Predictions

by

William Gamble

I wrote Investing in China in 2001. I utilized my original methodology based in law and economics and game theory to analyze various areas of law in China. In writing the book and other subsequent articles, I made certain predictions. I am happy to say most have come true. The following is an initial list, which will be supplemented over time.

Securities

Securities regulation in China doesn’t work. It never will. The problem is not legal. It is economic. The incentives are wrong.

It's all in the family: Regulating the Stock Regulators: Securities Law in China, China's stock market will likely face more scandal because corruption is an integrated part of the system not likely to change soon

ChinaOnline, December 2000

The sense of paralysis at the heart of China's most vibrant city is easy to explain. The mainland's stockmarket is in a dismal slump. On February 1st, the domestic A-share indices in Shanghai and on the junior exchange in Shenzhen hit their lowest levels for more than five years

A marginalised market, February 24th 2005, The Economist

WTO Compliance

Major reforms introduced this year to clean up the stock market, enforce bankruptcy laws, encourage corporate governance have been stopped dead by the entrenched interests of the Party. The latest and boldest attempt at enforcing national laws, accession to the WTO, will most likely have a similar fate.

Investing in China, p. 2, written December 2001, published December 2002

Chinese actions in other important areas for manufacturers have not resulted in effective compliance, and serious problems remain. Manufacturers continue to report a variety of trade and business problems that they had expected would be resolved by implementation of WTO commitments. In fact, the NAM received more responses to its request for comments this year than in any of its prior compliance reviews. Many members believe that China’s failure to comply fully with its WTO obligations is limiting business opportunities in China and subjecting them to unfair competition.

Review of China’s Compliance With its WTO Commitments, The National Association of Manufacturers, September 6, 2005

The benefits to Brazil of granting market economy status to China have fallen short of expectations, to Brazil “We were supposed to get infrastructure and other investment in return and it hasn't happened.”“we gave China [market economy status] for nothing.”

Brazil says China deal is falling short of its hopes, Financial Times, October 2, 2005

Courts: Enforcing Awards

The judiciary is well aware of the problem. According to a judge in Henan province, “The legal channels for repayment do not work. It is in part a problem of enforcing judgment, due to a lack of will on the side of the courts. The main problem is local protectionism and debtors hiding their assets, making enforcement impossible.”

Investing in China p. 18, written December 2001, published December 2002

The failure to enforce legal judgments is a common and stubbornly persistent feature of the Chinese legal system, and afflicts foreign and local plaintiffs alike. According to a 2004 article in the China Law and Governance Review, Chinese courts command little obedience to their decisions, especially when they affect officials or government departments. Judges responsible for implementing court decisions report high levels of political interference. Some of that interference, while illegal, is based on policy considerations. But much of it is due simply to corruption.

Winning is only half the battle, The Economist, Mar 23rd 2005.

Contracts

Reliance on government connections rather than legal frameworks can create arbitrary results in a number of ways. Competition for government favors from private individuals and firms, leads to unpredictable outcomes especially when the government’s policy is inconsistent. There are several ways that these inconsistencies can occur. Local government may not enforce rules, laws, orders or regulations from another branches of government. Different agencies or bureaucracies can have conflicts. The most dramatic are conflicts at the very center of power Investing in China p.20, written December 2001, published December 2002

So at the end of the day, nothing works. Neither experience in China, government contacts, personal contacts, high government position, good lawyers, bribed judges, corrupt bureaucrats, there is no substitute for an effective legal framework. Without contracts and the infrastructure to enforce them, there is no way for the parties to protect themselves from opportunism and unforeseen contingencies.

Investing in China p.22, written December 2001, published December 2002

Thames had signed a 20-year contract to supply water to the city. It spent US$73 million building a plant and started pumping water in 1998. With almost 15 years to go on its contract, it suddenly had no deal.

RWE Thames Water, the world's third biggest water supply company, is required to withdraw from a water treatment project in Shanghai and hand the project over to the state-run Shanghai City Water Treatment North Co. after the government changed rules on the rate of return for such investments

China Economic Review July 2004 vol 14, 07

Real Estate

Speculative markets often result in panic when greater fools become scarce. Property prices in Shanghai nearly doubled between 2000 and 2004. In 2004 they rose 28% in the city center. Part of the problem is that 75% of the purchases are speculative, with buyers from both with China and overseas. At the top of the market, 80% of the apartments are being purchased by buyers from Taiwan and Hong Kong, who could quickly take their money home.

China, Bankruptcy, and the Dollar

by William B. Gamble

Published on April 18th, 2005, International Assessment and Strategy Center

Shanghai's July housing index fell 41 points, or 2.82 per cent, from its level in June, the biggest monthly drop since December 1999. Transaction volumes have fallen by more than 50 per cent and more than 1,000 real estate brokers have gone out of business.

Mark O’Neil, Shanghai fire sale belies developers' long game, South China Morning Post, Monday September 12, 2005