Facebook and the challenge of initial public offerings and fair market valuation

I write this posting with the recent Facebook initial public offering (IPO) in mind. And in many respects I write this as if a continuation of my recent series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, posting 64 and loosely following.)

Facebook rode into its IPO on a tidal wave of hype. Seemingly everyone was talking about Mark Zuckerberg and of his company, Facebook as the up and coming $100 billion wonder, and the investment to buy in on for 2012 and beyond. And the Facebook IPO came in as one of the biggest public launches in history with an initial overall valuation showing at just over $104 billion dollars. And over the coming weeks the value of Facebook’s new publically traded stock shares fell, and with losses that at times brought the overall valuation of the company down to less than 80% of the initial market capitalization as reached at the end of the first day of public trading.

Depending on who was doing the analysis, Facebook’s initial price-earnings ratio (P/E ratio) ranged from a very large 85 and up to as much as 100 and more so according to the fundamentals, this company was tremendously overvalued. But Facebook’s key underwriters, Morgan Stanley, JP Morgan and Goldman Sachs were pushing this as if it were the best investment opportunity in existence. And then as the price of Facebook shares failed to rise, and in fact as it fell, news reports started to surface suggesting that these companies were publically taking one position as to the value of Facebook and its growth potential, while privately and in internal documents concluding something very different.

Facebook’s IPO was plagued with technical problems on its day one with initial trading delayed on the NASDAQ exchange by a half hour and with problems continuing in making and completing trades – some investors and would-be investors did not even know if their trades had gone through. More than 40 law suits were filed against Facebook in the first month after that IPO launch, and the US Securities and Exchange Commission and other regulatory agencies began investigations. There were allegations that this IPO was developed as if a pump and dump scheme – a fraudulent practice usually associated with microcap stocks in which prices are artificially inflated through false and misleading statements, in preparation for dumping shares for an immediate inflated profit.

The reputations of both Morgan Stanley, the primary IPO underwriter, and of the NASDAQ were damaged by this offering and how it was mismanaged. Morgan Stanley, I add, did very well out of this making a substantial profit from the IPO and from sale of Facebook shares.

One aspect of the fallout coming from this series of events has been the casting of a pall over social media and new technology IPO’s in general.

My goal in this posting is not to make a statement as to the validity of this IPO and how it was set up and carried out. And I am not writing this in commentary as to the validity of any claims, for or against Facebook, or Morgan Stanley or the NASDAQ or others, or with regard to any regulatory investigations anticipated, planned or underway.

My reason for offering a brief and I admit selective accounting of this IPO is to discuss

• The issues of transparency and openness that this story reveals, and the need for them
• And how many if not most of the problems that developed here stemmed from a failure in that – and with the uneven playing field that different classes of investors faced when making their investment decisions.

Hype was real and in retrospect tremendously overblown, and that was fed by insider “news” and insight. Reality could not live up to overblown expectations, and while some made tremendous profits, others lost that value from their investments in this new stock offering.

And I come back to the basic regulatory approach that I developed and discussed in my series: Considering a Cost-Benefits Analysis of Economic Regulatory Rules as cited above at the start of this posting.

• The absolute levels of potential risk and benefit are not as important as the symmetrical distribution of risk and benefit shared – equally at least ideally, by all involved stakeholders.
• The real risk of instability and crisis comes from risk and benefits distribution asymmetry.
• And I add here that asymmetry developed and this IPO ran into trouble because of systematic failures in the sharing of crucial information with all investors, potential investors and investor classes and groups, as individuals and organizations made their investment decisions regarding this IPO and followed through upon them. Failed communication and misinformation prevailed and with combined losses for those who were not insiders, totaling well into the billions of dollars.

This is a story I have been thinking about and following, and it is one that I might very well return to and both for Facebook and its IPO and with regard to IPO’s in general. Meanwhile, you can find this and related postings at Macroeconomics and Business and I have also included this in Startups and Early Stage Businesses.

Considering a cost-benefits analysis of economic regulatory rules – 14

This is fourteenth installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64and scattered following for Parts 1-13.) And I turn in it to consider the sometimes invisible participants in the room when regulatory law is proposed and framed, challenged and developed in finalized detail – and with restrictions and exceptions added in that can in and of themselves effectively make or break the resulting law as an effective and fair mechanism for managing overall risk and its distribution.

I stated at the end of Part 13 that:

• Bad regulatory oversight can be empirically, objectively evaluated as bad if it creates special exceptions and windows of opportunity for risk/benefits asymmetry.

The goal of the lobbyist is to persuasively argue the case to those who would develop and enact regulatory law, to draft and enact law that explicitly supports their position, and even preferentially so. Lobbyists argue in favor of strategically skewed playing fields and shifts in the distributions of risks and benefits faced, in favor of their clients. And they argue against shifts and changes that would go against the interests of their clients, and against law that they see as starting out at odds with their client’s specific needs.

I do not argue or seek to argue against lobbying or lobbyists per se, as lobbyists do bring the perspectives and voices of affected parties into the discussions that go into framing these laws. But I do argue against the allowance of opacity of process or secrecy as to when and how lobbying is done.

This means, among other things:

• Legally mandated transparency as to who is lobbying and on behalf of whom.
• Legally mandated transparency as to what positions those lobbyists are promoting and to whom.
• Legally mandated transparency as to what if anything is offered by those lobbyists and to whom, with that including any gifts or other sources of value provided and to whom and with very strict limits on permitted monetary value. Personally, I do not think a lobbyist should be offering as much as a purchased cup of coffee to a legislator they are lobbying too, or as much as that cup of coffee to a member of their staff or to a member of a legislator’s or staff member’s family.
• And as the largest and most significant source of lobbyist giving comes as campaign contributions for reelection, I add legally mandated transparency and openness as to who donates what and on what terms towards political campaigns, and either directly to specific candidate’s election campaigns, or indirectly to pooled political party funds.
• All paid lobbyists should be required to register as such and to state both who they are lobbying for and paid by, and who they are lobbying too. And lobbyists and their organizations should be on open and public record wherever they offer anything of monetary value to either specific politicians or their staff or families, or to political parties.

