Taking Stock of China : An Executive Examines Nation’s Interest in Capitalism : THOMAS C. CASEY

Thomas C. Casey thought it was odd that the People’s Republic of China wanted to learn about U.S. stock trading and other financial matters from a group of American businessmen.

As part of a 16-member U.S. delegation, the veteran executive at First American Trust Co. in Santa Ana said he was surprised to learn that China was interested in such capitalistic tools as stock exchanges. After all, the communist nation abolished private ownership and banned stock exchanges after the 1949 revolution led by Mao Zedong.

But under Deputy Premier Deng Xiaoping in the last decade, Chinese Communist ideology was reinterpreted and sweeping economic changes were set in motion. Western technology and management techniques replaced Marxist tenets that retarded modernization.

Since the latest reform movement began in 1979, individuals have been allowed to own small businesses, such as grocery stores and restaurants, and even computer firms.

Shanghai’s once thriving stock exchange, described by some Chinese writers since the revolution as a den of iniquity, made a comeback of sorts. Amid fanfare in 1986, China allowed two enterprises to sell stock in Shanghai, marking the return of individual investments in companies.

But China’s new stock exchanges are rustic and barely resemble the kind of trading Western investors are used to. The U.S. delegation that included Casey gave the Chinese an overview of the free-market system, components of which the Chinese could incorporate into their own system.

And the delegation, put together by the Citizen Ambassador Program, learned much about China. Although the state owns all the land and provides housing and food to most citizens, there is a vibrant society and a growing amount of free enterprise, Casey said.

China is fostering its enterprises as a way to get foreign capital, and opportunities exist for U.S. companies to set up plants there, Casey said. He discussed with Times staff writer James S. Granelli some of the things he learned about China, its business and its way of life.

Q. What kind of opportunities would U.S. companies find in China right now?

A Currently the prime opportunity would be a joint venture with the Chinese in one of the six special economic zones, like Shen Zhen near Hong Kong. The Chinese provide the land under a 50-year lease and the labor, and the Western company provides the capital and the product and trains the laborers. The land cost is relatively low.

Q. Labor also comes cheap?

A. Yes, one of the advantages of doing this is the very low labor cost. To attract people to these zones, China pays twice as much as the average worker would get, yet the cost of manufacturing a bicycle in a zone, for example, is 1% of the total cost of the bicycle.

Q. And what are the tax benefits?

A. For the first two or three years, there’s no tax. A slight tax after that. And then, after seven years, you’d reach the total tax, which currently is 15% of profits.

Q. Are the joint ventures aimed at making products for Chinese consumption or for export?

A The products that are made are almost entirely for export. China wants hard currency, and the way they’re doing it is getting companies like UTI Chemicals in Irvine to come in and set up a plant to export materials. UTI wanted to sell its solid bicycle tires to the Chinese, but to do that, it first had to set up a company to export its chemicals and products to Pacific Rim countries. That way, China gets its share of the profits in foreign currency.

Q. Why is that important?

A. China needs hard currency because its state industries need to buy products, capital equipment and raw materials abroad, but other countries won’t accept the Chinese currency--yuan--as payment. The yuan is worthless outside of China. But partly through export profits in joint ventures with non-Chinese companies, the country has built up reserves of $18 billion in foreign currency.

Q. So now that UTI exports from China to Pacific Rim, it can make and sell its tires to the Chinese.

A. Yes. But it could be tough if the company makes too much money in China’s domestic market because you can’t take yuan out of China, and yuan isn’t transferable to other currencies. When you travel there, you exchange your cash for foreign exchange certificates, not actual yuan. FECs are exchangeable but they’re only for tourists, not the Chinese people.

Q. So why do business in China?

A. In negotiations for domestic joint ventures, you need an agreement with the Chinese that would allow you to exchange yuan for hard currency so you could take your share of the profits out of the country. Otherwise, there’s very little reason to do business there.

Q. Bicycles, I assume, are a hot item in China.

A. Yeah. After they have their food and some clothes, their first goal is to get a bicycle. I think practically everyone has a bicycle now. They are an entirely bicycle-bus society. You do see taxicabs. And Mercedes-Benzes and some Cadillacs, but those are owned by the officials. A bicycle is extremely important. The second thing they want is television. In driving around one night in Shanghai on a slightly elevated roadway, we could see into the small apartments, and practically every apartment had a large screen color TV, like a 26-inch or thereabouts. And now, they are also apparently starting to get more interested in appliances like refrigerators so they can buy the food and store it and not have to go to the market every day.

