Mr. China Read online

  The turnaround was better news for the investors but for me, sadly, it was a paradox. There were no more battles to fight; no more deals to win; no more sieges to plan. I realized that I had worked myself out of a job.

  As I started thinking about what to do next, I knew that we were anything but an isolated case in the combat zone of Chinese investment; the whole business landscape was littered with the wrecks of failed joint ventures. Ten years after we had first raised the money hardly anyone did joint ventures any more. Even Pat had learnt a little humility; he developed a habit of describing China as ‘the Vietnam War of American business.’ Most of the big multinationals set up their own wholly owned companies unless the Government threw up restrictions. All but the most innocent of newcomers had concluded that joint ventures were just too hard to be worth it. And of the billions already invested, much of it was languishing in dysfunctional joint ventures entangled in all those familiar circuitous cross purposes where no one was in control.

  The experience at Five Star had shown that, with careful handling, considerable value could still be extracted from the most dire of situations in China. Five Star had been utterly bankrupt by any customary standards of business: wages were four months late, the bank had called in the loans and we had been pursued from bank to bank by Court officials with freezing orders for months on end. When I called around to talk to the multinational brewing companies to see if they might be interested in Five Star, I knew in my heart that buying the business would make no sense for them. So I hadn’t been surprised that no one had returned my phone calls.

  And yet Tsingtao had paid more than twenty million dollars for a share in the breweries, offshore and in hard currency. It made no sense in a conventional business context – but it was worth it for Tsingtao. They had raised plenty of capital on the stock exchanges in Hong Kong and Shenzhen so cash was no problem. Moreover, local investors still seemed so keen on buying up shares that Tsingtao’s stock was trading high and their shareholders appeared relatively unconcerned with short-term profits. Paradoxically, that meant that Tsingtao’s management could take the long-term view and try to buy up market share in China.

  Acquiring the Five Star breweries enabled Tsingtao to establish a strong foothold in a major market in China without the pressure for short-term returns. They were building market share to the stage where they could reach economies of scale and, as Pat had said years earlier at that dinner with the Mayor of Changchun, ‘take out the opposition.’ It was an irony that he had been right that Chinese industries would inevitably consolidate along lines that would seem familiar to a student of American history. It was just that the consolidators were Chinese and not from Wall Street.

  The same process of industrial consolidation was happening in the components industry. One spark-plug factory in Hunan, which I had visited eight years earlier, had grown from a small company about the same size as our business in Jingzhou into a large multiproduct group that was bigger than all of our seventeen businesses put together, just in the space of eight years. It had managed to get money from the stock exchange and buy up several larger companies that were exporting components to America. At one stage it expressed an interest in buying some of our businesses. Although it might have got money back to the investors, Pat would have none of it. Selling out to more flexible and quick-footed Chinese was something that wasn’t in the original plan; it was something that simply could not be accommodated within his view of the world. But with plenty of well-funded Chinese companies out looking for businesses to buy, and the huge stock of dysfunctional joint ventures like Five Star all across the country, I felt that there might be an opportunity to put the two together and recover value. So I parted company with Pat and went out to look for opportunities to extract value from difficult situations.

  As China moved into the new millennium, it became obvious that the minor mishap with a few hundred billion dollars of foreign investment during the 1990s was dwarfed by the problems of China’s domestic banking system, which is a cock-up of truly astronomical proportions. Buried under a mountain of non-performing loans or ‘NPLs’ left behind by the state planners, the banks were struggling with bad debts that some economists estimate to be the equivalent of seven hundred billion dollars. But even there, in those most dire of situations, which the financiers rather coyly called ‘distressed’, I became convinced that some value could be recovered, that some of the ‘distressed’ businesses could somehow be resuscitated and given some hope. So I ended up wading into the new morass of the Chinese NPL market to see what I could find.

  It was only after I left the company and emerged blinking into the sunlight that I realized how completely out of touch I had become. I was so preoccupied with the battles that I had failed to see what had been going on all around me. I quickly realized that where one iron tree had blossomed for us it was as if a whole forest had burst into flower along the Chinese coast. Everything had changed in those ten short years; there had been a seismic shift in the economy. China began to generate its own cash from the stock exchanges in Shanghai and Shenzhen.

  As huge amounts of cash had trickled slowly down to street level the lives of hundreds of millions of ordinary Chinese had improved unrecognisably and, probably irreversibly. Everything had changed in the coastal cities: the appearance and dress of the people living there, their access to information, transport, food and decent living accommodation, their choice in education and health care. Many families began to send their children overseas to university while back in China the cityscapes had changed so much that I felt like a complete stranger in the country that I had made my home.

  When I went down to Shanghai after a three-year gap, I didn’t recognize the place. I told the taxi driver to keep driving around on the huge elevated roads that sweep across the city so that I could gape at the vast towers and skyscrapers dominating the skyline; I felt like a child staring out of a car window at the Christmas illuminations. Occasionally I could pick out the odd familiar building squashed in between the towers, but not often.