Depending on where you are and the legal systems in place in your legal jurisdiction, some or even many of these restrictions might be in place, and at least as a matter of general principle. But in most if not all countries that in some way seek to regulate lobbyists and their activities, there is always push-back in favor of opacity and secrecy, and opportunity to take actions to influence and even skew regulatory decisions made. In this regard, I cite one of my more recent postings: Entrepreneurship and Freedom.

My area of focus in that posting was on recent changes in political campaign finance law and in how it has been reinterpreted through US Supreme Court decisions so as to foster election funding opacity and the skewing of election results. One immediate outcome that can be expected of this and both going into the 2012 elections as candidates campaign for office, and coming out of them as candidates are elected will be increased pressures against robust and consistent regulatory law and its enactment. Right now in the United States, the Republican Party has come to take a stridently anti-regulatory position, and with the incoming flood of corporate campaign financing that Citizens United v. Federal Election Commission now allows, we all face significant risk that the regulatory lessons learned from the Great Recession and from earlier avoidable massive economic downturns will be forgotten again.

And as an exercise in wistful thinking I will add one more point to my above list of lobbyist oversight guidelines, though this is also a guideline for legislators and their staffs too.

• Lobbyists should not be writing laws, or providing key wording needed to flesh out legislative proposals into working law.

The argument in favor of this practice is that the issues that laws deal with can be so complex and specialized that the legislators and their staff members do not understand them, themselves. But this simply means their rubber stamping legislative wording that they do not understand, or understand the ramifications of.

• If you do not understand the issues that would go into a law and its wording, find and bring in disinterested, uninvolved third party experts, and not partisan lobbyists or others with a specific stake in the issues involved.
• And if you do bring in a partisan stakeholder with a specific interest in a proposed law such as a lobbyist, clearly identify any contributions they make to the final wording you submit for committee approval or for a vote as to where that wording came from. Identify it as having been provided by a paid lobbyist and identify who that is and who they are paid to lobby for.

To the best of my knowledge no legal system mandates or even suggests this level or type of legislative process transparency, but it would be interesting to see its impact, and certainly on more extremist lobbying ventures and their impact.

At least as of now I am finished adding to this series, though I will definitely be coming back to this complex topic area again. Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. See also Ubiquitous Computing and Communications – everywhere all the time.

Perceiving China – East and West 7

This is my seventh installment in a series in which I discuss China as that country is perceived, and both from within and by the outside world (see Macroeconomics and Business, postings 78 and scattered following for Postings 1-6.) And I begin this by citing two conversations that I had late this past week. One was with a marketing guru who lives in Shanghai and whose professional activities cover China and also extend into Japan. The other is a television executive with a programming production company that focuses on the Chinese community, and who is himself from China.

We met and talked at a meeting on the Chinese marketplace and on what drives the consumer and the consuming public in the People’s Republic. And in the course of our post-meeting conversations I was able to ask both of these China experts two telling questions, and I was able to do so separately so they answered without hearing each other’s responses.

• One of the underlying themes of this meeting was on how modern China is firmly rooted in its history and in its culture as extending back centuries and even thousands of years. And the advent of the internet and of greatly increased capability and opportunity to reach out and connect was discussed for the most part in how this New fits into that ongoing pattern and the continuing momentum of Old. And in that context I asked what overall impact cell phones and the internet will have on China and its governance.
• My second question was one of the ongoing and long-term stability and even viability of the one Party system that governs all in China today. In that, Party dominates over Government. Party dominates over business, and for both government owned and private sector enterprises, with parallel chains of command in every business enterprise – privately and government owned alike and with Party leaders always holding authority over business leaders and even over business owners. Party dominates over local communities, and over peoples’ private lives as well as their public lives. My question was one of whether this can simply continue unchanged and exactly as-is, moving forward.

My marketing guru colleague, a senior executive with a large multi-national, argued the case that the internet is no passing phase, but that it will adapt and accommodate more than the culture or systems that make up China of today will. The internet will not in and of itself bring about change, or at least fundamental change. My television colleague argued the perspective that the internet and particularly the ubiquitously connected interactive internet will by its very nature force change in everything – and that this is already happening. That, I add, is my opinion on this question too.

But tellingly, both took the exact same position with regard to my second question. They both simply assume that Party will always prevail, dominating all in China and at all levels. In this, Party and Party leadership have simply reframed Emperor and Dynasty and Imperial Government, and while I did not ask them this, I am fairly certain that both would have stated that Mao Zedong specifically and explicitly fit the mold of Emperor, complete with cult of personality and of office. And I found myself thinking of the approaching cliff-edge challenges that China faces if it simply tries to continue as-is, and of the evolving statements concerning this made by one of its current supreme leaders: Wen Jiabao, their soon to retire Prime Minister and the second most powerful member of their Politburo Standing Committee.

• When Wen first assumed Premiership he stated “the socialist system will continue in China for the next 100 years”.
• But as he more fully took on the responsibilities of this office his views changed, and in August 2010 at the National People’s Congress he stated that “without political reform, China may lose what it has already achieved through economic restructuring.”
• And at the 2012 National People’s Congress he further stated that China must “press ahead with both economic structural reforms and political structural reforms, in particular reforms on the leadership system of the Party and the country.”

Most of this has been censored from the public record as directly shared by the government with China’ own people and through official news channels. But it is clear that even, and perhaps especially at the top of China’s Party and Governmental leadership, there is a growing and acute awareness of a need for change. And the rampant, blatant, rotting-from-within corruption of Party and Government and particularly at lower, more local levels (as simply highlighted by the Bo Xilai scandals), only drives home what was already becoming an unavoidable truth.

But as my Chinese television colleague noted, the only reason why Deng Xiaoping was able to effect the levels and types of reform that he pushed through was that he had the active support of China’s military – the same military I add that more recently elevated Mao’s grandson, General Mao Xinyu to a position of spokesperson and public face visibility, in promotion of system and practices as usual. Will China’s new and emerging leaders hold such authority and influence as Deng had over the People’s Liberation Army and its vast industrial and socioeconomic reach?

