Tea Leaf Nation

Why There Are No Credit Scores in China

The government has a plan, but the shadow of Mao-era abuses still looms.

HONG KONG — Few would dispute that Chinese society suffers from a serious trust problem. After surviving crafty scams and shoddy products for years, Chinese people have become guarded with strangers and cautious in business dealings. Given all that, it would be tempting to celebrate the fact that, according to a May 5 report in Chinese state media, the powerful National Development and Reform Commission (NDRC) has signaled that a nationwide electronic system will be established by 2017 to track each Chinese citizen's credit history. This would include performance on meeting obligations connected to taxation, government transactions, finance, judicial matters, and traffic violations. But for the system to succeed, Chinese people will eventually need to buy in -- and so far, that's not happening.

China's economy, of course, still manages to function without a credit-scoring system. Chinese banks, all of which are state-owned, limit most of their lending to large businesses (preferably state-owned enterprises) and high-net-worth clients who have made significant deposits. Debit cards are far more common than credit cards. Urban residents can usually obtain collateralized loans for real estate and automobile purchases, but those without assets are left in a lurch. When faced with emergencies like a large medical bill, most Chinese families cannot pull out credit cards; instead, they draw down on their savings accounts or borrow money from loved ones. Similarly, small and medium-sized private businesses in China have often had to rely on the so-called shadow banking system to raise money, which despite the nefarious moniker, simply involves raising capital outside the formal bank loan system through personal connections or off-balance-sheet loans.

In theory, the proposed nationwide credit-scoring system would further grease the wheels of China's growing market economy by rewarding the punctual and punishing the dishonest. In a May 5 article published on the Weibo (Chinese Twitter) account of CCTV, China's state-owned television station, economist Dai Xianfeng opined that such a system would "lower transaction costs," "improve economic vitality," and make individuals' lives better by enabling them to obtain credit cards, lower-rate mortgages, and other financial products.

But many of China's Internet users are worried less about the trustworthiness of other citizens and more about the trustworthiness of the government that would steward the new system. According to the timeline announced by the NDRC, by June 2014 the government will introduce a plan to assign unique credit-tracking numbers to Chinese citizens, likely based on the current identity card number that each adult already possesses. (It would do the same for companies and organizations.)

The proposal invokes unpleasant memories of a Kafkaesque system that began under Chairman Mao Zedong. Under the Communist Party, a mysterious dang'an, or file, on each urban resident recorded political, administrative, or personal transgressions and followed everyone for life from schools to work units. As then-New York Times Beijing correspondent Nicholas Kristof reported in 1992, dang'an was a "part of China's complex system of social control and surveillance," but it had started to lose relevance even then as Chinese become ever less reliant on the party for job placement and mobility. These days, while dang'an may still matter to ambitious party members, the system no longer holds the sway it once did over ordinary people. In 2013, CCTV published a special report called "Is Dang'an Becoming a Pile of Wastepaper?" in which a casual online survey revealed that 74 percent of respondents believed that dang'an had no relevance to their lives.

Some in China worry that the new credit system now threatens to revive the intense control that authorities once exercised unchecked. One Weibo user commented called the idea "dang'an by another name" and asked whether those with oversight of the new system would be trustworthy. "Will individuals know what is written about them?" Another hoped that "political factors would not be a part of the system" because it could be used against those who disagree with the party line. Many Internet commentators also worry that in cases of stolen identities or clerical errors, ordinary people would have little recourse to clear their names.

These are not idle anxieties. Abuse of the dang'an system was exposed in the widely publicized case of Tang Guoji, a man from central Hunan province who had graduated from a teacher's college in 1983. Tang discovered in 2002 that the reason no work unit or graduate school had been willing to take him for the past 20 years was a mysterious piece of paper in his dang'an that declared him mentally unstable. The document had been placed there by college advisors who held a grudge against Tang for blowing the whistle on management problems at the school. Tang had no idea this damning evaluation existed at all for almost two decades, even after years of petitioning the government for job placement and fair treatment, to no avail. Tang eventually began a career as a successful freelance writer, but the damage to his life was immeasurable.

Internet users also muse about the irony that Chinese officials, widely perceived to be corrupt and untrustworthy, are tasked with keeping credit files on citizens. Ye Tan, a columnist for Caijing, a top financial magazine in China, commented that the credit system should "start with the government" because "having a record of the trustworthiness of the powerful is more important in promoting a market economy than keeping records on ordinary people."

This anxiety also has a basis in fact. China's well-connected have sometimes shown themselves willing to fabricate files in their dang'an for personal gain. In June 2004, a midlevel cadre in northwestern Liaoning province named Cao Zhongwu was sentenced to death for corruption and falsifying official documents after it emerged that he had created fake documents and certificates to supplement his dang'an for about seven years in order to gain promotions. By the time he was caught in 2001, Cao had embezzled about $250,000 and taken $150,000 in bribes. (He was executed in September 2005.)

