CHINA ESQUIRE

For those of you looking for quake information, please see the following:

“ More Ways to Help in the Aftermath of the Earthquake - UPDATED!” where I track reputable charities that are taking donations to help the quake victims.

“ Sichuan Quake Updates and Red Cross Donations - UPDATED!” where I track developments on Shanghaiist and mirroring the most recent updates, for everyone’s benefit.

I will continue posting again.  Please look below this post for my latest content.  I wanted to keep this post on top for the time being.

Today is another break from the usual law and business stuff because of the quake, and also, I just needed a day to relax. The BBC ran an article last week entitled “Wild times in changing China” that talks about the natural treasures of China’s environment. However, with the rural migration to the cities, it seems like rice paddies may get wiped out and greater industrialization will jeopardize the environment.

China is a country that in some peoples’ minds has become synonymous with industrial pollution, rigid political control and spectacular economic expansion.

But behind this image lies another world which is the real, essential China - a place of vast shifting deserts, tropical coral reefs, steaming jungles, snow-capped peaks, evergreen forests and smoking volcanoes.

And surviving, tucked away within this incredibly diverse landscape, is a wealth of animal and plant life.

China is home to 534 species of mammals - one eighth of the world’s total, of which more than a hundred, including iconic creatures such as the giant panda, are endemic.

The country’s birdlife is also extremely rich, with more than 1,300 species, whilst there are more than 2,200 species of fishes.

China’s plant life is equally spectacular, with an amazing 32,800 species of higher plants, making China the third richest country in these terms after Malaysia and Brazil.

Rural demands

Experts are forecasting that in the next couple of decades, more than 300 million rural people will migrate to China’s Eastern seaboard in search of better-paid jobs.

Traditional farming systems, like the terraced rice paddies which cover the hillsides of southern China, require a huge amount of manual labour for planting, upkeep and harvesting.

As wage levels rise, such work is bound to become uneconomic, and without intensive management, the paddies will not survive the annual onslaught of monsoon rains for long.

At the same time, pressures to increase food production to meet increasing demands from a growing urban population, and to cope with the effluent produced by massive industrialisation and vast urban conurbations, will inevitably pose serious environmental challenges.

I have a feeling this is a tragic, but rather inevitable part of a growing economy. Why else would America put so much focus on natural parks and wildlife preserves if industry didn’t wipe out large chunks of the environment? I am actually not much of an environmentalist, so don’t get me wrong here. I am not saying let’s go back to pre-historic, pre-industrial society like a Luddite. I am just making an observation that it’s bound to happen, but am somewhat sad that the beautiful landscapes of China may be threatened by this. I hope green tech reaches China early enough to make a dent on this problem. But we can never really be certain it will.

And for all those who are only interested in touring/visiting China, make sure to check out the natural scenery while it is still beautiful.

Again, I can’t get myself to post anything substantive because of the Sichuan earthquake and subsequent aftershocks. I have been trying to update my other posts. (see here and here) On a positive note, China Esquire: Law and Business Blog was recently blogrolled at:

- Alltop, a new aggregator that has China and Legal sections
- Asiabizblog, a classic in Asia law and business which lists us as “China Law and Business”
- China Vortex, Paul Denglinger’s had some excellent postings on Chinese BBSes recently
- ImageThief, which should not need any introduction
- Silicon Hutong, a great source of information for China technology

UPDATE (5/15): China Law Blog, probably the classic China law blog (which I follow very closely), and Managing the Dragon, run by the well-regarded Jack Perkowski and others, have added China Esquire to their blogrolls as well.

I truly appreciate everyone’s support. I only wish that this were a more celebratory time, as I will continue to watch the news about the Sichuan earthquake.

I had a post on PE ready to go, but I can’t bring myself to do it. This Sichuan quake, while it doesn’t compare to the Myanmar cyclone in terms of sheer cost of human life, has been on my mind too much. And so, I will keep on topic for another day. I apologize if you came expecting law and business advice, and feel cheated.