Something has to give. The only question I have is one of how much change China’s new leadership will have the vision to see, and the capability to enact in its attempts to control this and prevent the types of societal disruptions and failures that Wen Jiabao and others have warned of.

China is no longer Communist in the way that Mao envisioned and enforced even if it still adheres to the old names and terms, and to the framework of Party that he built. Even if change can only be carried through in the linguistic framework of old Party labels, real reform of Party is needed, and yes – the allowance and even encouragement of an open plurality of voices and of organization, and not just the clique and faction structure that exists now with its local cronyism and its opacity-protected corruptions.

In a brief span of months, the big changeover of leadership will take place with seven new faces joining the nine member Politburo Standing Committee and with further leadership changes extending out from there and throughout national and provincial level governments and into local governments too. Will they be allowed to institute greater transparency and accountability, and even just to the extent that they proactively reach out for them? Will my two colleagues prove correct in their assessments that Party will simply seek to continue as-is and without real change, and if so what will be the longer-term consequences? I am finishing this series for now but I will be coming back to discuss these and related issues in the coming months. You can find this and related postings at Macroeconomics and Business and also see Ubiquitous Computing and Communications – everywhere all the time.

Considering a cost-benefits analysis of economic regulatory rules – 13

This is thirteenth installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64and scattered following for Parts 1-12.)

I have, up to now, taken a primarily pro-regulatory control position in this series, and for a simple reason. I have focused on the development and imposition of effective regulatory control and oversight. I switch directions in this installment to discuss good and bad regulatory mechanisms and law, and some basic criteria that would go into identifying a proposed regulatory process as one or the other. And in that I begin with a current events story that I began discussing in Part 12 of this series.

In Part 12 I briefly outlined the news story of how JPMorgan Chase ran into multi-billion dollar losses from failed high risk trades this Spring, 2012 and how this has impacted upon the credibility of both that banking institution and that of its CEO, Jamie Dimon. Dimon has been actively lobbying against stricter regulatory control over bank investment practices, arguing that “good banks” should not be punished for the actions of “bad banks.” For the sake of argument I will simply accept that here as true. And I will also simply accept as a given, his assertion that JPMorgan Chase has in fact been a good bank and even an exemplary one. This institution did, after all, avoid most of the bad investment challenges that led to the massive institutional losses of the Great Recession – then. So let’s simply accept as a given that JPMorgan Chase is a good bank and that Dimon’s basic lines of reasoning are correct. How did those recent massive losses happen? That is where this story gets really interesting and particularly if you take Jamie Dimon’s assertions as valid.

He has argued that the recent flood of red ink and losses coming out of their London offices and spreading from there, happened because they had a tremendously savvy and effective executive managing trades for JPMorgan Chase and at an institutional level. Then she became ill with Lyme disease and was unable to maintain positive supervisory oversight of the traders who actually created and carried through on those toxic high risk investments. So JPMorgan Chase was a good, and even a great bank not so much because of its engrained and enforced institutional practices and policies, but rather because they were fortunate enough to have the right people in the right executive and supervisory chairs, and performing to their peak levels of efficiency and effectiveness.

Even when addressing the opportunity and value of “good banks” and other investment organizations, regulatory control and oversight are necessary, as those extraordinary executives cannot always be counted upon to be there. They can be ill and absent, or away on vacation when they would in retrospect have been most needed. These are precisely the people who the competition would be most eager to grab away, and with offers that might prove too good to ignore. So even when starting out assuming that Dimon’s assertions are true, we still find ourselves facing a conclusion that differs from his in broad prospective pattern. Even good banks need regulatory control and oversight – so they do not have to face imminent risk of switching away from good if some or even just one of their key people is suddenly unavailable.

• Effective regulatory control serves to institutionalize “good,” so adherence to effective and prudent practices when developing opportunity and wealth can be standardized to best practices.
• The goal here is to effectively balance off potential for gain with potential for loss.
• And this is where absolute risk and benefits levels enter this discussion as a valid point of reasoned conclusion.
• Aligning risk and benefits so levels of one coordinate with levels of the other and for all participating stakeholders involved, would serve to provide direct pressures to limit maximum allowable risks created, even if that means those participants have to coordinately limit their own personal potential benefits as a tradeoff.

And with this I add another basic regulatory best practices guideline to the approach I have been developing here.

• Effective regulatory control systematizes and standardizes risk management and related due diligence processes, taking the ad hoc out of them as an acceptable approach and operational methodology.

And bad regulatory oversight can be empirically, objectively evaluated as bad if it creates special exceptions and windows of opportunity for risk/benefits asymmetry. And this brings me to the topic of special interests and lobbyists, and I will delve into that in my next series installment. Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. See also Ubiquitous Computing and Communications – everywhere all the time.

Considering a cost-benefits analysis of economic regulatory rules – 12

This is twelfth installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64 and scattered following for Parts 1-11.) And I have to admit this is currently so fast-changing a topic area that while I started out with historical narratives, I have found myself writing about current news and events too. And I continue that pattern here with this installment.

At the end of Part 11 I stated that I was going to add a posting, discussing “the impact of marketplace regulatory control and its successes and failures as they reach beyond the marketplace per se.” I went on to say that I would focus at least as a starting point for that on the issues of wealth and opportunity distribution within and across societies and the impact of skewed wealth distribution on societal stability, and on how the debate over regulatory control can, in practice, hinge on this set of issues. I will do that in this series installment, looking at the way that wealth distribution in the United States has shifted in recent years, bringing about an inequality of distribution of a degree that we have only experienced in this country in times of overall financial disturbance and instability – and notably, most recently reaching current levels of unevenness of wealth distribution in the years immediately leading up to the Great Depression of 1929 and the 1930’s.