Of course, online vitriol alone may not be enough to derail a much-needed development from coming to pass. But authorities surely monitor web chatter to gauge public opinion; if the government is ambivalent or internally divided about the scope or timing of a new credit system, online outcry could tip the scales. During the November 2013 party plenum, President Xi Jinping called for the market to play a "decisive role" in China's economic life. Perhaps it would be best for the government to follow its own advice and hand the credit-scoring business to private enterprise instead.

Photo: AFP/Getty Images

Tea Leaf Nation

The Chinese Are Coming, and It's Going to Be Fine

Chinese companies will create jobs stateside and are required to play by U.S. rules.

WASHINGTON, D.C. — On April 29, the United States Chamber of Commerce, a U.S. lobbying group, announced that Chinese investment in the United States surpassed U.S. investment in China for the first time. The news has been a long time in coming: Over the past decade, Chinese companies have made major inroads in the U.S. market -- from the energy sector to food production to Hollywood -- and it's clear their influence is growing. Americans worry that China is buying up the world. But there's another, better way for U.S. authorities, businesses, and citizens to approach the influx: Embrace it.

The story of Chinese investment in the United States, which will continue to play out to the tune of billions of dollars over the coming decades, is already well over a decade old. According to New York-based advisory firm Rhodium Group, Chinese investment in the U.S. increased by 600 percent from 2005 ($2 billion) to 2013 ($14 billion). Chinese firms first caught widespread U.S. attention in 2005 with one stunning success and one abject disaster. On the positive side of the ledger, Lenovo, a personal computer and consumer electronics firm, successfully bought U.S.-based tech firm IBM's ThinkPad laptop brand in 2005 for $1.25 billion. The fact that a Chinese firm hoped to buy a piece of a premier U.S. corporation led to a group of three Republican committee chairmen, led by House Armed Services Committee Chairman Duncan Hunter, to call for further scrutiny of the deal. But the transaction still went through relatively smoothly; it made practical business sense for IBM to sell off its personal computing division, and Lenovo was the best suitor.

By contrast, that same year, a highly politicized $18.5 billion proposed acquisition of California energy firm Unocal by state-owned China National Offshore Oil Corporation (CNOOC) made U.S. headlines, but scrutiny from politicians and the media killed the deal and forced CNOOC to eventually withdraw its bid. Duncan Hunter was again at the forefront, claiming that the deal posed a significant threat to U.S. national security, despite a fairly strong business argument why it made sense.

Increased corporate investment from China naturally leads to a number of legitimate questions and concerns. Who will be able to access the information Americans share on their smartphones? Will the pork they serve their families still be safe? Will Chinese firms impose unfair labor practices on U.S. workers? After studying Chinese firms for a decade, I am convinced that not only is the United States capable of handling these risks, but it is also in a position to capitalize on the phenomenon.

First, Chinese firms bring a great deal of cash to the table. Chinese global outward investment reached $85 billion in 2013, $14 billion of which ended up in the United States. A potent example illustrating the positive side of Chinese investment can be found in Michigan-based automotive steering firm Nexteer. During the global financial crisis, Nexteer CEO Robert Remenar targeted Chinese investors for his faltering firm. In 2010, he found a new owner in Chinese company AVIC Automotive, a state-owned firm, which bought Nexteer for $465 million. Under the new ownership, Nexteer's CEO retained his entire management team and his decision-making authority, and was able to revitalize the company in a few short years. In December 2013, Nexteer's president and global chief operating officer, Laurent Bresson, told local media that the firm was in "extremely rapid growth mode." In the two years following the deal, Nexteer invested more than $220 million in its Saginaw, Michigan operations, where the firm remains headquartered today.

In addition to pumping capital into cash-strapped U.S. firms, Chinese companies can also fuel job growth and add valuable tax dollars at the state and federal levels. In November 2000, Danish shipping giant Maersk Line ended its service to the Port of Boston, jeopardizing 10,000 local jobs. By April 2001, port director Mike Leone traveled to Beijing to meet with the management team of the China Ocean Shipping (COSCO). His negotiations proved successful in March 2002 when COSCO filled the void left by Maersk and opened direct service from China to Boston, not only saving those 10,000 jobs, but also creating additional ones through a $250 million investment into an expanded container handling facility.

Chinese auto parts firm Wanxiang America has also saved thousands of jobs for the U.S. economy. By January 2013, the firm saved more than 3,000 U.S. positions through multiple acquisitions of foundering U.S. companies. Headquartered in Elgin, Illinois, Wanxiang America has become a $2.5 billion corporation since its founder, Pin Ni, started the U.S. subsidiary out of his home in 1994.