Q. UTI’s domestic business in China is the exception. As you said, most joint ventures are export oriented.

A. Yes. For example, in Shen Zhen, there is a facility where they show all the products that are manufactured there for export. In addition to bicycles, they complete furniture, office cabinetry, pharmaceuticals, hats, clothing, sporting equipment, different kinds of mechanical equipment, gears, various kinds of things. Toshiba was manufacturing some of its products there. The Hong Kong people even have a lot of their products made there. You see “Made in Hong Kong” stamped on products but actually they’re contracted out and made in Shen Zhen.

Q. So the Chinese want to share in the profits of exporting.

A Right. The Chinese are interested in saving the hard dollars. They want equity. And they’re interested in getting for their own people the research and technical skills that they would like to acquire from these Western companies. And then, of course, the Western companies could see them competing.

Q. Why aren’t other U.S. companies rushing into either joint ventures or other kinds of arrangements for production and sale of products to the Chinese?

A. In discussing this with some people who are doing that, the Chinese want to have the production know-how, research, technical things of that sort, and the special machinery. But the cost to a company to go in there and put this in--without much of a guarantee from the Chinese on how long they will be able to do it or what kind of a market they will have for it--would be risky. I think there’s some hesitation to put a great deal of equity into the country without an assurance that they would be able to continue to operate in that country and make a profit. That’s one reason why there apparently is not too much manufacturing for local consumption going on. IBM has talked about this, and some of our local companies have been over there. But there is no assurance that if they invested all this money that they would have a good profit for the foreseeable future.

Q. So when will U.S. companies have confidence in Chinese government?

A I think one of the first things that will have to happen is that the Hong Kong situation is going to have to come down. In Hong Kong we met with the stock exchange people and with some investment bankers about what’s going to happen in 1997 when the British lease on all that land ends and China acquires Hong Kong. Are business investments going to be safe? They tend to think that they will be.

Q. Hasn’t China assured that nothing will change?

A China signed a document guaranteeing that the present economic system will continue to the year 2047. The problem is, when 1997 comes, will the same government be in Beijing? Will the same attitude exist? And will they observe the treaty that was signed in 1987?

Q. There are no people fleeing from Hong Kong now, are there?

A Well, one article I read said the Hong Kong Chinese are taking significant amounts of money out of the Hong Kong stock exchange and are putting it into the Vancouver exchange in Canada and moving there. We also heard that there were other such people who were continuing to live in Hong Kong, but were trying to get their money out.

Q. Assuming China can calm fears of political instability, do you see the country as possibly a manufacturing headquarters for companies engaged in Pacific Rim business?

A. I think China is just like Spain was 20 years ago or so. Back in the times of the 1950s and the 1960s, companies were a little bit hesitant to go into Spain under a fascist regime of General Francisco Franco. But now they’re joint venturing and setting up plants and buying factories. Now we can see that they have a stable government, it’s democratic. They respect the enterprise. China is still something of an enigma. I think that a lot of people would like to see how Hong Kong’s going to work out before they make big investments. And the people in Hong Kong think the key date is 1992. By then, either the Beijing government will have shown enough stability to show that it’s going to allow the prosperity of Hong Kong to continue or it’ll be too late for anybody to get out.

Q. You went to China originally to talk about stock exchanges and other financial matters. Is China ready for a full-fledged Western-style stock exchange.

A. Well, the answer is no. However, in two years, they’ve come from absolutely nothing until today they actually have an operating stock exchange where a few securities are freely traded at market prices.

Q. Those are not securities, however, as we know them.

A The stock doesn’t have all of the risk elements of ours. It’s not an ownership interest in the sense of a common stock. It’s more of an ownership interest in the sense of a preferred stock. You invest your money and you get a dividend, which ordinarily is in the area of 15% but it can go up if company profits go up. They used to have a limit but there’s no longer any limit on what that dividend can be.

Q. Are there cultural differences that explain why China cannot really establish a stock exchange?

A. The first problem I think they have is that the Chinese don’t understand equity and risk as the rest of the world does. The people have never had a clear idea of equity. They don’t own any homes. They don’t have to work to pay off mortgages on the homes. The only things they buy are the things that they use in their daily lives. But, the younger people are looking around, and some of them are seeing what’s happening in Korea and Japan and Hong Kong and Singapore. They see that people in those countries got to where they were by taking equity risk, and they said, “This is the way for us to make money.” I think, over a period of time, this idea will catch on more and more. How rapidly it swells I have no idea, but I’m quite sure--probably as this idea proceeds and if it is left alone--that they will be issuing regular equity stock.