The specific measure I would use and cite for this type of analysis is a mathematical economic tool: the Gini coefficient as it comparatively measures income distributions across members of a society’s overall workforce. Gini coefficient values can range from zero to one, with a zero indicating absolute equality of income distribution across a workforce and for all working members, and a value of one indicating as an alternative extreme that all income goes to just one workforce participant with everyone else receiving nothing for their efforts. And right now, as indicated above, labor statistics indicate the United States is operating economically at a higher Gini coefficient value than it has at any time since the 1920’s (see US Department of Labor, Bureau of Labor Statistics, statistics on pay and benefits.

So this assessment is not simply a matter of vague or general opinion, but rather is grounded in solid empirical data, as analyzed using standard mathematical techniques. And in this, I would argue that both the United States manifestation of the Occupy Movement as started with Occupy Wall Street on the Left, and the Tea Party movement on the Right in the United States, and their ascension into sociopolitical prominence of attention and concern fit a pattern that has shown at other times and in other places when the empirically measured Gini coefficient for a society has drifted into so skewed a position. One message that both of these movements have come to hold in common is that of inequality in voice and in opportunity. And bringing this into tight focus, much of the Occupy Movement rhetoric concerns the top 1% wealthiest and the remaining 99% who are argued to be left out.

And with that, I bring the issues of regulatory control and oversight into this discussion, and the often bitterly contested disagreements as to what is necessary – or simply questionable and wrong. And in that context I note the two basic perspectives that have come to dominate this debate as to regulatory control and oversight per se.

• One perspective would view regulatory control and oversight as primarily serving to preferentially limit marketplace access and opportunity to compete – and opportunity to generate and accumulate wealth through imposition of unnecessary and artificial barriers.
• The competing vision and perspective holds that regulatory control and oversight, at least when effectively drafted, primarily serves to level the playing field (e.g. so all participants: businesses, consumers and investors face equal opportunity and risk as I would formulate this perspective.)

And that brings me to a news story that is both current and unfolding for its details as I write this. And I begin with a system of derivatives trades that went bad for JPMorgan Chase and its CEO Jamie Dimon.

JPMorgan Chase managed to avoid much of the losses that so many other large banks and investment firms fell into from toxic investments made leading into the Great Recession. One consequence of that was that Jamie Dimon became a leading spokesperson in the fight against regulatory control and oversight that was being proposed and pushed forward – specifically to limit exposure to the risk inherent to the types of trades that proved so toxic going into the Great Recession. I refer here to hedge trading based on opaque and high risk investment instruments such as complex derivatives. Dimon argued against regulatory control in general and against imposition of a strong Volker Rule in particular, arguing that it was unfair to in effect punish “good banks” for the action of “bad banks.” He argued that if a general regulatory framework was imposed at all, it should be weak, so as to not limit the prudent investment practices of good banks in a rapidly evolving marketplace. And then JPMorgan Chase found itself publically facing the same type of investment practice scandal that had rocked the financial industry in general, leading us all into the Great Recession.

The investment failures and resulting losses that broke this news story began in London with what was initially called a local failure of due diligence and risk management oversight. And this was all blamed on the reportedly rogue actions of one trader – building up a combined loss of some $2 billion for the bank practically overnight. This, Dimon acknowledged, damaged his credibility as he argued against the Volker Rule leading up to the date at which it would first formally go into effect, this coming July 21, 2012. Then it turned out that this one incident was in fact not so much an anomaly within JPMorgan Chase and its system of investment practices. This was more a point of failure emerging from more standard and ongoing high risk investment practices that were being followed there, and identified as their risk hedging investment practices. And it was found that this red-flag of a failed investment decision was not going to be limited to just $2 billion and even just in immediate loss. As of this writing, on March 18 (I am close to a month ahead in preparing my postings), it has been announced that immediate loss from this will reach and top $3 billion – and there is speculation that overall losses from this will come to total over $5 billion. And I find myself coming back to thoughts of the Gini coefficient and the drive towards ever more inflated and hyper-inflated personal compensation among the senior executives of these institutions – and of the increasing dissociation between who faces potential gain and who faces potential risk from even the highest risk investments (see my series Stockholder Meetings, Annual Board Meetings and Annual Meetings Best Practices in my Guide to Effective Job Search and Career Development – 2 for background information on executive compensation practices, and earlier postings to this series for information on risk/benefits distribution.)

I have been weaving a complex story here with several distinct threads, but they do all come together.

• Those who argue and push back against regulatory control, come to take that position for a wide variety of reasons but for many if not most, their reasons come down to a single shared point – the way in which regulatory control and oversight can be seen as limiting opportunity to accumulate and concentrate wealth, and personal wealth.
• From a personal wealth perspective and as a matter of risk and benefits a practice that increases personal exposure to likely benefits while reducing exposure to concomitant risks is always going to be favored. But those concomitant risks will not simply go away. They can only be redistributed, and for high risk investment practices that means placing them on the shoulders of other stakeholders and participants.
• When this is done and on a large and systematic scale, the overall consequence is to both increase likelihood of adverse impact on the economy as a whole, from scale of overall economic transactions caught up in this investment behavior – and this can and will also shift overall income distribution, driving an increase in the value of the Gini coefficient.
• And when this value increases sufficiently, a correlated increase in sociopolitical instability develops too, as increasing numbers impacted by the downside of these investments react and act out, individually or through grass roots organizations such as the Occupy Movement and Tea Party activism.

I have, up to now, taken a primarily pro-regulatory control position in this series, and for a simple reason. I have focused on the development and imposition of effective regulatory control and oversight. I am going to switch directions in my next series installment and will discuss good and bad regulatory mechanisms and law, and some basic criteria that go into identifying a proposed regulatory process as one or the other. Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. See also Ubiquitous Computing and Communications – everywhere all the time.

Perceiving China – East and West 6

This is my sixth installment in a series in which I discuss China as that country is perceived, and both from within and by the outside world (see Macroeconomics and Business, postings 78, 80, 82, 85 and 88 for Postings 1-5.) And I begin this posting thinking back to a word that I invoked when naming one of my earliest organized series of writings to focus on China: The China Conundrum and Its Implications for International Cyber-Security, a 24 part series that I posted to Ubiquitous Computing and Communications – everywhere all the time (see postings 69 and scattered following.)

