China's economic reforms recently announced they were greeted with much fanfare by foreign investors, stirring expectations that broad, truly liberal economic change was just around the corner. The BBC said the new Shanghai Free Trade Zone is "the most important reform since the communist leader Deng Xiaoping, the architect of China's transformation from a market economy, Shenzhen designated.. Attempt. A special economic zone in 1980. "China was finally opening up and foreign investors thought so. However, the euphoria quickly turned to disappointment. The Wall Street Journal noted that "a year after the launch of the Free Trade Zone of Shanghai, touted as an unprecedented effort to rebuild the economy of China, the project has generated some significant reforms."
What has happened that foreign investors were initially optimistic only to soon become disillusioned?
The author suggests that foreign investors are guilty of misunderstanding of how reform in China and victims of excessive optimism occurs. Reform and liberalization have been taking place, often at a surprisingly rapid pace compared with other economies; only that foreign investors have misinterpreted the statements of the Chinese government, read them their own hopes, and gave history lessons about how the change in China. It is suggested that the following three points interpretive framework will help foreign investors assess more realistically Chinese reforms and expectations set correctly.
Chinese pilot reforms are "Experimental"
China's recent history has been marked by reform gone wrong. Attempts in the 20th century to accelerate the modernization and the "jump" into the future led to the catastrophe that failures undoubtedly dented the later reformers like Deng Xiaoping. As Deng China opened to market reforms in the 1970s after the dark night of the Cultural Revolution, which began with a series of careful experiments to test what worked and what did not, which aimed to find a way follow and yet contain the negative consequences of failure. Having experienced the chaos resulting from the previously ill-conceived reform, Deng was clearly determined to proceed with caution and to balance the need for a reform with the need for stability. According to Deng, "We must not only push up the economy, we must also create a good social order and good social mood."
Usually these reforms "pilot" (ie, experiments) were confined to limited geographical regions in the field or in places such as the famous and seminal special economic zone of Shenzhen. Once the specific reforms within those pilot areas were tested and tested, which were then rolled out nationally or alternatively industries, the reform package a "pilot" given could be extended to adjacent areas or related, or duplicate with a new "pilot" in other geographical area. The aim was to move cautiously and deliberately to identify constructive reform, reform discard undesirable, then quickly implement what has been proven to work well and not rapidly introduce untested reforms and there is no way back, which could lead to economic and social disruption experienced.As Deng previously described a once famous of these approaches, China is "crossing the river by feeling the stones"
So it is suggested here that a fundamental misunderstanding of foreign investors is overlooking the experimental nature of the reform "pilot" when it was announced that the reform is in an experimental phase and has not yet taken final form. Only the overall concept and the direction have been finalized. What ultimately may implement the reform and the specific change (or abandoned) it is still under discussion.
There are numerous examples of successful reforms that have been learned from the pilot Shanghai Free Trade Zone and are now being implemented more broadly. The Free Trade Zone Shanghai Pilot has been experimenting with the rules of exchange has more flexible capital. During the creation of a foreign investment enterprise in China, previously it requires all capital required to be injected within two years, and about a third in six months. However, even after the capital was committed and cable in China, it was still not freely convertible local currency. It has not historically been a tedious process for conversion where the documentary support to justify the necessary conversion to produce for foreign capital injected to convert local currency for use in commercial transactions. These rather strict controls on foreign currency have eased over the past two years in the Shanghai Free Trade Zone pilot, and the results have Chinese authorities sufficiently satisfied that there would be a limited risk in implementing reforms more broadly . Both restrictions on capital account officially been lifted and is now being implemented throughout the country.
Reform "in principle"
The executive of the US aerospace industry was looking at the commercial contract worth millions of dollars worth. After extensive talks with his Chinese counterpart and careful preparation of a lawyer, the final document had been returned with the following handwritten on top, "agreement in principle" word.
There are many comments on how Chinese and Westerners have a different view of legal contracts. Actually, the truth is that contracts matter enormously in China, but only for different reasons and in different ways. Comparisons can be drawn between how Chinese officials say the reform and how Chinese entrepreneurs preparers and users of commercial contracts. Chinese leaders try to bring in broad strokes and high principles leaving flexibility to work on the details that you go along. The history of China is proud visionary idealism of his revolutionary poet. These reasons are kept in the official dialogue of the Chinese leadership.
There is another practical reason to remain vague. The reform and change in China may be personally dangerous. Detailed and legalistic commitments that restrict the ability of a leader to adapt and adjust to the situation will be viewed with suspicion. When the reform fails, someone will be blamed, so it is advisable to leave space to distance themselves from failure.
He recalls a meeting with Chinese leaders, where, after the author had examined the organizational goals and objectives of the company, told his Chinese counterparts that the proposals should be reviewed to make them more practical and feasible, to their Chinese colleagues responded with disdain. To the surprise of the author, practicality and viability they were negatively viewed in that context. High-level pronouncements were intended for their colleagues to be aspirational and motivation and, as mentioned, to leave some space to distance if the failure occurred during implementation.
And so, here lies a fundamental problem when foreign investors interpret and react to the pronouncements of the Chinese leadership. They may be submitted in the language of surrounding pronouncements loud sound and you can also see a similar commitment to reform a legal contract; therefore, they are understandably disappointed when the scope of the real reform is more limited than the statement suggested as the commitment and the detailed implementation undestood anticipated not come to fruition.
Meets Bureaucracy Reform: Central vs. Local
Americans have a saying like these "all politics is local" thing, suggesting that the actual place of political power is at the local level, not the federal government. China is no different. "The sky is high and the emperor is far away", Before leaving foreign investors succumb to high hopes for China's reform, also remember this one thing. Change through such a vast geography and a large number of giant state-owned enterprises should necessarily meet resistance from local interests and bureaucratic inertia.
China is a great place, and every new Chinese leader strives to extend its influence into the country. Entrenched local interests seek to preserve power and resist change. This is true not only geographically; it is also true for the industry and market. To be successful, the reform initiatives Chinese central level have to find a balance between push and cajole a region and industry in a new direction and giving practical and vested interests, local time to find a profitable setting. As the reform progresses, some initiatives may be left behind as is clearly not viable locally. On the other hand, some local adaptations of the reform can be as successful and attractive that may be taken in the opposite direction from the center in a new permutation as the official reform.
And what about the vast bureaucracy of state-owned enterprises of China? All foreign entrepreneurs must deal with Chinese banks, such as Bank of China International and Commercial Bank of China (ICBC) and China Construction Bank. It may be one of the most frustrating experiences of life in China. Because each serving hundreds of millions of depositors and, at the same time also act as the enforcement wing of the Chinese government's policy related to foreign currency exchange, loans, and other financial policy, they have developed enormous bureaucracies. Each of these in turn have their own comprehensive set of internal rules and therefore to implement government policies and business strategies guidelines. As you might imagine, these large organizations to change direction and implement new sets of rules and guidelines is a process that takes years. Central government pronouncements can excite foreign investors that the bank reform is imminent, but one must remain cautious that the actual implementation will take time and the end result may not be the same as originally planned.
As China reforms and liberalized its economy, foreign investors and the media should recognize that it is actually happening quickly and with great success. China's implementation of value added tax at the national level is an example. It started three years ago in seminal form in Shanghai. In a surprise announcement midway in 2013, it spread to all of China, excluding certain industries like real estate and financial services. Even in these other sectors, the reform of value added tax should be complete by the end of 2015. It is hard to imagine a more rapid implementation of a complex reform through a vast region and economy such.
But not only that foreign investors were interested in, and herein lies the problem. Reading Chinese pronouncements own expectations of reform, of course, lead to disappointment.