Rich Brubaker, from All Roads Lead to China (and his other blog, China Crossroads), recommended some other charities other than the one posted in the Shanghaiist. Here is his post:

I have emails out to several friends in local NGOs catering to smaller villages, but for now I suggest:

China Charity Foundation - Partner with Red Cross

China Foundation for Poverty Alleviation

Rich also defended the quality of the China Charity Foundation on China Law Blog under the comments:

GONGO’s in China have had a bad rap for a while - partly of their own doing - however, the Red Cross and its GONGO partner China Charity Foundation have a strong reputation and are honestly the best NGO at this point.

As this will be an ongoing issue that requires a lot of development work, I also suggest donations to China Womans federation, Poverty Alleviation Federation, and the Youth Development Foundation also be considered. Each will have a large need, and each has a a good reputation.

Ironically, a close friend of mine (native Chinese) commented that China’s government will also take good care of the people, and that while charities are great, the government will definitely do its part. I sure hope so. I am guessing that all you are hoping so as well. I will try to keep yesterday’s post (entitled “Sichuan Quake Updates and Red Cross Donations - UPDATED”, here) updated to mirror Shanghaiist on a regular basis during West Coast business hours.

UPDATE: Shanghaiist reports that there are blood drives happening in China later which could help:

May 24–Thumb Square, 199 Fangdian Rd, Pudong

May 27–Level B1, Hong Kong New World Tower,
300 Huaihai Middle Rd,Puxi

Jun 15–Thumb Square, 199 Fangdian Rd, Pudong

Jun 21–Dulwich College Shanghai, Jinqiao, 200 Lanan Rd, Pudong

UPDATE 2: China Briefing recommends the international charity Care for Children (CFC) in China ( h/t China Hearsay). “All donations are requested to be marked ‘Earthquake Appeal.’ ” The Care for Children website is www.careforchildren.com.cn.

UPDATE 3 (5/14): World Vision set up a special China quake fund. Their announcement:

As the death toll from the 7.9-magnitude earthquake continues to rise, World Vision offices close to the epicenter have dispatched relief and assessment teams to provide immediate supplies, such as blankets and tents, to 10,000 people, with more supplies on the way. We are asking for an additional $1 million to support the initial response.

You can donate to World Vision here. This is one relief organization that is well regarded in the international sphere, and I have no trouble endorsing it.

UPDATE 4 (5/14): Rich Brubaker also mentioned there is a great need in orphanages out in Sichuan. He writes:

Our China adoption agency (CCAI) will route your donation directly to orphanages in the earthquake area. Type: ‘Earthquake Relief’ in the Specific Project line in the on-line donation form. As the largest China adoption agency in the US, CCAI has a long track record working with orphanages, an extensive network of representatives (including in Sichuan Province) and strong relations with the Chinese government. CCAI is a 501-3C charitable organization. I whole-heartedly endorse CCAI.
http://www.chinesechildren.org/Sichuan_earthquake.aspx

UPDATE 5 (5/14): The American Red Cross also has a China disaster fund set up here.

UPDATE 6 (5/15): China Children & Teenagers Fund (CCTF) website can be found here. From CN Reviews:

CCTF has formed a charity foundation for earthquake relief with with China Merchant Bank (CMB). Source from Sohu.

Account Name: China Children and Teenagers’ Fund
Bank Name: Bank of China, Head Office, Banking Department
Bank Address?No.1 Fuxingmennei Street, Xicheng District, Beijing, China
Account Number: 0005 8908 0910 14
SWIFT?BKCH CN BJ

UPDATE 7 (5/15):  Samaritan’s Purse, run by Franklin Graham (son of famous crusader Billy Graham), has given $285,000 so far.  Shanghaiist reports:

Looks like evangelist Franklin Graham who previously made the news in the China Daily for “hoping to do more for China” is seriously putting his money where his mouth is. Speaking from Shanghai after a tour of Beijing, Hangzhou and Nanjing, the CEO of the Billy Graham Evangelistic Association (named after his dad) and international Christian relief organization Samaritan’s Purse has just donated a whopping RMB2 million, or US$285,000. That’s a whole lot of money, ladies and gentlemen! To put things into perspective, even Singapore, which has one of the world’s highest GDP per capita, only managed a paltry US$200,000 or RMB1.4 million.