When I wrote and uploaded Part 1 of that series, I noted up-front that a conundrum is:

• A confusing or difficult problem or question.
• A question or problem having only a conjectural answer.
• A riddle whose answer is or involves a pun.

China is a land of tremendous strengths, resources and potential. At the same time China is a land hemmed in and stymied by systematic structural and organizational flaws and fault lines and by a vast cascade of problems that have developed from them – which I have only lightly touched upon in my various China-centric series and postings (see Part 1 of this series for references.)

Those successive postings note the basic conundrum as it has developed, piece by piece and decision and its consequences by decision and its consequences. And now China is facing a very public major transition in power and leadership, and with a public visibility for it that is showing through both the traditional news channels and the much more open and much less controllable venues of public-sourced interactive online communication. Just focusing on China itself for that, consider this story as it plays out and is presented in official news channels such as Xinhua (and see its English language edition). Now consider how it is more multiply-sourced and shared through several hundred million cell phones, plus social networking and social media sites and all of this in spite of and in ways even because of China’s Golden Shield Project: its Great Firewall of China.

And in a fundamental sense this conundrum is coming to a focus now, and to a degree that the People’s Republic of China has only approached once before: when confronted with the consequences of Mao’s more ambitiously vast social engineering programs. I refer here to his Great Leap Forward and his Cultural Revolution and to their systematic and consequential failures.

Deng Xiaoping led the pulling back of China from that abyss with a breaking away from some core elements of Mao’s legacy. And China began its still long and uncertain path towards allowing private sector and entrepreneur-based businesses and economies – with that shift in allowed opportunity still dominated and limited by state-owned and managed, and preferentially supported systems. And even that limited and tightly constrained change could only be contemplated let alone enacted in the context of Mao’s one Party, one State system and from within the absolute hegemony of the Communist Party of China.

As Hu Jintao prepares to step down from his position of Party and Government leadership and as Xi Jinping prepares to take his place, Xi has two very powerful tools for both framing and presenting a need for explicit, next-step change, and for enacting it – if he can face the risks and uncertainties of change himself, and the need for real change and not just cosmetic adjustments. And here I explicitly write as a contrarian, as his greatest and most effective tools are in fact two pressing and soon to be acute problems – problems that could be used to aim glaring spotlights on some of China’s long festering root-problems and challenges.

• I have already been discussing one of these potential tools – the growing embarrassment of scandal that has developed around a now very former Party and Government leader of Chongqing, China, Bo Xilai (see for example, Part 4 and Part 5 of this series.)
• The second of these tools, and one that China’s leadership has been very reluctant to even begin to acknowledge, is that China’s economy has grown at an explosive and unsustainable rate because it has been operating from a centrally contrived and maintained economic bubble that by its very nature can only prove ephemeral and with a falling off if not a collapse to follow. And that is the topic of much of this posting and I begin with the valuation and controlled undervaluation of the Renminbi: China’s currency.

I have been writing about China’s economy (see for example my series China and Our Increasingly Interconnected Global Economy as found in Macroeconomics and Business as postings 48 and scattered following.) I pick up on some of the issues discussed there, here again but with a very specific focus.

• China, as already noted has been artificially influencing and controlling the international exchange rate valuation if its currency, the Renminbi against the value of the US Dollar, the Euro and other major internationally traded currencies. China’s government has more specifically been keeping its currency undervalued.
• This means Chinese goods are being offered cheap in the marketplace, making them artificially more competitive as to price point they can be offered at when sold on the international market.
• That serves to create and drive up a positive balance of trade and a positive net flow of cash into China’s economy.
• This has led to job growth and higher employment for workers and increased business and productivity and for both private sector and state controlled businesses – and that has driven very large year to year increases in China’s overall economy and in its global economic strength.
• This has also helped China bring in massive amounts of foreign currency capital – as of this writing totaling some two trillion US Dollars and one trillion Euros, as well as significant levels of a wide range of other currencies. And this has given China a great deal of leverage when negotiating with other nation states, or with prospective private sector business partners as to terms of allowed participation with Chinese enterprises or access to the Chinese marketplace.

But bubbles by their very nature are intrinsically unstable and now China is facing significant and growing push-back for its monetary policies and for its policies for controlling access of foreign businesses in China’s marketplace and economy. The first really undeniable signs of this shift started appearing last year in 2011, and certainly by the end of that year. And China has faced marked economic slowdown since early spring, 2012.

On May 10, 2012 China’s General Administration of Customs announced that growth in imports had come to a virtually complete halt for April in comparison to the previous year. China depends heavily on imports for its economic strength and particularly of raw materials, manufactured components such as computer chips and specialized manufacturing equipment. Given the nature of China’s business collaboration agreements with foreign enterprises this indicates both a slowdown of key sector manufacturing in China, and a slowdown of crucial technology transfer and of business insight and intelligence acquisition too. At the same time exports grew at half of the expected rate creating an across the board economic downturn from previous growth rates. April, 2012 performance here has simply followed a developing trend.

China’s government has been slowing developing an economic stimulus policy response and such a response would be expected to include measures such as fiscal spending, tax breaks and fiscal deregulation, as well as perhaps less standard measures such as central bank-managed quantitative easing.

The People’s Bank of China stated on its web site the day following the above cited General Administration of Customs announcement that it was going to reduce the share of deposits that banks must set aside as reserves by a half percentage point, to increase funds available for loans. This type of reduction in cash reserve ratio adds yet another stimulus measure to this mix. But businesses that this overall policy would seek to stimulate into new growth already have sufficient cash funds for that. Interbank lending rates have in fact been falling in China, indicating there is plenty of cash available already for growth investment. My point here is that many if not most standard and expected economic stimulus measures that could be taken are not necessarily going to address China’s current situation, or even significantly soften the landing as China’s economy slows down.

