China is Enron reborn as a country

By Jerome Keating  / 

Tue, Feb 18, 2014 - Page 8

There was a time when many economic pundits and gurus promoted Enron Corp as the model company to emulate. It had a mystique. The guys that ran it were the “smartest guys in the room.” They were the innovative, bold, insightful risk-takers and the wizards that the financial world needed.

As the company grew, everyone wanted to get on this bandwagon of praise and profit. It was great as long as a lack of transparency veiled Enron’s shell game of mark-to-market profits and fabricated companies.

The hype over the numbers began to diminish once the bottom line was more closely checked. Demystification began. The shell game stumbled and the smartest guys in the room slid past clever down to being downright deceitful crooks who built an empire on deceptive practices and made-up reports.

Because of its success, Enron had, for sure, developed a mystique. It could do no wrong; it was, after all, not just financially successful, but big-time successful. Yet in the clear light of day shone, the end came quickly. Shares dropped from US$90.75 to US$0.61 in just over a year; people wondered why they had not seen the bankruptcy coming. Some of the company’s leaders went to jail, while others escaped and at least one committed suicide.

Their auditors, Arthur Andersen LLP, went down. Enron’s investors lost, but it was Enron’s 20,000 plus employees who bore the main brunt of collateral damage. Besides jobs, they lost about US$2 billion in shares and pensions. A later court settlement awarded them US$85 million, but that hardly balanced against the evaporated US$1.9 billion.

So what has this to do with China’s mystique? For the past two decades, the pundits of profit have been touting China’s growth and promise as the savior of the economic world. As a result, China has achieved a far greater mystique than Enron ever did, and one that operates on many levels.

Growth and profit are certainly there, but why and how? What needs to be demystified?

For starters, a shift in perspective is needed, one that begins with viewing China through the prism of a large corporation run by a select oligarchy and bent on regional if not world power.

Strange? Think on it. One key to Enron’s dominant early “economic success” was its lack of transparency and its ability to hide developing problems. China certainly has opaqueness in spades, as well as the added bonus of state-controlled media and a military and police force to squelch any forces that might question its methods.

As Enron sought to dominate the gas and energy market, China has initially sought to dominate the manufacturing field by becoming the factory of the world. Try the experiment of finding something that was not “made in China.”

China has other “corporate advantages,” including a much larger and more controllable workforce than Enron ever could imagine, but it still needs resources.

Pundits of profit can point to years of annual GDP growth of 10 percent and more, but as China’s growth now slows to 7.5 percent annually, cracks in the image develop. China has certainly become the manufacturing giant of the world, but why then are companies, including those based in Taiwan, already beginning to source other manufacturing locations?

There are other indicators that the pundits do not mention. While manufacturing has created jobs for millions, there remain many more millions in need of work. Meanwhile, wages rise in an attempt to keep pace with inflation, but making it more difficult for additional, newer factories to be built and compete.

Furthermore, while most factories have not matched the conditions at Foxconn Technology Group’s sites that make Apple products, Foxconn — the best of the best — is being challenged over quality and care for employees. Or has this in reality been a shakedown?

With a workforce of millions still outside this manufacturing cycle, and with growing pollution a problem, what other areas are open for China’s diversification?

China’s banks and the shadow banks that finance a lot of this growth have their own problems with audits and corruption.

Worst of all is that an increasing number of wealthy Chinese and bureaucrats are squirreling away money in offshore accounts. These safety nets suggest a preparation to cut and run more than trust in reliable future growth. Even relatives of Chinese President Xi Jinping (習近平), the one supposedly cracking down on corruption, are secreting funds.

What does this say for the hundreds of millions of Chinese not yet involved? Unable to solve these internal problems, China’s leaders distract the public by pushing for territorial expansion.

Analogies of course only go so far; Enron was a corporation and China is a country. China has no auditors or courts to hold it to account. It will not go bankrupt like Enron, but while it spreads its tentacles into the South China Sea and elsewhere for resources and control, it will create, and is already creating, greater problems and collateral damage than it is solving.

As this affects not just China’s neighbors, but the world, demystification is needed. Yet the pundits remain silent. They have no answer, nor a Dynegy or other white knight waiting to salvage this situation.

Meanwhile, President Ma Ying-jeou’s (馬英九) government blindly puts its eggs solely in its Economic Cooperation Framework Agreement (ECFA) basket, still pushing for an unexamined and unchallenged trust in its opaque ECFA union with this wavering manufacturing giant.

Disregarding the Legislative Yuan, Ma persists in chanting the mantra: “As Enron was good for the US, so China and ECFA will be good for Taiwan.”

This is the world and oligarchy that Taiwanese must face and demystify with elections this year and in 2016. This is the awareness that must be increasingly taken into account.

Jerome Keating is a commentator in Taipei.