The Problem with China

There have been a growing number of news stories lately about issues with China that impact your business decisions. I wanted to go through them, talk about them, and try to understand the problem with China. WATCH NOW

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VIDEO SUMMARY

Let me start by saying that recently in the US, there has been recent horrible acts of violence against Asian Americans. These acts should be condemned. The Asian American community is an extremely important part of this country and should be embraced. This video is about China, but please do not take this video as any kind of hate against the Asian American community or the Chinese people. In this video I am talking about the Chinese government, the Communist Party of China. It is important that people understand the differences between the government of China and the government of the United States, because the differences are pretty dramatic and the source of many of the current problems.

1. Intellectual Property. This has been an issue between China and the US for a long time. The FBI and Department of Homeland Security have released reports and issued statements showing that China actively engages in corporate espionage to steal Research and Development. Business people know that if your company does business in China, you have concerns that your intellectual property will be stolen. US companies will spend years developing new technology, China steals it and starts manufacturing it, avoiding all that cost. The root of this problem is that China and the US have very different attitudes around intellectual property. China believes “copying” an idea is not a problem, where the US regards this as stealing. This is a very significant issue, because strong protections on intellectual property are required for economic growth, otherwise people will stop investing in research and development.
2. Stock Market. There has been an issue for a long time with Chinese companies committing fraud on US stock exchanges. The recurring issue is that Chinese companies are not holding themselves to as high of accounting standards as US companies. Time and time again, the financial statements end up being inaccurate and US investors end up losing a lot of money. These Chinese companies did not think it was an issue to “adjust” their numbers to meet market expectations. Two weeks ago, the SEC adopted a new law called the “Holding Foreign Companies Accountable Act” with increased scrutiny over Chinese companies. If Chinese companies do not follow the new regulations, they could be delisted from US stock exchanges. This is an ethical issue where China is using lower accounting standards than US companies.
3. Entrepreneurs. There is a big difference between how entrepreneurs are treated in China versus the US. The big news story recently has been the disappearance of Jack Ma for three months. Jack Ma is the leader of the largest tech company in China, Alibaba. Jack Ma has only recently surfaced for only a few appearances. Jack Ma’s disappearance occurred after making public statements criticizing Chinese regulators. After the comments, the IPO for Jack Ma’s company Ant Group was shut down, and just yesterday China has fined Alibaba $2.8 Billion for “behaving like a monopoly.” These are targeted attacks by the Chinese government to keep Jack Ma in check. Imagine if this happened in the US. Imagine if an entrepreneur like Elon Musk, criticized the US government, and then the government kept him hidden for three months and tried to shut down his company. This shows dramatically different ethical values between the US and China on the freedom they give their entrepreneurs. We all know that entrepreneurs are an incredibly important part of growing an economy.
4. Human Rights. There are many documented instances of human rights violations in China including the massacre in Tiananmen Square where the Chinese government killed its own people for protesting for the right to vote. The recent problem, which is affecting the business community is cotton from the Chinese territory of Xinjiang. In this region, Uyghur Muslims have are being used as forced labor in the cotton fields, and if they refuse they are taken to concentration camps. Imagine if the government took you from your job, and told you that you have to go work in the fields picking cotton. That is your new career because the color of your skin. That is slavery and it is wrong. Just so you understand the scope of the problem, we are talking about as many as a million Uyghurs being used as forced labor in detention camps. Last week, the Biden administration issued a report accusing China of Genocide and crimes against humanity for their treatment of Uyghur Muslims. This has put clothing businesses around the world in a difficult position. Many of the shirts you own could be made by slave labor from this region. Many businesses have come out and said they will no longer purchase the cotton, but when faced with a backlash from the Chinese government boycotting their stores in China, many businesses walked back from their statements. I have to say to those businesses, have some backbone. We should all pay a little bit more for our clothes to ensure they are not made by slave labor.

These are ultimately issues about ethics. This are four examples where the Chinese government has used lying, cheating, stealing, and slavery to build their economy. If we look at all these four areas, there is a stark difference between the US and China. In each case, the US has higher ethical standards than China. Here is why ethics is so important: Ethics is good for business. Imagine you have two communities and in one community everyone lies, cheats, and steals, and in the other community people trust each other and respect their property. The ethical community is going to beat the other economy every time. The hope in the US has always been that China will embrace these higher standards of ethics, but it is difficult when the government of China will not even let its citizens have the right to vote. And if you speak out against the government, you are silenced. Just imagine the alternative. Imagine how much value would be created for the world if China embraced reforms, embraced ethics and unlocked the potential of its people. That is why it is important to understand the differences between the US and China and stand up for what is right.

So what happens next? It does not look good. Someone who has built their economy on lying, cheating, and stealing is likely going to escalate those activities. Right now, China has been taking aggressive action toward Taiwan by increasing military activity in the Taiwan Straight. Yesterday, the Biden administration said it was monitoring the situation closely. We have yet to see what will happen, but the time is coming when businesses will have to make decisions on these ethical issues. This is an opportunity for each of you to think through your own ethics and decide what type of world do you want to live in.

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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.