At a time when major organizational change in leadership is taking place and when ongoing stability and the image of such stability are essential to quelling questions as to where China is headed with that change, this downturn simply feeds into a sense of crisis and certainly when viewed in the context of Bo Xilai and his still growing scandal, and so much more. And perception has a tendency to become reality. If Xi Jinping and those who would support him have the vision and courage to pick up on these challenges and use them as tools for driving change, these challenges can become their strongest assets. Or they can simply seek to take a seemingly safer road and hope that all of these issues can be made to just go away – and with long-term costs that will not do so, so easily.

I am currently planning on adding one more installment to this series, and with a focus on the consequences of the monolithic and of denial of considered alternatives – and of the need for real diversity and choice if China and its leadership are to find an effective Chinese path forward. Meanwhile, you can find this and related postings at Macroeconomics and Business and also see Ubiquitous Computing and Communications – everywhere all the time.

Considering a cost-benefits analysis of economic regulatory rules – 11

This is eleventh installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64and scattered following for Parts 1-10.)

I posted on crowd funding as a new and still unregulated investment channel in Part 10 of this series, doing so as a follow-through response to reader feedback. And I noted at the end of that installment that I would “begin my eleventh series posting by rounding out my discussion of crowd funding, by citing how broker and middle-man sites are being developed that at least in principle, do at least some due diligence research and validation for their investor clients, and for their new business clients too.”

One such broker site that comes immediately to mind for me is Kickstarter.com and I have to begin this part of my crowd funding discussion by in effect challenging one of the basic assumptions I noted in Part 10. Specifically, I stated that:

• Crowd funding would in most cases be pursued by newly forming enterprises that need relatively small amounts of infused capital for early and even earliest-stage development and growth. (Emphasis added in boldface for the key wording for purposes of this discussion.)

Individual investors might make small investments in any given crowd funded venture, but one of the goals of any brokerage site such as Kickstarter would be to develop positive viral marketing buzz about the businesses that they work with and promote – as that is where they would bring in revenue from their efforts. These sites might take an up-front new account set-up or similar fee from their client business ventures. But in most cases it could be expected that they would also take at least a small percentage of any and every investment made to one of their client businesses that come in through their web site and from their marketing efforts. And I have to add that when a crowd funding brokerage site raises significant funding levels for startups and early stage businesses that have garnered a lot of positive buzz in the online conversation and online community, that has to benefit the brokerage firm too by putting them on the map for other potential fundraising businesses and for potential investors too. That could only serve to help them build themselves as businesses too.

Individual investors may take small investment stakes through their crowd funding activities, but individual business ventures are already in some cases bringing in many millions of dollars of investment capital through single rounds of crowd funding – and even aggregate funding levels that would match what would be obtained from venture capital sources – but without any of those smaller investors doing their own due diligence in the way that a venture capitalist or even an angel investor would. So real money is in play here, for crowd funded ventures and not just a few discretionary-income dollars. And that makes regulatory protection-mandated openness and transparency essential moving forward.

New investment instruments and channels and new business models for managing them are continually arising and new forms and variations on older approaches are arising just as fast and certainly as online connectivity has opened up and globalized the marketplace. Regulatory control and oversight needs to evolve in response and with matching agility if it is to offer the type of level playing field that is called for. And with that, I turn to reconsider regulatory control and its costs and benefits per se and I begin by explicitly noting two conflicting visions as to what that word “regulatory” means. I add that these two visions are currently being played out in United States national politics, and certainly going into the upcoming 2012 presidential elections – though variations on this differing of vision can be found in a great many other countries and in international trade alliances as well.

• One perspective would view regulatory control and oversight as primarily serving to preferentially limit marketplace access and opportunity to compete. This is the laissez faire or “government hands-off” approach, according to which the default assumption is that regulatory control should be considered a hindrance and harmful unless specifically and by instance proven otherwise. The basic underlying assumption here is that markets are always self-correcting to limit the impact of improper business practices and that long-term, good practices will always prevail. And Adam Smith’s invisible hand of the market is usually invoked in one way or other to justify this perspective.
• The competing vision and perspective notes that even if this were to hold true in the long term, a great deal of harm can be caused and for a great many individuals, families and businesses in the short term, and on any ongoing basis – from predatory marketplace behavior. I have been positing this approach throughout this series in terms of effective regulatory control leveling the playing field for marketplace participants by more equitable distribution of risks and benefits, with that coming in large part from the imposition of greater transparency and accountability. But the basic approach of this version of regulatory control reality is to limit the potential gain from predatory marketplace behavior per se. And that is where the still unfolding development of crowd funding enters this story. Any effective positive vision of and approach to regulatory control, has to be adaptable and flexible in the face of continuous ongoing change. Otherwise it can only be reactive and behind the curve, and running the risk of actually causing harm from failure to address actual current practices.

That is why I focus on risk/benefits distribution and on transparency and accountability per se and not on the specifics of regulatory control as it would address any particular current state of the art of business practices – good and bad, that will be superseded for immediate relevance as the marketplace and opportunity in it change and evolve.

I am going to add at least one more installment to this series, looking at the impact of marketplace regulatory control and its successes and failures as they reach beyond the marketplace per se. I will focus at least as a starting point in that on the issues of wealth and opportunity distribution within and across societies, and on societal stability. Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. See also Ubiquitous Computing and Communications – everywhere all the time.

Perceiving China – East and West 5

This is my fifth installment in a series in which I discuss China as that country is perceived, and both from within and by the outside world (see Macroeconomics and Business, postings 78, 80, 82 and 85 for Postings 1-4.) And I begin this by repeating a question that I posed at the end of Part 4:

• Will Bo Xilai and his group be treated as an exception and as a rogue group, or as more symptomatic of a widespread problem, and if the later what lessons will be learned and by whom, and what fundamental changes will be enacted to limit if not prevent a recurrence?

China has a track record of changing and of seeking to control the historical record, and a penchant for seeking to define and redefine the historical reality that its Here and Now are based upon, and that will form its future. When Mao Zedong and his revolutionary forces marched into Beijing and into power, Mao orchestrated a rewriting of the history leading up to his taking leadership of China. And the boundaries between history and myth blurred for the Long March and for so much else, and for both the triumphant and for those defeated.

