China’s crisis conundrum

Despite the government's attempts to regulate consumer safety, corrupt business practices are deeply rooted in Chinese culture.
Constance Kong | Aug 13 2010 | comment  

China lurches fromone man-made catastrophe to another, despite the efforts of its government toimprove laws and regulations to protect people and the environment. In thelatest front-page scandal, babygirls have been developing breasts after consumption of milk powderallegedly laced with growth hormones.

This comes justtwo years after another milk formula scandal that killed six babies and sawnearly 300,000 others become ill with kidney ailments from powdered milkcontaminated with a toxic chemical (melamine), which is used in the manufactureof plastics.

While it’s truethat the West has its own problems, China’s crises point to fundamental problemsin its corporate culture. Problems in food and pharmaceutical products in theWest are usually due to a breakdown in systems or processes, or sometimes tomalicious sabotage or extortion. In most cases companies move quickly toprotect consumers, thereby enhancing their own reputations.

In China, on theother hand, crises have been too often caused by greed: companies place profitsahead of people. Health and safety standards are ignored to obtain better bottomline returns. Many Chinese glibly explain that life is not worth much.

To a large extent,the problem in China is compounded by the incestuous relationships between theCommunist Party, government and business. Indeed, they are often one and the same. Sanlu, the company at thecentre of the 2008 melamine scandal, was part owned by the city government ofShijiazhuang where it was headquartered in Liaoning Province. Its chairwomanwas a Party appointee and a member of the Chinese People’s Political ConsultativeConference, a political advisory body to the Central Government.

Often, too, lawsare not enforced if they reduce profits that go directly to government coffers.The worst example is China’s mining industry where the annual death toll is unimaginableby Western standards. The government admitsthat 2,631 coal miners died in 1,616 mine accidents in 2009, down 18 percentfrom the previous year.

Many mines thatbreach occupational health and safety regulations are at least partly owned bylocal governments. In many cases local officials do not enforce strict regulations.

But don’t rush toblame Mao Zedong and Communism. China is also a prisoner of its ancient culture.Two deep-seated aspects of Chinese culture – guanxi and mianzi – arealso important.

The concept of guanxi or connections allows manybusiness leaders to act with impunity. This dates back to the days of imperial rule and the Mandarins. Today itmeans weakened corporate governance as many companies are led by companydirectors with strong connections to members of the Party and politburo and canskirt laws and regulations.

The Sydney Morning Herald’s Beijingcorrespondent, John Garnaut, recentlyargued that Du Shuanghua, one of China’s richest entrepreneurs and the businessmanat the heart of the Rio Tinto bribery scandal that landed three of its executivesin prison, not only escaped censure but continues as a leading player in Chinabecause of his guanxi with the familyof the nation’s president, Hu Jintao.

Mianzi or face is important when thegovernment or companies seek to cover up a crisis. The melamine milkcontamination crisis, for example, was covered up by Sanlu so that China wouldnot lose face in 2008 when it was hosting the Olympics.

In some casessenior managers do not become aware of simmering issues until it is too latebecause subordinates either want to save face for themselves or for theirbosses.  Simply put, juniormanagers are averse to reporting problems up the line.

While China isunlikely to end its system of State-sponsored capitalism or implement major democraticreforms to address these problems, the country needs some political reform,however limited. At least it should unshackle its judicial system. As long ascourts remain under government and Party control, justice cannot be served andthe darker aspects of culture and politics will continue to thrive. A freerjudiciary might also provide China’s seething underclass with an outlet for itsfrustrations – a point not lost on the Communist Party, which came to power onthe back of proletariat and peasant disenchantment.

But even limitedreform seems revolutionary and unlikely. A truly independent judiciary would undoubtedlythreaten government connections and vested interests. Where’s the face in that? 

ConstanceKong is the pen name of a Shanghai-based business consultant.

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