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22TH January 2011

Business Tricks - Entrepreneur - Geopolitical - Timely

Big Red Star for you! How China rolls.

What do you do when someone to whom you owe a zillion dollars does stuff you don’t like?  Survey says: “shut up and pretend it doesn’t bother you.”  That, and quit borrowing or we’ll all see this video come true before 2030!

It was China Week in the US.  Obama hosted Hu Jintao on a state visit, and pressed him on human rights. Oh, please. Pressed him with what, precisely?  China only cooperates when someone has something they want. The rest is noise. Here’s how I see it:

China’s GDP growth has been unprecedented in the past 10 years (try 10% GDP growth on for size), but that comes as part of a social pact with their 1.7 billion people.  It goes something like this: “You were (are) poor. We give you food, shelter, and a chance to occasionally buy purses and perfume with luxury branding. You, in turn, have no freedom of speech, no chance to elect government, and no say in how we do things. Deal?”

And so, the importance of China’s growth boils down to the ruling elite preserving power by feeding the growing appetites of a few billion mouths. That makes for a busy kitchen to feed that fire.  Raw materials must be secured, and how they procure those key supplies reveals a major stylistic difference from the U.S.

China’s trading philosophy  is both politely predatory and mercilessly mercantilist. Got aluminium? Send it our way and we’ll build highways, railroads and schools. Oil? Great, heres a bomber. Cobalt? We’ll take it, and build your stadiums and hospitals. Running short of cash? We’ll buy the Treasury bills. People looking for consumer goods in their stores? No problem –our merchants will flood the market with the dross pumped out by our growing capacity to produce more stuff. (My opinion is informed by Stefan Halper, author of Beijing Consensus and from the ensuing discussions at a recent breakfast at The Roosevelt Institute hosted by Bo Cutter)

And unlike the US, there are no requirements to qualify for Chinese support. No need to move toward democracy, no pesky voter’s rights, no freedom of speech. If you’re an oligarch or autocrat sitting atop any natural resource or strategic landmass that China wants, you’re good. We may be outraged by the crassness of it all, but meanwhile, deals are being cut all around us — moral equivalencies be damned. Seriously, the Chinese laugh every time we wag a finger about Tibet or freedom of the press when we don’t have a  hard trade to back it up.  Last time that happened, Obama was in Beijing.

So what can an angel or an entrepreneur take away from this scenario?

Well,  investing in China as an angel is the devils work. I don’t know how it can be done successfully, and if successful, how do you extract the cash after an exit?  So scratch that idea. But for entrepreneurs thinking about doing business with China,  one big rule applies: stay in between your Chinese counterparts and something they really want.  Additionally, keep improving the product so that it’s nothing they can thank you for later, after developing their own. Respect their customs and point of view, no matter how different it might seem. Bottom line? It’s all about the supply of key ingredients and helping them feed their giant — so check your moral indignation at the door.

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