When Deng Xiaoping and the voices of change he led challenged areas of Mao’s legacy through actions such as the Gang of Four trials with all of the public repudiations and recriminations they generated, once again a big part of this developed as the closing out of what had been considered historical truth. Voices were silenced. What had previously been assumed and known went away into the oblivion of a past that had now officially never happened.

This certainly happened after the Tiananmen Square protests of 1989 and the massacre that ended them. To this day and regardless of photographic and other evidence to the contrary, those events never happened. This pattern has been followed many times and for both large and far-reaching, and small and far more locally forgettable news and historical narratives.

When Bo Xilai first fell into disgrace a campaign began to remove his story and much of his record, leaving a simple and even simplistic stereotype of corruption and guilt.

• That means organized, systematic amnesia as to his gang trials and all of his anti-corruption efforts and initiatives and even where they sought to achieve societal good – especially then.
• Bo actively sought to promote state owned business and industry, and of a type that many in power in the Politburo and its Standing Committee still strongly favor.
• Bo actively promoted foreign investment, and bringing technology and knowledge-rich foreign businesses into China and under terms in which Chinese enterprises and workers could gain in skills, knowledge and productive capabilities. He in fact led a significant number of these technology and knowledge transfer initiatives that have enriched the Chongqing that he led.

Much if not all of that is simply disappearing from the conversation and from the official records and all that is reliably left is his own corruptibility and his own corruption, and that of his family and of his key supporters and enablers – with one category of exceptions to that. Members of China’s national level Politburo and its Standing Committee who were supporting and advancing Bo and his career up until his downfall have been deleted from this story as ever having played a supportive role for him of any sort. This definitely includes members of China’s current leadership who had supported Bo’s advancement towards a spot on the Standing Committee and into China’s most senior Party and Government leadership. Now, that never happened and any public at least, record of it has for the most part evaporated and certainly within China.

I argue the case that even effective and honest leaders can make mistakes and that people can be deceived and into supporting those they come to see as having not been worthy. So even if members of the Standing Committee and more senior and influential leaders of Party and Government had supported him – it happened and that needs to be remembered and learned from.

• If the embarrassing details of history and of the historical record are simply made to go away, what can be learned from them to limit their recurrence?
• What can be learned as to what their root causes and enablers were?

Bo’s senior Party and Government backers came to regret their support of him and for many reasons. Embarrassment and even deeply held personal embarrassment have to be considered to occupy the heart of that. And what lessons were buried with this story and with this history? There are many but I will only note one of them here.

Ideological nepotism and the advancement of those who hew to and support the one party line as an only criterion for advancement, can only lead to mediocrity and short-sightedness at the top – and to the corruption that would support them and that in fact feeds off of them too. Acknowledging Bo Xilai and his full story, positive as well as negative, and how he advanced to the positions he held could only serve to challenge the one Party state – free of any of the checks and balances that a more openly and publically contentious and challenging political system would bring.

Political and business-centered corruption can always take place and even in highly politically contested and competitive settings. But open eyes and the capacity for long memories and for a diversity of facts, opinions and perspectives does expose the corrupt and their activities. And this does at least create opportunity for actually learning from them.

Party and Government in Chongqing operated a maze of bribe-based and supported bureaucratic systems and if anyone, Chinese or foreigner wanted to accomplish anything in Chongqing, they needed to find and pay off the right people who would then open the necessary doors and fill out the necessary forms. Bo may be gone but this only means a new set of enablers and gatekeepers have to be found and paid – and according to the same pattern that has been in place since well before Mao. What has been learned? What is being learned? What can be learned when the lessons of history are buried and made to go away, along with all of the troubling details that they would be expressed and understood through?

I am going to turn in my next series installment to consider the still upcoming changes in leadership that China will be enacting later this year, 2012 and into the next. Meanwhile, you can find this and related postings at Macroeconomics and Business and also see Ubiquitous Computing and Communications – everywhere all the time.

Considering a cost-benefits analysis of economic regulatory rules – 10

This is tenth installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64and scattered following for Parts 1-9.) I have been developing a model approach to evaluating regulatory oversight based on distribution of risk and benefits, building my discussion of this from a series of briefly outlined case studies and historical narratives and discussions. At the end of Part 9 I stated that I was going to “round out this series with a final installment, more fully examining the implications of our increasingly ubiquitously connected and interconnected computing and communications systems” on the regulatory process and on what might need to be regulated. My goal was and still is to examine and discuss the increasingly pervasive role and influence of the internet on regulatory oversight, and particularly where Web 2.0 and the wider interactive online experience are considered, with their increasingly ubiquitous support of online social media and crowd sourcing.

Then soon after writing Part 9 and before it went live on the blog, I received an email from a friend and colleague who is an active member of an angel investor group, in which he expressed his, and his group’s concerns regarding crowd funding. The reason for his email and for his concerns stem from the way that crowd funding was added into a recently passed major piece of US legislation: the JOBS Act of 2012 (and also see my posting from this series where I look into this new law, in Part 4 and Part 5.)

I want to start this posting by quoting a section of my reply email:

“First, I agree with you completely about crowd funding and I agree with you about the snake oil salesmen – not just potential but inevitability in that. Some people will make good and wise crowd funding investments, but many will get clipped. I am just about to write my tenth installment for that series – I am about a month ahead in my writing. I was going to finish with that but I have decided to add another one, and my topic will be a due diligence perspective on crowd funding and on its lack of regulatory control and consumer protections.

“I have worked more with VC than with angel investors and know that one of their concerns is that they need to know who they are dealing with as owners of an up and coming, early stage business. Even when any crowd funding participation is above-board and realistic and for both business and investors, this as a complicating ownership consideration would help muddy the waters and serve as a source of due diligence concern. So crowd funding might help raise funds early but not necessarily for the right new businesses – and even when it was to the right ones that might just hinder their growth opportunity later and in significant ways. Good call and on your and your group’s part.

“Four or five years from now I expect to see a real call out to in some way regulate this new funding channel so as to protect both legitimate businesses and potential investors – and the ones already involved in crowd funding. That means specifying systems of identification and accountability – I am planning on writing about this in greater detail and I am still thinking it through.”

