Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Investors Connecting With China's Profit Pathway

Companies / China Economy Sep 22, 2009 - 02:34 PM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: XIAN, People’s Republic of China – During the politically charged period in the late 1980s and early 1990s – when China believed it really needed friends – a small number of Western companies ignored the controversies and refused to abandon the market.


Global investors will recognize some of the names: The Coca-Cola Co. (NYSE: KO), Johnson & Johnson (NYSE: JNJ), and ABB Ltd. (NYSE ADR: ABB). In the years since, their courage and commitment has been rewarded with hefty market shares, growing profits, and a position of trust that’s very tough for an outside firm to obtain.


These firms also have guanxi.

Loosely defined as “connections,” guanxi is actually a Chinese word that refers to the very fabric of how relationships work, and how business is conducted in this growing Asian nation. In fact, trying to better describe just how important this concept actually is, some sociologists have actually likened it to “social capital.”

While the definition itself may seem a bit hazy, one fact is crystal clear. The best relationships and biggest profits in China are built upon the trust and long-term interactions embodied by this deceptively simple term. Global investors who take the time to understand what guanxi means – and to identify the companies that actually have it – can expect to reap the biggest windfalls from their China-focused profit plays.

A Different Point of View

Talk about “connections” to a Westerner, and the odds are good you’ll get a negative reaction. In the West, a connection can come down to one person owing a second person a favor. But in China, guanxi is about increasing one’s personal standing, about getting respect and about giving it, too. It literally encapsulates every aspect of Chinese society.

(For connections,” that’s actually something of an oversimplification; some sociologists have actually likened it to “social capital.” But even that doesn’t capture all of the nuances that make the Asian culture so fascinating to watch and study.

Contrary to beliefs here in the West, guanxi has nothing to do with bribery or corruption – although there is admittedly a very fine line here, just as there is anywhere in the world where power, money and profits intersect).

And while some forms of guanxi can be built up immediately, as my example involving Coke, J&J and ABB demonstrates, the most powerful and profitable benefits of guanxi can take considerable periods to amass.

The same is true for individuals, which is why most Chinese seem to spend inordinate amounts of time and money establishing, cultivating and maintaining their guanxi networks. Needless to say, once these connections are forged, they are nurtured, treasured and even guarded, for they can last a lifetime.

Guanxi starts with decency and fairness. If a company delivers their products on time – and honors its promises to the governing authorities and its workers – that firm is demonstrating “trustworthiness.” The company is reliable, dependable and can be counted on. Those qualities all enhance the firm’s guanxi.

Companies that didn’t stick with China, that seemed to pass judgment on the country and its precepts, or that tried to push a Western agenda, very rarely experienced any kind of overt or official rebuke. Instead, these companies discovered that they’d been shuffled aside. And their chance to be a real “player” in China was gone.

Guanxi’s New Role in the “New” China

Westerners who are still coming to terms with modern China will likely attribute this to what they believe is Beijing’s centralized authority. As state-operated enterprises (SOEs) decline in number, so-called “government guanxi” is losing its influence. And with good reason: The growth in entrepreneurship here has created legions of companies that are no longer dependent on state sponsorship for profits.

As China continues its emergence as a global economic superpower, even a social norm as old and established as guanxi is finding a new role. Properly constructed guanxi relationships will help global investors identify future trends, potential profit opportunities and even the players best positioned top pursue them.

In that sense, it’s a bit like the proverbial “old-boys network.” The companies with the connections will be best positioned to capitalize on the new projects, markets or potential partnerships. The companies that lack guanxi will read about the new deals in the newspaper after they’ve been finalized.

With their finely tune sense of “fair play,” it’s not surprising that many Westerners will want to cry “foul” when it comes to this aspect of guanxi. But here’s the thing: In China, connections are fair play. They’re completely legal. And it’s been that way for 5,000 years.

If anything, my experience in Asia over the last 20 years suggests that people without guanxi are the ones who should be worried.

So that begs the question: Absent traveling here three or four times a year and spending as much time as I have here in Asia over the past 20 years, how do you go about developing your own guanxi? Even better, how do you identify the companies with the powerful connections and the best profit potential?

