Chinese Swindling

Last week, while in Beijing, ostensibly to study and forecast China’s future energy needs, the local press was having a feeding frenzy over the Mattel toy recall story. TV and newspapers went all out, linking everything from the contaminated pet food of a few weeks ago, to the execution of the country’s food and drug administrator last month, to the sealed drinking water bottles, containing unfit water. In a country where the press is either outright controlled or knows its limits, it was clear: the government is very, very, worried and very, very serious to do something about the endemic swindling in its manufacturing and market place. There was none of the usual defensiveness, blaming defaming foreigners, in the way the stories were presented.

While foreigners and Americans, in particular, worry about rather esoteric issues from Chinese products, the Chinese themselves appear on the verge of panic. The stakes are huge in real economics, on the prestige that the country has carefully cultivated for years as a manufacturing powerhouse, and not to be underestimated, all in the backdrop of the upcoming Olympics.

To be fair, the current turmoil does not reflect modern China by any means, a country that has made phenomenal strides in the last 20 years. After all, this is country that sent a man in space and can build 4000-kilometer oil and gas pipelines in a fraction of the time required by Americans. The imposing and bursting mega cities of Shanghai, Shenzhen and Beijing and the tens of thousands of miles of new superhighways crisscrossing the country are a pretty good proof that the country is a lot more real than fake.

Interestingly, the answer to my quest to understand why China has gone berserk in its energy demand without letdown in sight and all the recent consumer and manufacturing problems have a common root: urbanization and the growing pains it entails.

Consider this. Ten years ago China was 80% rural and 20% urban. By comparison the United States is 2% rural and 98% urban. Today, China is 60% rural and 40% urban. In a country of 1.3 billion people what this means is that roughly the equivalent of the entire US population moved into China’s cities in just a decade and there is still a long way to go.

The combination of things happening so fast while people suddenly pursue the good life becomes a recipe for disaster. Demand increases inside China in practically everything are huge. Manufacturers, competing for market share or just to meet the demand for their products, have been cutting every conceivable corner.

The West has never seen the mass production, currently all ever China. With cheap labor, every penny cut, multiplied by huge numbers, translates to huge profits. It is the nature of the Chinese beast today. They have developed an astonishing propensity for things to look good but with lots of flaws lurking behind the looks. Clothes may look excellent but their buttons will be undone after one unbuttoning or the seams will come apart because the thread is unraveled.

Brand labels mean nothing and it is not just the usual knockoffs like Nike and Luis Vuitton. The Chinese themselves know that there are fakes and there are fakes. They even have their own rating system with AAA the top rank. The situation is so widespread that the Chinese government formally warns Chinese tourists to Europe to check if their name brands are real to avoid confiscation (and embarrassment.)

The Chinese society has been on its toes long before the government’s recent conversion to consumer advocacy.

For the Chinese, a good restaurant is not just the one where the food tastes good but one for, example, that does not recycle the oil that the food was prepared. Defense? Put cigarette ashes in the serving dish. A good supermarket is where “stinky tofu”, a breakfast delicacy, is the result of natural fermentation; a bad one is where the tofu may have become stinky by being dipped in a sewer.

The ongoing uproar understandably fills the press with stories. Like the couple that had a nasty fallout and, the woman, in an apparent suicide attempt, ingested rat poisoning. Her husband rushed her to the hospital to find out that the rat poisoning was fake. She would live. In celebration, he went to a liquor store to buy alcohol. The name brand bottle that he bought contained benzene-contaminated industrial alcohol and he died.

Some of the stories are from enterprising journalists feeding a jittery public. And Beijing is unforgiving, as in the case of a journalist who was sent to prison for his fake story about a manufacturer adding flavored ground cardboard in popular dumplings. It proved to be entirely made up but captured the public’s imagination for a few days.

The task ahead for China is formidable. Solving the country’s consumer products problem is not trivial but it is of overwhelming importance both for the country and for the entire world which for the last two decades has come to rely on China as its manufacturing engine. The recent uproar is a good start and it is the Chinese themselves that are demanding swift and decisive action. Undoubtedly Beijing is on notice.