  I thought back to the time years earlier, in the late 1980s, when I had first gone over to Pudong on the eastern bank of the river in Shanghai. Pudong lies opposite the Bund, the line of imposing colonial buildings where I had visited the Land Bureau with the pinstriped bankers from New York. Back then, before it was chosen as China’s main development zone in the early 1990s, I had enjoyed a walk in the country. I remember seeing the occasional water buffalo squelching around in the mud and an ancient temple where women with perfect white hair and faded blue cotton jackets hobbled across the stone flags to push joss sticks into the huge piles of ash in the three-legged bronze incense burners. Ten years later, the fields had disappeared for ever but the temple had been preserved and made into a museum. It stood just opposite the Shanghai Stock Exchange. The crush of skyscrapers towered eighty storeys above the temple roofs, the towers of steel and glass overwhelming the stooping curves of the old temple eves and the cracked glaze on the tiles; no one burns incense there any more.

  Further on, the roads through the industrial parks behind the city stretch for miles towards the horizon, past huge car-assembly plants, software institutes and microchip foundries. Shanghai had been swept up in the same mad dash for growth that had gripped Shenzhen and Zhuhai in the days after Deng’s Southern Tour. But whereas the Pearl Delta down in the south has a population of maybe a hundred million, the Yangtse River Delta, which spills through the sprawling waterways and oyster beds into the sea near Shanghai, is home to nearly three hundred million people. The river connects the financial centre to the huge population of the inland provinces: Sichuan alone has a hundred million people, Jiangxi eighty, Hubei another ninety, and so it goes on, each province bigger than a European nation.

  The inexorable industrialization of the Chinese countryside creeps further inland, crawling along the river’s banks, seeping into the mountain villages in its never-ending search for labour. There is an inevitability about China’s march
onwards; those stamping feet have their own relentless rhythm – in a few years the Yangtse basin will be the largest manufacturing base in the world. It’s only a matter of time, and the changes churned up in its wake will affect the whole world. At its centre, in ten years the Shanghai Stock Exchange had grown from nothing into one of the largest in Asia; for a well-run Chinese company, raising a hundred million has become almost routine. The Chinese economy has reached a self-sustaining momentum and it seems as if the explosion that Pat predicted all those years earlier at dinner with the Mayor of Changchun has finally happened. The foreigners helped light the fuse but much of it has been powered by the Chinese themselves.

  It seemed for a while that this new economic growth might spark a second foreign investment wave, a decade after the first; billions were lost by foreign investors, but they still kept coming. I had been forced to dismantle entirely my assumptions about China and relearn all the basics, but many investors still appeared supremely confident that China would eventually view the world their way, that it would eventually ‘see reason’ and begin to conform to the familiar business school model. But as China continues to press ahead with opening up to the world at a speed that can be astounding, my hunch is that it will always retain an intense sense of its own place in world history. It remains more complex, more in tune with its unique ‘Chineseness’ and in tune with its own past and much less conformist than can be imagined by visitors like Charlene Barshevsky, the US Trade Representative who described the World Telecoms Agreement as ‘a triumph for the American way.’ We’ll see.

  As I thought about Old Shi, Chen Haijing and Madame Wu with a clearer perspective once the battles were over, those three characters, for me, gave a picture of China in transition. Old Shi, the risk-taker, the entrepreneur always running out of time, had escaped from the system. To me, he represented the type of Chinese who took all those experiences of turmoil and wild reversals under Mao and Deng and learnt to survive by keeping ahead of the game. Completely unbound by convention or regulation, he remained an irrepressible showman with the short-termism, adaptability and speed needed to run rings around his opposition. Unsurprisingly, his business is thriving down in the valley and he recently set up a new factory in Shanghai. He started to get export orders from America and every so often he calls me in Beijing and we have lunch.

  Chen Haijing has his foot in both camps; he has traces of Shi’s business flair but for some reason he hasn’t made the break. Stuck in some middle ground, halfway between official and entrepreneur, he has been forced into a constant compromise, endlessly balancing interests within his business and the local government. He represents the entrepreneur within the system, the man struggling with the basic incompatibility between China’s economic and political systems, the mismatch between Shi’s raw Victorian capitalism and the largely unreconstructed and poorly paid Communist bureaucracy that still controls the country. In retrospect, it was not surprising that our difficulties in Jingzhou involved land; problems concerning land are common throughout China. It is a highly valuable asset that is still controlled by officials who earn a miserable wage. It is hardly surprising that there have been so many problems with officials misallocating land in return for favours.

  And Madame Wu. For me, she represents the change-lessness of China. She is the Qianlong Emperor who will argue for months about the kow-tow, accept the tribute gifts and then continue serenely on her path, undeflected by the foreigners who have come before her. In the end, she had survived without needing to compromise. In fact, she came out on top. She had started off with a Beijing brewery with millions of dollars of bank debt but ended up with the loans paid off by American investors and a new partner, Tsingtao, which was the strongest beer company in China. I had to admire her for that. And some understanding had sprung up between us. We’re still in touch and every Mid-Autumn Festival she sends me mooncakes, little round pastries stuffed with red bean-paste. It makes me laugh. I’m sure I told her that I can’t stand mooncakes.

