Lesson From China : Beginning a Venture Now Could Be Unwise but Established Business Might Find Opportunity

The state of China’s nearly 10 years of economic reform was made clear to economist Sung Won Sohn when he tried to hail a taxi outside a Beijing hotel one afternoon.

“The driver told me, ‘I’ve worked hard enough for the Communist Party this morning. I don’t want to work this afternoon,’ ” said Sohn, senior vice president and chief economist at Norwest Corp., a Minneapolis-based financial services firm.

Sohn visited China at that government’s expense in May, only weeks before Communist Party hard-liners crushed the student democracy movement. Although the political turmoil may slow the rate of economic liberalization, it may be difficult to tell because the pace is already leisurely in the extreme, he said.

The lesson that U.S. business can learn from the on-going crackdown is to stay put, Sohn said. This is not a good time to think about starting a venture in China but for those already doing business there, it represents an opportunity to win points with the government, he said.

China today is much different from the country that Mao Tse-tung led. Such modern trappings as skyscrapers and cars can be found in growing numbers. Capitalism of sorts is taking hold, and price reform is making progress, although the country still has a dual system of fixed prices and market prices.

Received Coolly

All this change is part of a government push to loosen the restraints on its economy so that productivity will improve and the standard of living will rise. Sohn said he was invited along with experts in other areas to tour the cities and countryside and then make recommendations to the government.

Sohn’s recommendations: China must accelerate price reform, moving away more quickly from fixed prices; the country needs financial reform, including savings incentives, and China must cure its labor immobility and wage rigidity problems, which inhibit economic development.

The Chinese government’s reaction: “They weren’t enthused exactly,” Sohn said. “They basically said, ‘We’ll do it our way and these things will eventually happen.’ ”

“It’s easy for a capitalist economist like myself to talk about reforms, but impediments to reform are formidable,” he acknowledged.

China’s pricing system is confusing to businesses and individuals because many commodities have two prices, the fixed one and the floating market price, Sohn said. A textile mill can buy cotton at the low fixed price, but when the limited supplies run out it must go to the market where inflation has driven prices up, he said.

“I think it creates a lot of uncertainty for their planning system,” he said.

China’s hotel room glut is another example of the failure of the pricing system, Sohn said.

When Chinese officials a decade ago realized that the country didn’t have enough hotel rooms for tourists, it was decided that more should be built.

“In our system, the price mechanism would decide how many hotel rooms you do or don’t need,” Sohn said. “But in China, a bureaucrat decided how many rooms to build.” As a result, Shanghai now has 20,000 hotel rooms--more than in all of Hong Kong--and many, not surprisingly, are empty, he said.

China must also create a true financial system, he said. Most banks there cash checks only for the government, not individuals. The concept of borrowing to buy goods doesn’t exist--everything is purchased with cash. Any savings is forced because there aren’t enough goods to buy, he said.

“China needs savings for investments,” Sohn said. “A lot of people literally put money in their mattresses.”

Another problem is labor immobility because jobs often are assigned according to political and family connections rather than by ability, he said. “Once slotted into a job, especially if you are a nobody, the chances are you will be stuck there for life.”

The problem is exacerbated by housing shortages. Even if a worker could move to a better job in a new city, he or she would drop to the bottom of the long list for housing in the new town, Sohn said.

People Problem

As resistant as the thousands of Chinese bureaucrats are to change, Sohn said, they are not the big impediment to economic reform. The Chinese people are.

“A lot of peasants we talked to were longing for the days of Mao Tse-tung,” he said. “Eighty percent of the people don’t want to change. They are angry about economy reform in the city and thought they weren’t benefiting.”

Sohn said a Chinese intellectual told him, “What this country needs is a Chinese Gorbachev,” a modern leader, unlike the aging Chinese hierarchy. “But I’m afraid he’s still in high school,” the intellectual added.

Sohn said he tells business executives to think twice about doing business with China.

“Why bother?” he said. “There are a lot more attractive places to go. China is a very difficult place to do business.”

For those determined to go in, Sohn advised bargaining hard. “I think you could negotiate some very favorable terms.”

For those businesses already in China, “take advantage of the situation,” he said. “In the Orient, it’s important to find out who your friends are. You can make a lot of Brownie points with the government” by persuading them that your business is a good friend during this tumultuous time.