Q. Any other cultural differences?

A. Losing face is terribly important to the Chinese. In any business transaction, a person does not want to lose face. In dealing with the people in a business-like arena, whether it’s in conferences or in a store and bargaining with people or buying and selling, face is critical. Therefore, people who are out in the business environment and buying securities would lose face if the value of that security dropped or the dividend was eliminated. And this would be very bad. They don’t, I believe, want to take that risk. Interestingly, however, there’s a big contradiction when it comes to pleasure, they are apparently very heavy gamblers. They apparently don’t mind losing if it’s for pleasure or entertainment, but when it comes to business, apparently it is something else.

Q. Can you describe one of the stock exchanges?

A The market we went to, which is the principal stock market and the most active in China, is called the Jing-An Security Exchange Counter in Shanghai. Shanghai was a major stock market back prior to World War II, and they did have a flourishing market. But currently, the Shanghai exchange is located in a backwater part of the city of Shanghai. It consists of one large room, reasonably large, with a counter across the middle of the room and people at desks and abacuses on one side of the counter. People were in lines with cash in their hand coming in off the street to give the broker cash in exchange for shares of stock, while somebody records these on a blackboard as they did in the old days here in the United States.

Q. Any securities activity in the capital?

A. In Beijing, we went to the Beijing bond market. That was located in another back part of the city above a fish market. Here again, there was a large room with three or four booths with, I believe, three or four employees. There were telephones in this particular exchange and a man sitting with a telephone and his abacus. Now the Beijing bond market is said to be a very active market, but we were there for one to two hours and we never saw a telephone ring or anyone pick up a phone.

Q. Securities sales, then, are limited to the Chinese, unlike the free trading here.

A Currently Westerners cannot buy these Chinese securities. If and when the government allows stocks and equity interests to be purchased by Westerners, it will help provide another source of hard currency. I think the markets are not mature enough or active enough for a Westerner to be interested yet. I think that’s one of the reasons we were there--to see what they need to do to build the markets up so eventually they would be attractive to Western money and hard currency.

Q. Certainly the Chinese are not abandoning communism.

A They’re communists in the sense that all the land is owned by the government; the majority of all the production facilities is owned by the government, and a large amount of the distribution facilities is owned by the government. And certainly, it is a dictatorship. But there is a sense of freedom that they are trying to foster to allow more of a free enterprise system.

Q. Typically, the entrepreneur is the engine that runs a free enterprise system as we know it. Do the Chinese have entrepreneurs?

A. Sure. About 800,000 people are entrepreneurs. And they actually use the word in conversation. They understand the word entrepreneur. The interesting thing is that the entrepreneur is considered the lowest class.

Q. Why is that?

A. The majority of people more or less frown on the entrepreneur. He does not belong to a work organization, called a donway . The donway provides all the other Chinese with housing, identification papers, food rations, transportation permits, education and everything. The entrepreneur is on his own. The difference, though, is that instead of making $30 a month, the entrepreneur can make that much in a day. And the millionaires of China, entrepreneurwise, are making $1,500 a month, which the Chinese think is almost criminal.

Q. You mentioned that the college students think of the party almost as a joke. Are they cynical?

A. The students we talk to seemed to be no different from the students you’d meet at UCI or Orange Coast College. They seemed to be bright and articulate, and they wanted to get ahead with their life. However, they did have the problem of not being given the choice of what they were going to do. Their professors were in charge of assigning them, upon graduation, to their (work) positions. Most of them--and this maybe shows a little bit of insight about how change can come--were in favor of private enterprise and the security markets. The bright students wanted to get into joint ventures--private enterprise-type joint ventures. This is where they wanted to end up because they could see so much more future in it than they could being just assigned to being a professor or to being a bureaucrat.

Q. So they had a choice then of either being assigned or going out on their own to do what they wanted to do.

A. Well, when you go out on your own, you lose all the privileges of housing, food and so forth. I understand that one of China’s goals or projects for the future is the development of Hainan Island into a resort. It’s south of Taiwan and off the coast of Vietnam. Apparently, it has some good beaches, and apparently there will be more opportunity for free enterprise there. So a lot of the more highly educated Chinese are leaving their jobs and literally going to Hainan begging for any kind of menial job until their opportunities open up.

Q. People then are encouraged about change.

A They are hopeful; they are not hopeless. They can see change. They have one expression I heard several times--problems can be solved. And that, to me, was encouraging.