Samaritan’s purse is taking China quake donations here.

If for some reason this list isn’t enough, then CN Reviews has a very comprehensive list here. Again, the key is not more information, but to just give.

I have been doing some posts about networking and being able to practice law (unofficially) in China. Well, the Star had an interesting article entitled, “Practising law a risky endeavour in China”. Sure, it involves lawyers who end up taking controversial cases, but I thought it was worth highlighting because the rule of law is not yet established in China, and that is something to consider before you work out there. For example, if you want to be a public interest lawyer, you should be forewarned that there might be some headache and heartache involved.

Here’s the article:

One fine fall afternoon last year, Li Heping was making his way towards a newspaper kiosk not far from his office when a man approached, grabbed him by the arm and said sternly, “Come with me.”

In a matter of seconds, Li had a cloth sack pulled over his head, he was wrestled into a car and driven to the outskirts of town where he was brought down into a basement and beaten.

Li is a lawyer – a partner in the respected Beijing Globe Law Firm.

“They were slapping me about the head, pulling me by the hair and striking me with electrical batons.

“They were yelling, `Sell your house, sell your car and get the hell out of Beijing!’”

Towards midnight, he was bundled back into the car and dumped in a forested area, from which he eventually made his way home.

I would’ve expected that business lawyers would be exempt from this sort of bullying. Well, what did Li actually do?

He’s among a select group of lawyers in China who dare to take on politically sensitive cases.

Li is one of 49 human rights lawyers interviewed for a report released today by Human Rights Watch entitled, “Walking on Thin Ice: Control, Intimidation and Harassment of Lawyers in China.”

Part of me is cynical and thinks that this is part of the territory. But part of me also recognizes that the rule of law, building such a thing into a country that does not really have it firmly established, will involve these sort of personal costs.

Senior government officials routinely proclaim China to be a country of “the rule of law.” Even President Hu Jintao, at the 17th Communist Party Congress last year, stressed “the rule of law constitutes the essential requirement of socialist democracy.”

But many observers see China as a country of “the rule by law” – the law being an instrument that remains largely in the hands of the government.

As a consequence, it remains risky for lawyers to take on certain cases.

“Abuses of lawyers compound human rights violations,” says Sophie Richardson, Human Rights Watch’s Asia advocacy director. “Without due process and genuine defence rights, law remains little more than an instrument of state repression.”

I’ve heard of substance abuse, but lawyer abuse? Interesting.

Two things. First, this should not discourage you from wanting to be a lawyer in China. It shouldn’t really. The rule of law is still marching forward, albeit slowly. But it should make you think about what your motivations are. If you want to be a lawyer in China to change the government and the system, you might actually accomplish that. But there is a high price to pay and you better know that. You also better know that it might not happen in your life time. I am not anti-public interest. But I am opposed to public interest types thinking that they can be aggressive in America, and then just waltz into China and be aggressive there too. Don’t be naive.

In general, I don’t think this applies to most of us who want to practice business law in China. The actions and motivations of someone like that is probably going to be a little different than a crusader.

Second, if you do end up out there as a lawyer, even as a business lawyer, it does not mean you are suddenly immune. You choose your cases. Well, you also choose your causes. And if you insist on choosing causes that the government doesn’t like, just be ready if intimidation comes knocking on your door.

Bottom line: use your head.

Review time again as usual. Most interesting business article for the week comes from Seeking Alpha entitled “Progress or Pipe Dreams? Private Equity / Venture Capital in China.” ( h/t to China Law Blog) Well, its not really an article: it is a panel discussion from some people who know the industry better than most others. Here is what Dan Harris at China Law Blog said:

Project Alpha just posted the transcript from a very enlightening panel discussion on private equity/venture capital in China. The discussion was at JP Morgan’s recent China conference in Beijing. I attended this discussion and found it very informative.

Shaun Rein (Managing Director, China Market Research Group) did an excellent job moderating the discussion between Robert Theleen (CEO, ChinaVest); Joel Kellman (Managing Partner, Granite Global Ventures), and Brandon Lin (Partner, SAIF Partners).