When searching out investments, look for companies or profit opportunities that manifest the following three qualities. As we’ll explain, the presence of these three qualities makes it a near certainty that guanxi connections are present, as well. Those three things to think about are:

Consistency: Look for companies that have been in business here for a long time, and whose management teams have a strong track record. Western investors have a well-chronicled fixation on startups. And there’s a real temptation to concentrate on the newly formed companies in the potentially hottest new industries. But here’s a stunning fact: Most of China’s fastest-growing and most-profitable companies right now are the ones transitioning from a purely state-owned status. These firms either want to become private ventures outright, or to become new companies that are aligned with such major national initiatives focusing on large infrastructure projects, environmental issues and pollution control and energy. It’s no surprise that the companies with guanxi will have the best success landing business in areas the government has deemed to be so important.

Investors searching for more-aggressive, smaller companies should look for companies that have locked up special licenses, operating contracts or market franchises. These usually come about as a result of the collective guanxi of that company’s executive management team. One great example is a small, educational company that I discovered recently. It’s one of only a small group of firms granted an ultra-rare license that allows it to stream its Internet content all across China.

Patience: Here in China, executives often work for years before they are trusted enough to manage their first major deals. When I first came to Asia, a senior executive bluntly told me that he wouldn’t even begin to trust me until after we’d met at least three times. Even then, he said, that trust would be superficial, at best. When I asked why this was so, he informed me that “we Chinese see so many hotshots who come here expecting to get ahead and we only get to know them on the surface. There is no use for that.”

In his view, “we must see each other over a period of time to get to know one another.” Only then, he informed me, would our “truest character” emerge. And that would put in place the building blocks for a relationship built upon long-term trust.

It was a bit of insight that I’ve never forgotten. And neither should you.

When it comes to picking investments in China, you can’t learn everything there is to learn about a company from a “tip sheet,” or from an initial public offering (IPO) prospectus. It’s important to review management and even meet senior company officials, if possible. And if you can’t meet there in person, establish your own guanxi with someone who can.

The important thing is to learn what makes them tick over time. Just because a company is new doesn’t mean it’s the next sure thing – particularly in China.

Deliberateness: Thanks to its commitment to market reform, China has made more economic progress in the last two decades than it did in the previous 2,000 years combined. Despite the still-accelerating pace for change, however, the investors who succeed here will be those who tackle this process in a steady, measured manner.

To better understand what I mean, compare what’s happening here in China with what’s taking place in the United States. China is right now weathering the global economic storm by spending the money that it spent years saving for a rainy day. And with foreign reserves estimated at $2.3 trillion, it can rain for a long time before China’s economy gets too soaked to function.

What’s more, China’s outlays might well be better described as investments as opposed to expenditures. Beijing is spending money on expanding capacity and infrastructure that will help its economy grow for the long haul, even as it creates wealth in the near term. To a trained eye, it’s clear that the plans were put in place in a way to capitalize on the connections in business, industry, finance, and government. The country’s actions have been very deliberate. And very shrewd. Given all these considerations, the payoffs will be substantial for the country in general – as well as for investors who are shrewd enough to participate.

On the other hand, the U.S. is trying to borrow its way out of a problem that was created by debt in the first place. And it’s compounding that error by using that borrowed money to create “work” programs and to finance voter-appeasement bailouts. Neither of these actually fixes the problems at hand. Even worse, however, is that neither creates any long-term value. But both will end up sticking us with the mother of all credit card balances.

It’s no surprise to us that China is still on track for 8% economic growth. It proves that old adage that says “it’s who you know that counts.”

Especially in China.

[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best - because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world's financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

China is Investing Billions in Renewable Energy One firm has already built China�s largest wind turbine manufacturing factory. And it�s working with the Chinese Science Academy to develop new wind, solar, and geothermal technologies� for which it will own 70% of the rights. But this company�s business reaches far beyond the Chinese border, with operations in Southeast Asia, the Middle East, Africa and Eastern Europe. It�s first quarter net income increased by 294% over a year ago. Click here for the full report.

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules