BUSINESS

HARD LINE AND BOTTOM LINE

BEIJING’S HARSH REGIME PROVOKES A COSTLY EXODUS OF INVESTORS FROM BOTH CHINA AND HONG KONG

PATRICIA CHISHOLM April 2 1990
BUSINESS

HARD LINE AND BOTTOM LINE

BEIJING’S HARSH REGIME PROVOKES A COSTLY EXODUS OF INVESTORS FROM BOTH CHINA AND HONG KONG

PATRICIA CHISHOLM April 2 1990

After doing business in China for more than 17 years, Toronto hotel owner Fred Braida is as comfortable discussing Chinese art as he is approving blueprints for a new hotel. He acknowledges, however, that China is now widely perceived as a difficult and unfriendly place to do business following the government’s bloody crackdown on protesters in Beijing’s Tiananmen Square last June. But, if the government has become unfriendly to foreigners, the Chinese people are still eager to maintain their contact with other countries, Braida said. During a visit to the coastal city of Tsing-tao last November, the Austrian-born Braida said that he was saddened by the obvious decline in foreign visitors to China and the grim sense of disappointment over that decline among his Chinese hosts. Still, he added that he was impressed by the efforts of the Chinese to welcome a delegation from Tokyo, Tsing-tao’s twin city. The Japanese delegation, which included Tokyo’s mayor, was greeted by brightly colored banners and a 40-piece marine band. Said Braida: “Foreigners are still welcome because they contribute to the country’s advancement. But it is a sad situation there—it’s a mess.”

Last week, China’s hard-line Prime Minister Li Peng disappointed those looking for signs of a thaw in the government’s economic and political policies when he publicly called upon Chinese officials to “redouble ideological and political work.” In a speech opening China’s legislature, Li also warned against foreign subversion of the Chinese Communist system and called for a strong stand against those who would move down a capitalist road. The hard line will do little to encourage needed foreign investment. China’s trade deficit is a staggering $4.25 billion, and looming deadlines for the partial repayment of its $44-billion foreign debt are creating a critical need for foreign currency. The Chinese have recently taken limited measures to woo foreigners back to the country by loosening credit terms and devaluing their currency, but many businessmen believe that further major investments in China would be at risk. Richard Hartree, vice-president of Vancouver-based Alcan Pacific Ltd., which last year withdrew from negotiations for a joint venture to produce electrical conductors and build an aluminum-processing plant inside China, said that his firm pulled out because of the political uncertainty. Said Hartree: “We backed away. We want to see how things fall out. We’re not looking for new things in China.”

Clearly, foreigners are now cautious about China. Revenue from tourism, an important source of foreign exchange for China, dropped to $1.85 billion in 1989 from $2.25 billion the year before. Visitors like Braida report all-but-empty hotels, with many projects that were under construction now halted. The city of Guilin in southern China, a scenic destination that drew an average of 7,300 foreign visitors each day before last June, now receives an average of just 14 a day. Canadian Airlines has suspended its scheduled service to Beijing, at least until April, 1991, because of a lack of passengers.

More than just the bodies of young students were crushed under the tanks in Tiananmen Square. Business confidence in Hong Kong, the booming British colony located on China’s southern coast that will be returned to Chinese rule in 1997, was also flattened. The colony of 5.6 million people is home to some of the richest conglomerates and individuals in the world. China had promised to keep their business empires intact and to operate the colony under a capitalist system. But the sounds of gunfire and the shouts of despair echoing through Tiananmen clearly made people question that promise.

At the same time, there is a still-growing exodus of money and people from Hong Kong, with Canada one of the main beneficiaries. Robert Peck, spokesman for External Affairs and Immigration Canada in Ottawa, reports that 1989 saw a 37-per-cent increase in inquiries about immigration to Canada from Hong Kong residents. In 1990, thousands of Hong Kong Chinese are expected to immigrate to Canada, bringing with them close to $2.4 billion, with much of that money channelled into property in Vancouver and Toronto.

Andrea Eng, for one, has been selling commercial property in Vancouver to investors from Hong Kong for more than two years and says that the number of inquiries from the colony have continued to increase since Tiananmen Square. But now, she adds, the investors have become much more aggressive about establishing a place in Canada. Said Eng: “The rush is on to set up here and to build a business for their kids. No one wants to be the last one out of Hong Kong.”