If Dan thinks its a must-read, it probably is. Here are some excerpts I found interesting from the discussion:

Bob Theleen: At local, municipal and regional level, government is very much supportive of the PE industry. At national level things become more complex for the reasons you mention.

On the other hand the contradiction is there is not a mayor or a governor that I have ever met that does not say, my city needs capital; it needs growth capital and I want to support local entrepreneurs. Since the covenant of Beijing with regional government is you are more on your own, that regional government has to fend for itself. I think you will find that contradiction, that Beijing has to accommodate local government and it has to accommodate and support the PE industry, but how do you separate that out from issues like controlling the aggregate capital in a high-inflation market? That is a problem that China faces.

* * *

Shaun Rein: Is it hard right now for entrepreneurs to get capital?

Bob Theleen: I think it is very hard. It is harder because of credit tightening.

The good news is that our regional city banks are providing more and more debt. The aggregate savings of China, pools of RMB are accessible today through trust companies, through other financing sources. But that is an important component of making all of those kinds of business strategies effective.

Good stuff and worth a read. It reads pretty quickly.

CNN World Business ran an article this past week that states that food exports have dropped by 30% to Japan, which is a key market for Chinese food products.  I am not sure that I actually feel too badly for China in this case, but let me explain after the article:

China’s food exports to Japan, a key market, plunged 30 percent in February, hurt by a scare over poisoned Chinese-made dumplings, according to data reported Friday.

Japan is the third-largest market for Chinese exporters of fish, dumplings and other processed food, and the drop in sales is a severe blow to the fast-growing industry.

China’s food exports to Japan in February totaled 186,000 tons, down 30 percent from the same month in 2007, the General Administration of Customs reported.

Exports from Shandong, the eastern province that is the base for food processors serving Japan, fell 60 percent, the official Xinhua News Agency said.

“Influenced by such things as the `poisoned dumpling incident,’ our country’s food exports to Japan fell one after the other,” said a customs agency statement.

Chinese-made dumplings were pulled from Japanese supermarkets in December after traces of a banned insecticide were found in the dumplings and in the vomit of people who fell ill after eating them.

Bad Chinese products are nothing new.  And it is not all too surprising considering that China is become the world’s manufacturer, not just America’s sourcing base.  And as expected, there are issues of quality fade, lack of quality control, and lack of repeat due diligence.  So sometimes I actually think its a miracle that there aren’t more Chinese products issues on a regular basis.  Thankfully, most issues are not lethal, like the glycerin that Panama bought some time back for cough syrup.

But why do I say that China has no one to blame but itself?  Because it often takes the stance that it’s importing country’s responsibility to check out product issues, not the exporter’s.  The Chinese SFDA did that when it came with pharmaceuticals here (and I covered this topic in this post):

But the SFDA said that based on international practice, “safeguarding the legality, safety and quality of raw materials imported for use in pharmaceuticals is the responsibility of the importing country.”

This was the official policy regarding pharmaceuticals, so I know it’s not quite the same thing.  But it is my belief that this has been China’s stance toward food and other exported products as well.  Here was China’s response:

Chinese authorities say their investigation has found the poisoning probably was an isolated, deliberate case. They say there is little chance it happened in China and have accused Japanese police of failing to cooperate with them.

Sure, but if China is trying to implement domestic food safety standards, then it must know that there are food export issues as well.  As long as the government refuses to tackle this issue head on, and expend some serious capital and resources to deal with it, then China really has no one to blame if Japan or other countries decide to start consuming less food products from China.  That’s pretty logical actually.  And I am not trying to be cruel.  In the end, China can only blame itself if the market for Chinese exports, particularly food exports, drops.

This is a good opportunity for the government to get involved in regulating its exports.  It doesn’t need to massively regulate.  But more regulation, though costly, will be welcome.  And ultimately, it may cost China less if other countries can learn to trust Chinese exports again.

The Institute for International and Comparative Law is hosting their Annual Symposium: International Mergers & Acquisitions - Strategies and Trends. This two day program takes place in Plano, Texas, on June 17-18. Both days are packed with programs, as can be seen here. Of particular note are some of the sessions, which cover a lot of topics:

A Case Study of a Cross-Border M&A (3 parts and nearly all of one day to present!)

