Monthly Archives: January 2011

China’s Next-Gen Multinationals

For the past five years, Boston Consulting Group, a management consulting firm, has published an annual list of 100 companies from emerging economies that it reckons have the potential to become multinationals. All of what it calls its global challengers are fast growing and expanding internationally through acquisition. Sixteen countries from Argentina to the UAE contribute to BCG’s 2011 list. A third of the companies on it are from China.

Nine of the 33 Chinese firms are new additions this year, accounting for 40% of all debutantes. The nine are:

The concentration in mining and minerals, steel, construction and fossil fuels, across the list and highlighted by the Chinese newcomers signal, BCG says, the rising importance of infrastructure and natural resources to the success of developing economies. Add in, in China’s case, emerging clean technologies. Note, too, the emergence of Chinese civil engineering firms among the world’s leading contractors, thanks to access to cheap labour and capital, vertically integrated suppliers and lots of experience with large-scale infrastructure projects at home.

Within the next five years, BCG forecasts, half of those on its list could qualify for inclusion among the world’s 500 largest companies. Several of those will inevitably be Chinese. They will have to battle with the challenge today’s multinationals face, of being global companies decreasingly rooted in their home countries, a challenge that culturally may prove more difficult for Chinese companies than U.S., European and Japanese ones. But note the names now.

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China and America’s Stealth Fighters: Spot The Difference

China may have reversed engineered the J-20 stealth fighter it has been ostentatiously leaking pictures of in recent weeks from a U.S. F-117 stealth jet shot down by Serbia in 1999 while on NATO duty during the Kosovo war. That is the implication of remarks by Admiral Davor Domazet-Loso, Croatia’s military chief of staff at the time  who says Chinese agents bought up parts from the downed plane, one of the first to have been shot down, from local farmers. (via BBC). “At the time, our intelligence reports told of Chinese agents criss-crossing the region where the F-117 disintegrated,” Domazet-Loso says.

The BBC says a senior Serbian military official confirms that some of the pieces were removed by souvenir collectors, and that some ended up “in the hands of foreign military attaches”. If nothing else, this would all help explain why China and America’s stealth jets look so similar.

China (and Russia) maintained close intelligence links with Serbia during the Kosovo war. Beijing is long thought to have run an intelligence post from inside its Belgrade embassy during the war. The embassy was struck by U.S. bombs barely a month after the F-117 was shot down. The U.S. maintained the attack, which was orchestrated by the CIA and in which three people died and 20 were injured, was an accident, the intended target being a Serbian arms warehouse a quarter of a mile away. While we have absolutely no evidence to think otherwise, we do now wonder.

Update: State media have refuted the allegation that the J-20 is based on a downed F-117. The Global Times quotes test pilot Xu Yongling as saying that “the J-20 is a masterpiece of China’s technological innovation”. He adds that it would have been impossible for China to glean technology from the F-117, whose stealth technology lags far behind fourth-generation fighters and was regarded as ‘outdated’ even when it was shot down. The same article quotes an unnamed defence ministry official as saying “it’s not the first time foreign media has smeared newly unveiled Chinese military technologies. It’s meaningless to respond to such speculations.”

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China’s Open Throttle

Quite how fast is China’s economy growing? The Financial Times’s Lex column run’s Li Keqiang’s informal but crunchy measures of economic growth, the ones mentioned in a Wikileaked U.S. embassy cable from 2007: electricity consumption, rail cargo volume and bank lending. Lex finds that:

The first two are at full throttle: electricity consumption rose almost 15% last year, 8 percentage points more than in 2009, while freight traffic’s 10% growth over the first 11 months was about double the five-year average. New loans of 480 billion yuan last month, meanwhile, were 10 times their level of December 2007.

Those numbers suggest that the official GDP figures have yet to catch up.

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ICBC Comes To America

As President Hu Jintao was leaving the U.S. after his four-day state visit, Industrial & Commercial Bank of China announced plans to move in. ICBC, the world’s largest bank by assets, has agreed to take control of Bank of East Asia’s U.S. operations, which include 13 retail bank branches in New York and California. ICBC is to pay $140 million for an 80% stake, subject to approval from Chinese and American regulators, Hong Kong-based Bank of East Asia says. The two struck a similar deal last year with ICBC taking 70% of Bank of East Asia’s six Canadian branches.

Chinese investments in American financial services firms by taking minority stakes in the likes of Blackstone and Morgan Stanley have a hapless record, mostly because the last round came before the global financial crisis of 2008 which made a nonsense of the valuations. Buying a network of retail branches is a new tack, and echoes what Chinese banks having been doing elsewhere in the world, if not yet in the U.S.