  Pat is still there, running his components business. The plan to consolidate the industry has been quietly jettisoned, but he is still on the trail for new capital. Last time I heard, he was raising more money in the States to invest in the export business. In the earlier years, some of his rivals used to mutter that raising so much money and getting into difficulties after investing so quickly had ruined the private equity market in China. But that always sounded like sour grapes to me. Out of all the China funds set up in the early 1990s, his was the only one to survive. And you know, I still admire him; China didn’t work out according to his financier’s equations but at least he had the guts to try.

  China had been modernized in a way that I wouldn’t have believed possible ten years earlier, and the Government delivered on its promise of stable growth. The lives of millions of ordinary Chinese had been improved beyond recognition as the planners began to fade into the past. But I still knew that the coastal region was the showcase and that the inner provinces remained poor. Whenever I flew west from Beijing, I gazed down over the endless expanse of ‘Yellow Earth’, the great loess plateau that stretches inland beyond the Taihang Mountains at the western fringes of Beijing. It was there, in Shanxi Province, that Ai had worked with the peasants. I tried to imagine what it would be like down there on the dusty yellow soil, in the landscape of crumbling earth pitted with ravines. On a flight out westwards, a colleague once told me that she had heard how a group of peasants in Shanxi had won a competition and had been invited up to Beijing where their hosts had treated them to a banquet. Some of them had cried when they saw the table: so much food, so much waste when back home there was nothing.

  I wanted to know what it might have been like for Ai in the fields; I wanted to get some feel of the land. I’d travelled through Shanxi by car and by train, but that was too insulated. I decided to go by bike. I would go right into the guts of China, unprotected so that I could see what it was really like.

  I flew to Xi’an in central China, bought a bike and rode it back to Beijing alone. It was a journey of nearly a thousand miles through some of the poorest parts of China. The first few days were uneventful as the roads wound through rolling countryside and picturesque villages with neat cave dwellings carved out of the hillsides and vines and gourds growing around the doorways. But on the third day the landscape changed.

  Over the course of the morning the countryside became rockier and steeper. The road became narrower and more congested as I climbed up through a valley. I suddenly noticed a couple of coal mines over on the other side. I knew that up in Datong where Chang Longwei had spent all those years in a gearbox factory there was a big coal-mining region, but that was several hundred miles to the north. It hadn’t occurred to me that I would need to go through a coal-mining area so far south, but I pressed on.

  By midday the entire landscape was black. The valley narrowed down to a few hundred yards across and the craggy sides towered over me. I realized that I was in a ‘third front’ area where Mao had hidden all the military facilities in the 1960s. Huge factories were tucked up in side valleys under great clouds of yellow smog. The smell of sulphur hung in the air.

  I’d never seen such pollution: the soil was black, the air was thick with diesel fumes and factory smoke. The rivers had run completely dry, their beds a mass of smashed rock and thorn bushes. Every few miles I saw slag heaps and the towers with the wheels on top that lowered down the miners in their cages. Even from a distance these coal mines looked badly managed and much too small to be economically viable. Local village committees ran them, but they had no access to cash or resources to put in proper safety measures.

  Everywhere was black and the whole valley was filthy: the rocks were black, the soil was black, clothes and faces were black, and there were no trees. Coal dust was in my eyes and in my lungs, its smell was in my nose and the taste was in my mouth. By the time that I struggled to the head of the valley, I was filthy and exhausted. I stopped for a rest.

  As I sat
by the roadside to catch my breath, I looked up and my heart sank. A few hundred yards ahead the road disappeared into a tunnel. I hadn’t thought of that particular hazard so I took out my maps. Avoiding it would involve a thirty-mile detour. I just didn’t have the strength for that; I’d done nearly eighty miles and had to travel another forty to the next big town and it was already early afternoon.

  I looked into the darkness, past the hulking trucks and through the thick fumes, and I could make out the vague shape of the tunnel’s exit at the far end in a yellowy light. So I plunged in. But halfway through I was in pitch darkness. Trapped next to a wall I couldn’t see, with huge trucks rumbling past next to me, I was choked with filthy diesel fumes and deafened by the air horns blasting in my ears. Suddenly I ran into something sticky on the road’s surface and I felt my wheels twitch sideways. Eventually I got out, with my nerve almost broken, black from head to foot. That was the only time in China when I remember being really frightened.

  As I came out of the tunnel and into the sunlight, I saw that an oncoming truck speeding towards me was shedding its load. The driver hadn’t noticed and carried on as huge thick logs ten feet long bounced along the road towards me like matchsticks. I managed to avoid them but the near miss completely shattered my nerve. I threw myself on the ground and lay in the dirt and rubbish at the side of the road, my chest pounding.