Practical Problems and Guidance for a Cross Border M&A

Best Practices and Worst Mistakes Made by Foreigners in Brazil, India, Russia, U.S. and Venezuela

General Counsels’ Roundtable on M&A Issues

Pitfalls and Disputes in Multi-Jurisdictional M&A Transaction

You can even register online here.

I have been hammering the fact that Chinese IPR enforcement–the protection of various sorts of intellectual property like patents and trademarks–has been getting better and better.  Statistics are powerful, and I don’t think these are any different.  The Economist recently did an article called “850,000 lawsuits in the Making” ( h/t Rich Brubaker at All Roads), which reads:

Since 2003 the number of trademark applications has grown by 60%; the number of patents has nearly doubled (850,000 are now active) and the number of lawsuits about intellectual property has more than doubled (see chart). The government is encouraging the trend in many ways, including signalling to the press to cheer it on.

This enthusiasm marks a dramatic change. During the Maoist era, private property of any kind was seen as theft from the masses, and so subject to just expropriation. Only in 1985 did China begin to enact laws to protect patents. It did not enforce them much until 2001, when the authorities promised to crack down in order to win admission to the World Trade Organisation.

China has since opened more than 50 courts that deal solely with intellectual-property cases, and Chinese firms are using them. Prominent litigants include a pram manufacturer protecting designs, a soya-milk producer defending an industrial process and a maker of Chinese medicines shielding a name that, roughly translated, means “mind and blood purge”.

Again, very encouraging numbers.  50 specialty courts that deal with IP?  That’s fantastic.  Sure, they are not all up to par with the Federal Circuit Court of Appeals, but I cannot complain.  Chinese judiciary specializing in IP and learning how to deal with these sorts of cases is a good thing.

As companies in China establish brands and develop products, the incentive to sue will grow, particularly because the cost of bringing a case is minimal. “If you can afford a car, you can afford a lawsuit,” says Tony Chen, who works in the Shanghai office of Jones Day, an international law firm.

In America, firms often settle intellectual-property cases out of court for fear of enormous awards by juries. That is not true in China, Mr Chen says, where a judge rules in the majority of cases and damages tend to be small. They normally cover legal costs, however, turning lawsuits into a self-funding method to battle piracy.

Well, perhaps there is an argument to be made for the British system…  that being a tangent, the British winner-takes-all approach will only allow the rule of law to grow in the early stages of IPR enforcement.  Maybe later it can hurt, but for now, including damages into legal costs will encourage more and more companies to turn to the courts for IP remedies.  That is a good thing.  Few things encourage the rule of law such as the general citizenship of a country embracing lawsuits.  And if Chinese companies can embrace them wholeheartedly, then perhaps the Chinese people will finally be able to as well.

Unsurprisingly, the main beneficiaries of the sudden interest in intellectual property are Chinese lawyers. Some reportedly earn more than $5m a year. Non-Chinese law firms sometimes provide advice on thorny cases. But they are not allowed to file patents or appear in court on behalf of a client—a proprietary process that Chinese lawyers are keen to defend.

Yes, there is a silver lining in the advancement of the rule of law: it’s that the lawyers profit most.  I guess I can’t complain.  But yes, someone will have to profit off of this sort of growth.  For most people, that’s an unfortunate fact.  But it’s a fact of life.  The more that law becomes integral to Chinese society, the more lawyers will become more important.  That’s an already established fact in America–much as lawyers are hated, they are also necessary to the functioning of everyday business.  Expect the same in China.

So onward rule of law!  Just make sure your coattails are long enough for the lawyers…

From China Law & Practice’s website, Asia Law & Practice is hosting an Asia Pacific Mergers & Acquisitions Summit in Hong Kong on 6/3/2008. Their description of the event:

This top-level business symposium will feature open discussion and expert advice on the key regional and cross-border M&A issues in Asia. The Asia Pacific M&A Summit will bring together over 200 of the top corporate legal counsel and business leaders. They represent some of the largest and most active companies from across Asia and beyond – companies and individuals who are key clients of leading legal advisers.

Should prove fascinating because I wonder if they will cover reverse M&A into America, which is technically a Pacific Rim practice.

