'Experts' on China need to be scrutinised

Luke Minford

"Beware the so-called experts" is the sage China advice of an intellectual property lawyer in Beijing.

Luke Minford, of Rouse and Co, has drawn cogent conclusions on where New Zealand companies coming to China go wrong - and that one tops the list.

"We are valued for being upfront and honest. But that can translate into being too trusting of those that hold themselves out as China experts," the fluent Mandarin speaker and the son of John Minford, a leading Chinese scholar, says.

"In a country that is changing as quickly as China, an expert four years ago may not be an expert today, and a theory on how to break into one part of China may not work in another."

None the less, he believes China offers huge opportunities for investors with the associated risks being overblown. Many people are concerned about the theft of intellectual property, but Minford thinks enforcement is more efficient than most realise. There is one caveat: criminalising the wrongdoers is difficult as opposed to forcing them to stop.

Another important issue is "trade secrets". These are difficult to protect, especially if the secret's owner is a New Zealand company with no physical presence in China.

Obtaining trade secret protection for IP rights requires that the disclosing company clearly identify it; a process that often requires a company to describe scrupulously its intellectual property through the course of negotiations and confidentiality agreements. Companies are reluctant to do this in China because they do not trust that secrets, once disclosed, will be kept secret and believe the enforcement environment does not deter Chinese competitors from utilising stolen trade secrets.

The message is that many foreign companies do not believe trade secret protection amounts to much in China. Even here, Minford says, effective steps can be taken to minimise the risks.

"The precautions you put into place are much like those you would adopt in any other country, such as restricted passwords, clarifying who has access to what information and drawing up watertight confidentiality agreements in the event staff jump ship," he says.

"The problem in China is that these steps are too often overlooked in the mad panic to increase market share and production; a problem exacerbated by infrequent visits announced well in advance by the trade-secret owner. Furthermore, if infringement occurs, you must follow up vigorously and show that you are intent on exercising your rights or you will lose all credibility."

Companies should also remember that threats to IP rights don't just come from criminal types. A major complaint of some foreign investors is the necessity of disclosing know-how to Government agencies responsible for approving the transfer of that technology.

"Investors wanting to build a plant that requires government approval in China must provide the local government with the specifications," Minford says.

"Unfortunately that can open the gates to abuse by crooked Government officials - who are much harder to sue."

However, even this practice tends to occur in the poorer and less sophisticated parts of China rather than around Shanghai or Beijing. But Minford's words further highlight the importance of handling the Government successfully.

As senior representative of the International Monetary Fund in Beijing, Ray Brooks is one of the most "official" and senior New Zealanders in the capital. An economist and China expert, his experience is less hands-on than some, but his analysis of China is interesting in determining whether the ambitions of his compatriots are feasible.

Brooks has an essentially optimistic view of China, in particular compared with his experience of other developing countries in Africa.

"One of the most striking achievements of China is how it has managed to attract and retain investor confidence. Foreign direct investment is pouring in. That's quite a contrast to many African countries, which have signally failed in this regard."

The situation is slightly ironic for the IMF since China has no need for that entity's traditional offering: Capital.

In fact, China is awash with capital, ranging from the US$55 billion attracted from foreign investors annually in the past few years, to its US$800 billion in foreign-exchange reserves.

Brooks thinks China needs to focus on three key points:

* Introduce a more flexible exchange rate to give a more independent monetary policy.

* Slow the rapid pace of investment growth that is creating excess capacity and new bad loans.

* Continue to reduce budget deficits.

The latter is important to provide the country with a financial buffer zone, given the huge spending on education and health that must eventually occur.

However, Brooks says China is entering an encouraging period, thanks to tax revenues pouring in at a higher rate than the country's GDP growth rate.

"This means funds will be available for the crucial task of raising educational and health services - a key component for levelling income rates across China and ensuring sustainable growth."

One of Brooks' most interesting comments is that China and New Zealand have some surprising similarities.

"You could say China is taking a similar course to that which New Zealand took after the fall of Robert Muldoon.

"Just as happened in New Zealand in the 1980s, so China is also seeing an explosion of economic dynamism based on the roll-back of the state," he says.

Such an endorsement must surely give heart to those New Zealanders eager to tango with the elephant in their own backyard.