Demystifying China: a Club Enron Writ Large?

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Friday March 18, by Jerome F. Keating Ph.D.

There was a time when many economic pundits and gurus promoted Enron as the model company to emulate. It had a mystique. The guys that ran it were called the "smartest guys in the room." They were the innovative, bold insightful risk takers and the wizards that the financial world needed. As the company grew, everyone wanted to get on board this bandwagon of praise and profit. It was great as long as a lack of transparency veiled Enron's practices and its moving shell game of mark to market profits and "fabricated companies." But then the hype over the numbers began to diminish and the bottom line was more closely checked. Demystification began. The shell game could not keep pace and the smartest guys in the room soon went from being smart to being clever to being downright deceitful crooks who built an empire on deceptive practices and fabricated reports.

Because of its success, Enron had, for sure, developed a mystique. It could do no wrong; it was, after all, not just financially successful but big time successful. Yet once the clear light of day shone in, the end came quickly. Shares plummeted from $90.75 to 61 cents a share in slightly over a year; people wondered why they had not seen the resultant bankruptcy coming. Some of its leaders went to jail, others escaped, and at least one committed suicide. Their auditors, Arthur Anderson also went down. Enron's investors lost but it was Enron's 20,000 plus employees who probably bore the main brunt of collateral damage. Besides lost jobs, they lost some US$ 2 billion dollars in shares and pensions. A later court settlement would award them US$85 million but that hardly balanced against the remaining lost US$ 1.9 billion dollars.

So what has this to do with present day China and its mystique? Well, for the past two decades the pundits of profit have been touting China's growth and promise as the savior of the economic world. As a result, China has achieved a far greater mystique than Enron ever did, a mystique that operates on more than one level. Growth and profit are there for sure, but why and how? What does the discourse hide that needs to be demystified? For starters, a shift in perspective is needed; the first step is to view China more through the prism of a large corporation, one run by a select oligarchy and bent on regional if not world power.

Strange? Think on it. One key to Enron's dominant early "economic success" was its lack of transparency and its ability to hide developing problems. China certainly has opaqueness in spades as well as the added bonus of a state-controlled media and a military and police force to squelch any forces that might question its methods.

As corporate Enron sought to dominate the gas and energy market, China has initially has sought to dominate the manufacturing field by becoming the factory of the world. Try the experiment of finding something that was not "made in China?" China has other "corporate advantages;" it has a much larger and more controllable workforce than Enron ever could imagine, but it still needs resources.

The pundits of profit can point to years of a successful GDP of 10 per cent and more, but as China's GDP now slows to 7.5, cracks in the image are developing. China has certainly become the manufacturing giant of the world but why then are companies including nearby Taiwan already beginning to source other manufacturing locations in other countries?

There are other indicators that the pundits are not mentioning. True, China's manufacturing has created jobs for millions but there remain many more millions there still outside that work force. As this happens, wages are of necessity rising in an attempt to keep pace with inflation but that makes it more difficult for additional newer factories to be built and compete. Further, while most of the existing factories have not even caught up with Apple/Foxconn, they, the best of the best, are being challenged over quality and care for employees. Or has this in reality been simply a shakedown?

With millions still outside this manufacturing cycle, and growing pollution a continuing problem, what other growth areas are open for China to diversify into? China's banks and the shadow banks that finance a lot of this growth are also having their own problems with audits and corruption. Worst of all is the fact that an increasing number of Chinese tycoons and bureaucrats are squirreling away money in off shore accounts. These "safety nets" suggest a preparation to cut and run more than trust in reliable future growth. Here even family relations of Xi Pinying, the one supposedly cracking down on corruption, are guilty. What then does this say for the hundreds of millions of Chinese not yet involved? Unable to solve these internal problems China's leaders distract by pushing for territorial expansion.

Analogies of course only go so far; Enron was a corporation and China is a country. China has no auditors or courts to hold it in account. It will not go bankrupt like Enron, but, while it spreads its tentacles into the South China Sea and elsewhere for resources and control, it will and is already creating greater problems and collateral damage than it is solving. As this impacts not just China's neighboring countries but the world, demystification is needed. Yet the pundits remain silent. They have no answer and no "Dynegy" or other white knight waiting in the wings to rescue this situation. Those that are not part of the solution are becoming part of the problem.

Ironically while this goes on, as if with blinders on, the Ma government in Taiwan continues to put its eggs solely in its ECFA basket. It still pushes for an unexamined and unchallenged trust in its opaque ECFA union with this wavering manufacturing giant. Disregarding the Legislative Yuan, Ma persists in chanting the mantra, "as Enron was good for the USA, so China and ECFA will be good for Taiwan." This is the world and oligarchy that the average Taiwanese must face and demystify with coming elections in 2014 and 2016. This is the awareness that must be more and more taken into account; is Taiwan ready?