The Los Angeles Times recently published an article entitled “Chinese Firms Bargain Hunting in U.S.” ( h/t to CDT).  Ironically, I had just posted an article recently about western companies going into China because the U.S. economy was faltering.  ( here)  And while I had also written about China’s growing economic muscle ( here), the LA Times article puts two and two together: Chinese companies are setting up shop in the U.S. because it is actually cheaper or almost cheaper to set up shop here.  Scary thought.  But the more the west goes to China and drives up costs (particularly raw materials and HR costs), the more that China might be tempted to bring more of that capital here.

Here are excerpts of the article:

Liu Keli couldn’t tell you much about South Carolina, not even where it is in the United States. It’s as obscure to him as his home region, Shanxi province, is to most Americans.

But Liu is investing $10 million in the Palmetto State, building a printing-plate factory that will open this fall and hire 120 workers. His main aim is to tap the large American market, but when his finance staff penciled out the costs, he was stunned to learn how they compared with those in China.

Liu spent about $500,000 for seven acres in Spartanburg — less than one-fourth what it would cost to buy the same amount of land in Dongguan, a city in southeast China where he runs three plants. U.S. electricity rates are about 75% lower, and in South Carolina, Liu doesn’t have to put up with frequent blackouts.

About the only major thing that’s more expensive in Spartanburg is labor. Liu is looking to offer $12 to $13 an hour there, versus about $2 an hour in Dongguan, not including room and board. But Liu expects to offset some of the higher labor costs with a payroll tax credit of $1,500 per employee from South Carolina.

Liu is part of a growing wave of Chinese entrepreneurs expanding into the U.S. From Spartanburg to Los Angeles they are building factories, buying companies and investing in business and real estate.

For years, investment between the U.S. and China flowed one way, with American firms spending billions in the Asian nation. But the Beijing government’s $5-billion stake in Morgan Stanley and $3-billion investment in the private equity firm Blackstone Group brought China’s overall investments in U.S. firms to $9.8 billion in 2007, up from $36 million the year before, according to Thomson Financial.

“It’s a lot of pressure going to the largest market in the world,” Liu said. But he thinks it’s certain to help his business become more competitive. “That’s one of the real benefits from this expansion.”

(emphasis added in bold)  We all know that the dollar has been weakening and that international players are finding bargains here.  It’s just an interesting surprise to discover its not just the CNOOC’s and the Blackstone’s that are coming to the west–it’s even smaller Chinese operations quietly coming in. It isn’t terribly surprising once I think about it a little–because it does make a lot of sense.  It’s just that I wouldn’t normally put two and two together in this sort of way.

What does this mean for corporate attorneys?  Or more specifically, for U.S. corporate attorneys?  The large M&A market is sputtering in the U.S. according to a recent article in the Recorder.  ( here, subscription required)  However, the mid-level deals are still alive and kicking according to the article.  These Chinese businessmen bringing business to the U.S. will be mid-level deals at best.  And more likely, need corporate attorneys who can help them set up shop: entity formation, real estate transactions, employment agreements.  In other words, basic corporate lawyers.  This is a bit of good news in a rather slow economy.

And for those M&A, LBO, and structured finance folks who are out of work with the spate of layoffs, maybe its a good time to do entity formation work.  Here’s a start for retraining:

whither the c-corp, s-corp, llc, lp, etc.?

Maybe I will get around to doing that analysis of different U.S. corporate entity types once my work slows down.

CNN Money ran an article the other day with a title that made me want to read it: “You Have 7 Years to Learn Mandarin”. Oh really? Why so you might ask? My original thinking is because the Chinese business (and therefore legal) market would become too saturated with ex-pats and half-pats to break in. I was wrong. Instead, the article talks about a prediction that China will be the world’s economic superpower by… 2015. 2015? You got to be joking. But that’s what CNN is peddling to an unsuspecting public:

Back in 2001 when the International Olympic Committee chose Beijing as the site of this summer’s games, the event was meant to mark China’s debut as a player on the global economic stage. But a recent study by the economist Angus Maddison projects that China will become the world’s dominant economic superpower much sooner than expected - not in 2050, but in 2015.