And for some of the 80 China-based companies now operating in Canada, business also remains lucrative despite Tiananmen. Shu Mei Weng, general manager of the Toronto-based real estate developer Great Wall International Investment (Canada) Ltd., said that her company recently completed a townhouse development in Richmond, B.C., and that 22 of the 30 units will be sold by next month. And the company, which is one of 180 subsidiaries of the state-run Shezhen Special Economic Zone Development Co., will begin constructing a 350-unit, three-tower condominium development in Burnaby, B.C., in August worth between $60 million and $65 million, with presale of the units to begin in April.

In fact, Weng says that the only change that Great Wall has encountered in doing business in the past year is in the cautious attitude of others. “As time goes by,” she added, “clients will see that we do not represent the government and learn to treat us as a business.” Another China-based company, China State Construction Engineering Corp., put up half of the $100-million investment to develop hotelier Braida’s Chestnut Park Hotel in Toronto’s downtown Chinatown area in order to learn how to build sophisticated Western-style hotels at home in China. The hotel is now thriving, and is actually used as a training facility where young Chinese men and women who want careers in the Chinese hotel business come to learn their trade. Braida is also negotiating with Chinese partners to build other hotels, one near Toronto’s international airport, and another in Shanghai. Other businesses with Chinese owners also say that Tiananmen has not adversely affected their foreign operations. Celgar Pulp Co., jointly owned by CITIC B.C. Inc., a subsidiary of Beijing-based China International Trust & Investment Corp., along with Canadian interests, announced last October that it will double the capacity of the pulp mill that it owns in Castelgar, B.C. Plans call for a $630-million expansion that will allow it to boost production to 420,000 tons of pulp a year from the current 185,000 tons.

In contrast to the slowdown of foreign activity in China, some of the Chinese government corporations operating abroad are quietly stockpiling their profits and using them to expand their foreign operations. Says Great Wall’s Weng: “For us, there is no slowdown. Most of our profits will stay here and be used to expand our activities here.”

With the world’s largest population, now exceeding 1.1 billion, China also has the potential to become one of its most productive countries, with a vast market that holds a strong attraction for foreigners. But observers say that, unless China can heal the deep rifts that have opened between itself and its trading partners and moderate some of its harsh economic measures, its troubles are only likely to deepen.

The domestic economy is suffering from Li’s economic austerity program, which includes restrictions on consumer spending and a tight reign on credit. While Li has succeeded in lowering inflation to the current annual rate of about nine per cent from 18 per cent last year, the price has been high. Industrial output in January was $27.1 billion, a decline of $6.1 billion from the same period a year earlier and China’s worst performance since the early 1980s.

Hardest hit have been the small and medium-sized private businesses that propelled much of China’s past decade of spectacular growth. According to official government statistics, the number of private businesses dropped by three million in 1989, while another 2.2 million were absorbed by other firms. Officials say that rural entrepreneurs, who account for about one-quarter of China’s industrial output, declined by 800,000. That increased the ranks of the unemployed by 3.4 million, which foreign sources estimate have reached a nationwide total of 50 million.

The emphasis on Communist party doctrine has also created an atmosphere in factories that some foreign investors say undermines established business practices. So-called cadres, or Communist party officials, have been reinstated to the boards of companies that are jointly owned by foreign investors, thus adding a political element to the decision-making process. Workers have been compelled to take time off to sing revolutionary songs, and foreign investors have reported that their dealings with Chinese officials have become slow and unpredictable as nervous bureaucrats struggle to make politically correct decisions.

The life of the average worker has also become harsher. Zhang Aiping, for one, works in a radio factory for about $36 a month, but was denied her usual bonus last year—equivalent to about one month’s salary—because of the austerity measures. She and her husband, who earns about the same amount, have a four-year-old son, and Zhang, 28, says that they are barely able to make ends meet. Many of her friends are also gloomy, she says, because they see no end to the poverty of their lives.

Zhang is, however, lucky to have a job at all. While the official unemployment rate is four per cent of the urban workforce, or about 5.5 million workers, foreign sources say that the actual number looking for work across the country is about 50 million, and many of them are now part of a floating population that drifts between rural areas and the cities, looking for work that does not exist.

Despite such problems, China seems determined to go its own way, even as it seeks new loans and direct investment from the rest of the world. Said Braida of China’s ambivalent attitude to the outside world: “China has a history of isolationism, and international contact is not crucial to the Chinese. There is no shortage of food, and they don’t care about Rolex watches. But they realize that, if they want to modernize, they need us.” But for many other Western entrepreneurs, there is little likelihood that they will participate in that modernization as long as the repressive and risky legacy of Tiananmen holds sway in China.