Risks from expanding into China not the ones expected: RMS keynote

NEW YORK — Investing and trading in China carries significant risks, but not necessarily the risks that seem to pervade public perceptions of the country's corporate ecosystem, according to Shaun Rein, founder and managing director of the China Market Research Group.

Government corruption, favorable labor costs, and political and social unrest may dominate news coverage of China's rising economic development, Mr. Rein said during a keynote address at Business Insurance's 2013 Risk Management Summit in New York. But those risks are only part of the broader risk profile U.S.-based companies are likely to encounter when expanding into China — and are often not the exposures that should worry U.S. firms the most.

“There are some very real risks, but they might not be risks you see on Fox News or '60 Minutes,'” Mr. Rein said.

Perhaps the most pervasive myth tied to doing business in China is the threat of government corruption, Mr. Rein said. However, while government corruption is a significant issue for locally based companies — as well as a long-term threat to country's economy on the whole — it rarely directly impacts foreign-based corporations, Mr. Rein said.

“It's absolutely a huge problem for the economy overall, but the reality is that it doesn't really touch multinationals,” Mr. Rein said, adding that Chinese officials are typically loathe to risk the appearance of corruption with non-Chinese firms for fear of incurring the scrutiny of foreign governments, particularly Western governments.

The real threat to multinational firms doing business in China, Mr. Rein said, is that of internal employee corruption and corporate espionage.

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“That's something that you're going to have to deal with on a very regular basis,” Mr. Rein said. “As risk managers, you're going to have to help your organizations figure out how to put the right management teams and systems in place to make sure that your own people aren't cheating you, because it happens all the time.”

Another myth that tends to dominate discussions of China's economy — and its relative appeal to U.S. companies — is that its success continues to be keyed to low wages and production costs, Mr. Rein said.

“A big myth about China is that it's a cheap place to do business. It's not anymore,” Mr. Rein said. “China's been a deflationary force on the world economy for the last three decades, but no longer.”

Mr. Rein said the primary driver of rising business costs in China over the last several years has been labor costs. In 2011, more than two-thirds of China's provinces raised minimum rages by 22%, Mr. Rein said. Last year, the average urban migrant worker's wages rose by 14%.

“It's extremely difficult to recruit and retain talent in China,” Mr. Rein said. “About 70% of Fortune 500 firms that we interviewed in China said they see turnover rates of about 30%. When we ask these firms what their biggest impediments to growth in the next five years are?, it's never corruption, or lack of transparency, or protectionism by the government. It's talent.”

Political and social unrest tied to widening income gaps and overall dissatisfaction with China's communist government are also popular topics of discussion among media outlets, Mr. Rein said, but rarely factors into discussions among regular Chinese citizens.

“What concerns me is the combination of optimism and aggression that's been instilled in younger generations of educated Chinese workers,” Mr. Rein said. “The middle class in China is by far the most pessimistic. They're starting to believe that they'll never achieve the wealth they envisioned, and that's where things get dangerous.”