While short-term investors are already cashing in on China’s growth by playing the global commodities boom, smart long-term thinkers are contemplating what happens when China matures from an exporter of cheap goods to a competitor in sectors where the U.S. is dominant - technology, brand building, finance. China has almost wiped U.S. makers of low-value items like toys and socks, but by 2015 it may threaten Apple (AAPL, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500), and Procter & Gamble (PG, Fortune 500). It will increasingly influence the S&P 500 and the mutual funds in our 401(k)s. So it’s worth looking at how that will happen, what it means, and what anyone can do in the seven years before the baton is passed.

Just using the exchange rate to convert China’s GDP into dollars isn’t helpful in comparing the two economies, because China controls its exchange rate; by that method, China’s economy might not pass America’s for decades. Exchange rates apply only to tradable products and services; they aren’t very useful in valuing nontradable goods in a country like China that is much poorer than the United States. So we need some way to compare the real value of China’s economic output with America’s, and economists have developed one. It is called purchasing power parity.

Angus Maddison’s forecast (which uses purchasing power parity) isn’t built on outlandish assumptions. He assumes China’s growth will slow way down year by year, and America’s will average about 2.6% annually, which seems reasonable. But because China has grown so stupendously during the past decade, it should still be able to take the crown in just seven more years.

If that happens, America will close out a 125-year run as the No. 1 economy. We assumed the title in 1890 from - guess who. Britain? France? No. The world’s largest economy until 1890 was China’s. That’s why Maddison says he expects China to “resume its natural role as the world’s largest economy by 2015.” That scenario makes sense.

China was the largest economy for centuries because everyone had the same type of economy - subsistence - and so the country with the most people would be economically biggest. Then the Industrial Revolution sent the West on a more prosperous path. Now the world is returning to a common economy, this time technology- and information-based, so once again population triumphs.

Where do I even begin? I think the 2015 number is built on a number that heavily favors anyone who wants to make grand declarations about China catching up quickly. In fact, last I remember, when Rich Brubaker at All Roads posted that China would catch up by 2028, we all took that number with quite a bit of skepticism. Sure, you can choose one particular figure to represent your claim? But this sort of economics… well, it seems more sensationalistic to me than realistic. Nor will it reflect reality. I doubt in 7 years that value-added industries, the service professions, will be ceded over to China. Hardly–that’s exactly what the U.S., EU, and other Asian Tigers will try to specialize in. So I think the 2015 stats were more shock value than anything else.

I also doubt that China have companies that can play along to the tune of Apple or JP Morgan. Or even Samsung. Not that China doesn’t have some successful companies, or some that have catchet like Lenovo. (okay, Lenovo didn’t have it… they bought it from IBM when they took over the Thinkpad series, which had serious cachet) The Chinese economy isn’t built on innovation and product advancement in the same way that other economies are. The educational system doesn’t embrace such thinking yet. So I doubt that we’ll see that. We will see SOE’s flexing their muscles more. I expect that. But I really don’t think a Chinese computer company will over take Apple in terms of computer and culture maker. Not by 2015.

The global economy is not a subsistence economy. It’s different. It’s more like a pyramid scheme in terms of value added industries. There is a reason why the west dominates in consulting still–because white collar professions, which are services and about “value”, have existed far longer there than in China. And it will be that pyramid for some time still, I am not saying that the Chinese services industry and other higher food chain type businesses won’t evolve. They will. They just won’t overtake the world by 2015.

I think that’s where the conclusion of the CNN Money article is going:

For companies: Focus on getting better at your highest-value activities. Just because the Chinese will be fighting you in the same industries doesn’t mean you’ll lose.

For individuals: You can avoid competition with Chinese workers by doing place-based work, which ranges in value from highly skilled (emergency-room surgery) to menial (pouring concrete). But the many people who do information-based work, which is most subject to competition, will have to get dramatically better to be worth what they cost.

I agree with the advice for companies. It’s a global food chain or pyramid more than a subsistence economy. I disagree slightly for individuals. Why? Because I don’t think information services will require that the west gets dramatically better. It just needs to stay a few steps ahead.