Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

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