Of course, many in the United States are rightfully worried about the threat Chinese investment could pose to domestic security and competitiveness. In October 2012, an extensive U.S. House Intelligence Committee investigation into Chinese telecommunications firms Huawei and ZTE found that "the risks associated with Huawei's and ZTE's provision of equipment to U.S. critical infrastructure could undermine core U.S. national-security interests." The Chinese wind turbine producer Sinovel divested its U.S. operations in July 2013 after it was charged in U.S. federal court with stealing trade secrets from its former U.S. supplier.

But the vast majority of concerns about the risks Chinese investment poses to the United States can be addressed under current regulatory processes. In particular, the inter-agency Committee on Foreign Investment in the United States (CFIUS) exists to "to review transactions that could result in control of a U.S. business by a foreign person...in order to determine the effect of such transactions" on national security. And it can block or limit the scope of transactions to the extent necessary to protect that security. The most recent CFIUS report to Congress, released in December 2013, found that the United Kingdom accounted for the most reviewed deals (21 percent of the total), while deals originating from China, increasing in frequency, accounted for 12 percent of reviewed deals over the same time period.

There's also a widespread misconception that Chinese companies aren't held to the same standards as U.S. firms. But whether it's food safety, fair labor standards, or corporate accounting and reporting, Chinese companies operating stateside are bound by the same laws and regulations as their industry peers -- with no exceptions. These firms, which operate as U.S. subsidiaries of Chinese parent companies, receive the same treatment as any U.S. firm. For example, the May 2013 announcement that a Chinese firm was acquiring Smithfield Foods, a U.S. pork producer, led to immediate public outcry about food safety. After an extended CFIUS review process, the deal ultimately went through because the committee reached the conclusion that the acquirer, Chinese-owned Shuanghui International, posed no threat to U.S. consumers compared to any other U.S. food products firm.

The ongoing politicization of deals like Shuanghui-Smithfield and CNOOC-Unocal frustrates Chinese officials and business people alike. In July 2013, the Chinese ambassador to the United States, Cui Tiankai, was quoted in his country's state media lamenting the "political obstacles" confronted by Chinese investors in the United States and urged "pragmatic efforts to eliminate these obstacles as soon as possible."

Contrary to populist rhetoric, the internationalization of Chinese firms is not part of a grand scheme for the Chinese government to infiltrate U.S. society. To be sure, there are indirect benefits for China itself, including an ability to diversify investments overseas, gain access to natural resources to fuel the Chinese economy, and increase its soft power in the world's richest and most powerful country. Nonetheless, the primary motivations of Chinese companies remain commercial. The Chinese market is intensely competitive; firms need access to new markets, brands, technology, and managerial talent. Expansion into advanced economies like that of the United States allows Chinese companies to hasten the evolution of their businesses.

This is also a two-way street. While Chinese companies are eager to bring their investment dollars to the United States, they will only do so if they are confident of smooth, successful deals. If these firms are met with unclear, inconsistently applied, or politically motivated regulatory procedures, the United States will miss out on a tremendous opportunity. For this to work, U.S. media and politicians should stop politicizing the small number of deals gone wrong. It simply perpetuates the myth, mainstream in China, that their investment is not particularly welcome in the United States. This ignores what the data actually reveals, which is that the vast majority of attempted Chinese investments are successfully completed without government interference. If the negative rhetoric continues, Chinese firms, pockets bulging with cash to spend, will simply take their business elsewhere.

There's one last reason not to spend too much time wringing one's hands over this new trend: The vast majority of Chinese firms still cannot compete against U.S. firms on the latter's home turf. In particular, their Chinese management teams lack significant international business experience, especially in advanced economies like the United States, which feature complex regulatory environments. To wit: Chinese athletic apparel firm Li-Ning failed miserably during its first foray in the United States in 2010. For starters, its products did not meet the needs of U.S. consumers. Li-Ning's flagship store in Portland, Oregon sold unpopular items including badminton rackets, kung fu apparel, and table tennis supplies. The firm's mismanagement of its U.S. leadership team even resulted in one of its U.S.-based executives to successfully sue Li-Ning for $1.25 million for calling him derogatory words and reneging on a promised promotion. U.S. companies and executives should try to understand the implications of this trend for their business and identify potential Chinese players emerging in their industry to ensure future competitiveness. 

Chinese companies are already operating in the United States, and this phenomenon will only continue to grow in the coming years. These transnational firms will irrevocably reshape the global business landscape, and their investments will bring tangible benefits. Ensuring there are clear rules in place that are fully understood by potential Chinese investors will ensure the United States can maximize beneficial investment while discouraging any that pose a national security or anti-competitive threat. From a U.S. perspective, whatever challenges Chinese firms may present, it is far better to have them emptying their wallets stateside than sending those billions of dollars somewhere else.

Photo: Getty Images