Making a Legitimate Fortune

-- Chinese Enterprises Work Towards Credibility

By staff reporter LI WUZHOU

The recent Enron and Arthur Andersen financial scandals in the

Sculpture of an ancient steelyard -- a symbol of credibility, accuracy, fairness and justice -- on the commercial street of Shenzhen.

United States, KPMG LLP's involvement in the Xerox case, Ernst & Young's being charged by the US Securities and Exchange Commission, and investors suing Merrill Lynch indicate how prevalent credit deficiency is within the world economy.

The Declaration of World Economic Development, also called the Zhuhai Declaration, was published in November 2003 in Zhuhai, one of China's earliest special economic zones. Along with China, several Nobel laureates participated in drafting this declaration, but critics were particularly impressed with China's obvious awareness of its responsibility as a big country participating in economic globalization.

Credibility, a big problem for China, was one of the topics raised and discussed by Chinese and international entrepreneurs and economists at the Zhuhai Declaration conference. According to the Chinese Federation of Enterprises, direct and indirect losses caused by credit defaults amount to 585.5 billion yuan, equivalent to 37 percent of China's total revenue, representing a reduction in GDP of 2 percentage points.

Over 1,000 company staff members put their signatures on a banner calling for credibility.

In developed countries, construction of a system of credit has taken place for over a century, but China is still at the initial stage. A survey on nearly 100,000 enterprises conducted jointly by the Credit Evaluation Department of the Chinese Association of Foreign Economic and Trade Enterprises and the Beijing Guoshang International Credit Evaluation Company revealed the main flaw in enterprise credit to be "loose law enforcement" (61.9 percent). Measures recommended to increase the enterprise credit ratings were "intensifying law enforcement" (52.6 percent) and "accelerating the process of legislation on credit" (43.7 percent).

Government Responsibility

Poor credit is closely linked with government law enforcement. At Zhuhai, Chinese vice premier Wu Yi stated that the Chinese government would perfect its laws concerning foreign investment in accordance with WTO rules, and strengthen protection of intellectual property rights to create an open, fair and transparent business environment. In other words, the government will work towards building up China's credit status.

Credit institutionalization was mentioned in the Report on the Work of the Government in 2002. In recent years China has launched several nationwide campaigns against fake goods and infringements on intellectual property rights in order to create a reliable credit environment. In 2002 266 enterprises in Beijing were stripped of their designation as trustworthy enterprises owing to failure to completely fulfill their contracts.

Vickie A. Tillman, executive vice president and chief rating officer of the US Standard & Poor's, was also in attendance at the Zhuhai Declaration conference. This indicates China's intention to cooperate with world advanced credit evaluation institutes like Standard & Poor's in order to endorse the authority of China's credit rating.

Appeals from Enterprises

Chinese enterprises are aware of the dire consequences of credit deficiency, and Chinese entrepreneurs strongly advocate the principle of credit being institutionalized in the domestic economy.

"Chinese down garments used to sell well in Russia. Then certain unscrupulous merchants began to fill garments with odd bits of cloth, cotton and even bloodstained down. As a result, Chinese merchants lost the Russian market. When I visited Russia, I saw signs in stores that read, 'No Chinese goods in this store,' and felt demoralized," said Gao Dekang, president of Bosideng Co., Ltd. whose sales volume of down garments ranks first in China.

Liu Yonghao, president of the New Hope Group, said that there is a wide gap between Chinese enterprises and their foreign counterparts, reflected in scale and economic strength, and also in norms of corporate behavior, particularly in credibility. Credit deficiency inhibits international transnational companies from investing in China, and hinders China from nurturing its own transnational companies and investing abroad.

According to statistics of the State Administration for Industry and Commerce, only 50 percent of the 4 billion contracts signed annually are fulfilled, and economic losses caused by lack of a credit system are therefore alarming. At national commodity fairs, many of the domestic enterprises participating prefer to forfeit large numbers of orders and clients rather than deal with credit settlement forms. Transactions are handled in cash, sometimes even through barter, methods that are in the world of international finance laughably primitive. Specialists have pointed out that this lagging behind in use of credit seriously inhibits economic vitality.

This issue was discussed during sessions of the National People's Congress and the Chinese People's Political Consultative Conference. NPC deputies and CPPCC members proposed a large number of measures in this regard.

Tong Shijun, chairman of Hainan Province Chamber of Commerce, suggested the Chinese government establish a State Credit Administration to administer credit intermediary service and credit evaluation companies. This body would be responsible for planning and construction of a credit system and operational rules, fixing credit ratings of enterprises, and management of credit certification.

Chinese enterprises demanding of the government that it improve the credit environment have put their money where their mouth is. On July 16, 1999 more than 300 non-public sector entrepreneurs displayed their credit declarations in the Great Hall of the People, appealing for a concerted effort to safeguard the standard market. Elite entrepreneurs in Fujian Province, which has a developed manufacturing industry, have published "Proposals to Enterprises on Being Honest and Trustworthy." Some enterprises go as far as to hand over hard cash to the Fujian Province Consumers' Association to be used to compensate consumer losses. On a consumer's complaint being verified, the Consumers' Association first compensates the consumer, and then demands recompense from the violator.

Not long ago, Sun Xiaohua, vice-chairman of the All-China Federation of Industry and Commerce, delivered a speech, confirming that Chinese enterprises have made great progress in establishing a credit environment, especially in the non-public sector.