China has problems with western business practices

Douglas J. Smith,

Managing Editor

With China planning to almost double its capacity of electricity by the year 2010, the country is looking to overseas investors to not only construct power plants but also to help its power plant equipment manufactures increase capacity. Currently China has insufficient manufacturing capacity to meet the country`s need for new power plants.

Westinghouse Electric, United States, is currently negotiating joint ventures with Chinese turbine manufactures in Shanghai and Harbin. Under the agreement, the factories in Shanghai and Harbin would immediately increase their outputs by 30 percent to 50 percent through the use of comanufacturing agreements. Joint ventures between Chinese and overseas companies are also being formed to upgrade and modernize China`s older problem-plagued 200-MW units.

According to China`s Ministry of Power Industry, China expects approximately (US)$100 billion of investment in its electric power industry by the year 2000 with (US)$15 billion to $20 billion coming from overseas. However, on its own China cannot develop or finance all of its electric power capacity needs, and without an adequate and reliable supply of electricity, the country will not be able to meet its economic goals. Unfortunately, China`s economic development could come to a halt unless overseas developers and the central government of China can agree on an appropriate rate of return on foreign investments in China.

Although China has opened its market to overseas investors, the central government is still suspicious of the west`s capitalistic free enterprise system. Gordon Wu, a Hong developer active in China, said that China sees foreign investment as exploitation. In some ways China`s suspicions are merited as sometimes profit is more important than people in the west; the west`s exploitation of China in years past cannot be overlooked.

Even though the free enterprise system has drawbacks, the benefits far outweigh the disadvantages and over the long term the free enterprise system would benefit China. This can only happen if there is trust and cooperation by both sides. Obviously there are risks in developing electric power projects in China. The Chinese government should be prepared to allow overseas developers to earn a rate of return on their investments commensurate with the risks involved.

There is currently a major conflict between the government and overseas developers in regards to the rate of return a developer should expect for his investment in China. The Chinese government believes 12 percent to 15 percent is an adequate rate of return while overseas investors believe 18 percent or more is realistic. As a result, foreign investors already in China are threatening to leave while other potential investors are waiting on the side to see what happens.

China needs the help of overseas developers if it is to grow economically. However, these same developers, particularly those from the west whose own economies are flat, need the Chinese market in order to grow.

Although in the past the western barbarians exploited the Chinese, it should not stand in the way of resolving the current differences. Without an equitable solution to the current problems, and suspicions, there will be no winners–only losers.