Jiang Jianqing, ICBC’s chairman, says:

This unprecedented acquisition of a controlling stake in a U.S. commercial bank by a mainland bank is strategically significant. The successful completion of this transaction will not only establish a good foundation for the provision of holistic financial services by a mainland bank in the U.S., but also will mark a new era of open-market co-operation between China and the U.S., and have a positive impact on Sino-US trade relations.

A previous attempt to buy a bank in the U.S. was torpedoed by Washington’s Committee on Foreign Investment in the U.S. (CFIUS), which reviews proposed foreign acquisitions of U.S. firms on national security grounds. The committee will be among the regulators weighing in on ICBC’s deal because ICBC is state-owned. The bank already has a securities business in the U.S., bought from BNP Paribas last year, but the purchase of retail banks comes under closer regulatory scrutiny. That is as much an examination of the acquiring bank’s home regulatory regime as it is of the bank itself.

ICBC can expect to wait a while. It took the bank two years to get a license for its existing commercial banking branch in New York. Whether the process is swifter in this case would be a good barometer of the state of Sino-American relations in the wake of Hu’s visit.

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Mr Hu Leaves Washington Unruffled

President Hu Jintao’s four-day visit to America was so uneventful it must be declared a success. As expected there were no significant policy advances or position changes by either side. There was less to Hu’s public remarks on human rights than met the eye, on North Korea he reiterated a position Washington has already rejected, and on trade issues even Hu’s statement that Beijing has abandoned its policy of favoring “indigenous innovation” won’t necessarily mean that U.S. firms will find doing business in China will change much.

Yet what mattered was the tone. We said before the visit that both leaders would have to ensure that relations between the two countries didn’t deteriorate further, and that the areas in which their national interests overlap, from climate change to Iran, North Korea and the international financial system, are stable and expanding. On the whole the pair achieved that goal. Emollience was the order of the day. Hu, in particular, stuck doggedly to his well-worn message that China’s wasn’t a threat to anyone and sought only a partnership based on mutual respect. And with no gaffes, unlike on Hu’s first visit in 2006 during the Bush administration, there was little grist for the hawks of either country. Both leaders’ hands were strengthened in pursuing engagement rather than confrontation between the two (not that that means that there won’t be a series of tension points between the countries; there will.)

In addition, Hu got to be seen at home as participating in a meeting of equals. U.S. President Barack Obama got to be seen at home as a gracious, not supplicant host of a nation that, for all China’s rise, is still a superpower.


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Six McKinsey Predictions For China In 2011

Gordon Orr, a director in the Shanghai office of McKinsey, a firm of management consultants, makes six predictions for China in 2011.

  1. Inflation in food prices will take longer than expected to control.
  2. Middle-class bankruptcies will expand dramatically.
  3. Minimum wages will rise, but productivity gains will outstrip labor costs.
  4. China’s economic growth will be lower than expected.
  5. China will step up its “invest out” program in the new five-year plan.
  6. The state will again try to reduce its ownership role in business.

This Bystander likes (in the sense of agrees with) 1, 3 and 5 (though this one is a bit of a cheat for 2011), but is less convinced by 2, 4 and 6. The short-term social disharmony they imply wouldn’t be tolerated in what is looking to be a critical and not always easy year for China’s development. What do you think?


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A Lot Still Needs To Be Done To Narrow The Perception Gap

Hu, Obama Press Conference, Washington, January 2010

“A lot still needs to be done in China in terms of human rights,” was President Hu Jintao’s well rehearsed answer at his joint White House press conference with U.S. President Barack Obama (above) to the question he rarely has to face in public. There is more news in the fact that he had to give an answer than in the substance of what he said (his earlier European hosts didn’t trouble him with the inconvenience of press conferences). Hu’s full response, as read by his translator:

“China is a developing country with a huge population, and also a developing country in a crucial stage of reform. In this context China still faces many challenges in economic and social development, and a lot still needs to be done in China in terms of human rights.”

What has been lost in translation is that the primary human right in China is viewed as the right to an improving standard of living for all Chinese. In this regard, a lot unquestionably needs to be done to lift even more Chinese out of poverty and to close the widening wealth gaps. Questions of political rights in, say, Tibet or Taiwan, are questions of national sovereignty. Questions of rights to, say, free speech or religion aren’t even questions.

It has long been Beijing’s position, reiterated by Hu on his visit to Washington that China respects the universality of human rights, but as the president also repeated that “we need to take into account the different national circumstances”.  As with so many moments of his Frenemies tour so far, Hu avoided coming off as browbeating, without anything actually changing.

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