its labor force are conscientious workers, fewer than 1% have university educations and a full 25% are semi-illiterate. During the summer months, when air conditioning for tourist hotels has top priority, factories in Shanghai and Canton must close three days a week because of an energy shortage. It is nearly impossible to drive from one city to another. More than 99% of China’s highways are crumbling, two-lane roads perpetually choked with wheezing trucks and oxcarts. Even more annoying for Western salesmen is the shortage of hotel rooms. After an unsuccessful four-hour search for lodging on his last trip to Shanghai, Blum ended up sleeping in a conference room at the Scientific Research Institute, a post-Mao think tank for itinerant Chinese scientists.

For Alex Blum, success in the China trade often means ignoring much of the management theory he learned at UCLA. One serious threat to his business occurred last year after he redecorated his Hong Kong office. Cheerful employees suddenly turned sullen. Several days later, a budding office romance fizzled. By the end of the month, a variety of maladies had sent absenteeism soaring and left those Cantonese still on the job in a state of near panic.

Blum soon recognized the problem. Obviously, the trendy designer hired to arrange the silk prints and rosewood furniture knew nothing about feng shui , the Taoist study of restless spirits and their interaction with wind and water. Somewhere in the office, amid the muted earth tones and potted plants, lurked a disembodied spook offended by the chic new interior.

With productivity at an all-time low, Blum summoned a geomancer, who concluded that harmony could be restored merely by moving the office door to a more propitious location. As an added precaution against obdurate vapors, he also installed a series of mirrors designed to send meandering spirits ricocheting out the office window into Hong Kong harbor.

Blum believes that feng shui may work, at least when the ghosts are Chinese. For more than a year, none of his 20 Hong Kong employees has been absent for even a single day.

“Two decades of living in China make feng shui seem like chicken soup,” Blum says. “You can’t say it doesn’t work; you just have to keep taking it and hope that it will.”

Blum doesn’t mind an occasional inconvenience since the silk trade has left him with a life style worthy of a James Clavell novel. A Philippine chauffeur, English nanny and two Cantonese maids pamper his Chinese wife, Grace, and their 2-year-old daughter, Bianca. A pool beyond the terrace of his home on Hong Kong’s rugged Saikung Peninsula looks out on a bay filled with bat-winged fishing junks. During moments of leisure, he can contemplate dozens of treasures, among them a reclining Buddha from Thailand, an Edo-period tapestry from Japan and a ceremonial sword from Mongolia.

One of the main threats to China’s economic growth is the mood of protectionism in the United States. Last month, the House of Representatives voted to cut textile imports from 11 Asian countries by an average of 35%. Most traders remain confident of the measure’s eventual defeat. A Senate version of the bill exempts China, and the House vote fell short of the two-thirds necessary to override the promised Reagan Administration veto. But some worry that U.S. jingoism could heighten Chinese xenophobia.

“Hong Kong doesn’t discriminate against U.S. exports, and Washington has a trade surplus with China; yet these two places are being asked to cut their textile exports by 60%,” Blum says. “The legislation is patently anti-Asian because it exempts the European Common Market. I don’t see any U.S. politician trying to limit imports of Irish linen.”

Only by opening new markets to American goods can America’s $150-billion global trade deficit be corrected, but this task is especially difficult in China, where consumers are hard to satisfy. “Chinese are skeptical of anything new,” Blum explains. “Since they invented almost everything to begin with, they assume that any unknown item from abroad is unworthy.”

Despite that impediment, Blum began shipping California wine to Hong Kong in 1981. “Chinese normally are not wine drinkers,” he says, “so we had to create a market among the young corporate managers who are being educated overseas. The British introduced the Chinese to claret; now I tell them California chardonnay is better.” Blum has met some resistance, especially in Macao where a chilled goblet of Portuguese Dao costs less than a can of Pepsi, but overall sales now exceed 6,000 cases a year. Today, selections from seven California wineries are on sale in hotel restaurants along the South China coast.

One California product that the Chinese already like is oranges. Blum had hoped to become a major supplier of navel oranges to mainland China, but that dream was dashed by Sunkist, which holds a near-monopoly position in Hong Kong by virtue of its long-term relationships with produce agents. Blum solved that problem by switching his focus to grapefruit, which China doesn’t grow and Sunkist doesn’t promote.

“The challenge was to create a new market,” Blum remembers. “So last year I brought in 1,000 cases of ruby-red grapefruit and gave them away free. I felt like I was taking marijuana to a high school, but I wanted to get the Chinese hooked.”

Blum’s idea worked so well that for next month he has orders for 400,000 pounds of American grapefruit--all pre-sold.