And I want to start from there by noting that regulatory oversight has to be analyzed and considered as a cyclical process, and our increasingly interactive online capabilities have both created new avenues of financial and investment activity, and significantly new variations on more standard business transaction and investment forms. And crowd funding can be considered a poster child example of this New, and both for its potential risks and benefits and for its need to be prudently regulated and for the benefit of both investors and for the businesses that they would invest in.

I used the terms “identification” and “accountability” in my letter and I begin this discussion there, and by posing a simple, basic question:

• What type of business would most likely seek out crowd funding-based investor capital?

Any meaningful answer to this would probably outline a laundry list of likely qualities and qualifications and I note a few of them here for follow-up discussion.

• A large and well-established company might venture into crowd funding in support of some specific venture for marketing purposes, and to be able to claim community endorsement and involvement. But crowd funding would in most cases be pursued by newly forming enterprises that need relatively small amounts of infused capital for early and even earliest-stage development and growth.
• They would essentially always be pre-breakeven and in most cases even be pre-revenue, as business ventures further along and already succeeding would have development track records that would interest and attract larger investors – angel investors at the very least. And they would probably need larger capital infusions than crowd funding would provide if they needed outside financial support at all.
• This means, among other things, that the most likely crowd funded opportunities would be for investing in businesses for which there would be the least public visibility, and certainly where verifiable information was limited as to potential business viability and soundness of business practices. And there would in many cases be minimal information readily available as to the track records of these business ventures’ founders.

And this is where crowd sourcing, marketing efforts to skew and bias the conversation, and “snake oil salesmen” could enter the picture. When less information is available through publically available business filings and other verifiable sources, the only information flow about a potential investment opportunity might be entirely from the crowd and the online social media conversation. And this is where a business would devote effort to create positive online buzz.

Crowd funding is not crowd sourcing or necessarily a part of it either, but crowd sourcing and the online social media conversation would drive crowd funding and through the momentum of positive word shared.

The expression caveat emptor – buyer beware comes immediately to mind here. And regulatory oversight of the crowd funding process would at least ideally mandate a level playing field so a potential investor would be able to make their investment decisions based on at least something of a reliable due diligence-based decision process.

• This might, for example, include a requirement that a business seeking crowd funding support have to file some basic information on itself and about its founders and owners, and their professional track records. That, I add would also include documentation identifying any legal actions against the business, and any criminal records of founders and owners.
• And in my letter, I noted that crowd funding and even for good and reliable business ventures could potentially create problems for the business too, and certainly if it were to seek anything like venture capital support later on. Effective regulatory guidelines would also specify a level of clarity as to what a crowd funding investor would be able to claim ownership of – a share of profits, equity in the business and if so in what form, or some combination.

Realistically, regulatory oversight of crowd funding would not and could not prevent business owners from seeking to bias the online conversation about their business and its value potential. Online social media-based marketing will happen and unless the message slips into outright fraud, this would be protected under First Amendment freedom of speech protections, and certainly in the United States. But effective regulatory oversight would help ensure that a prospective investor has other resources they could turn to, to validate what they find in the online and social media driven conversation. And this oversight would help ensure greater clarity as to what they would be buying through their investment.

I am going expand upon my discussion of the online community as it impacts upon regulatory control and oversight in my next posting. And I will write about the need for adaptability in the regulatory framework in addressing the ongoing flow of change and in societies and marketplaces, and as that change is driven by technological advancement and adaptation. I add that I will also at least begin my eleventh series installment by rounding out my discussion of crowd funding, by citing how broker and middle-man sites are being developed that at least in principle, do at least some due diligence research and validation for their investor clients, and for their new business clients too.

Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. See also Ubiquitous Computing and Communications – everywhere all the time.

Perceiving China – East and West 4

This is my fourth installment in a series where I discuss China as that country is perceived, and both from within and by the outside world (see Macroeconomics and Business, postings 78, 80 and 82 for Postings 1-3.) I put this series in a directory that focuses upon macroeconomics and business, and for a reason. How China perceives itself as a people and as a nation, and how China and its leadership perceive the world around it shapes their policies and both internally and as they reach out to participate in the larger world community. How the rest of the world perceives China, and the how the West does in particular at least for the focus of this series, shapes that outside world’s engagement with China and both for proactive and reactive policy and action. And friction and potential for friction in all of this arise where there are fundamental mismatches as to what is assumed and what is perceived on both sides.

China as Zhōngguó, the Middle Kingdom has in a fundamental sense seen itself as the center of the world and as holding special place for that. This name in one variation or other goes back in China’s history at least as far as approximately 1000 BCE when it designated the Zhou Empire, now thought of in later historic context as the Zhou Dynasty, located in what is now known as the North China Plain. The people of the Zhou Dynasty – Zhōngguó saw themselves as the sole holders of culture and civilization, surrounded by barbarians. China has long since learned of other cultures and civilizations, but as with many peoples and cultures this sense of special place in the world has still held, and as an underlying assumption when not as a matter of conscious policy and perspective. And for purposes of this series and my writings on China in general that means China holding special and uniquely Chinese problems and opportunities and I stress both sides of that. How they see themselves as a people shape both their actions and their understandings as to what is appropriate and what is even possible and this underlies everything.

In Part 3 I noted a developing scandal that is erupting from Chongqing and that is embroiling China as a whole, centered around Bo Xilai and his wife Gu Kailai and an increasing number of others. And as I noted in Part 3, Bo was a leading contender for joining their Politburo Standing Committee. Bo Xilai can only be seen as a member of China’s aristocracy, its Crown Prince Party as the son of one of the People’s Republic’s founding heroes, Bo Yibo. And all of this with its still unfolding details is coming out in the age of the internet and in public view, and both within China and across the world – and at a time when China is facing its first internet-age major transfer of power and for both Party and Government leadership.

I have been writing on and off for several years now about the challenges that China faces and about its approaches to addressing them (see Part 1 for a list of reference links.) I would contend that much of the conflict and friction that arises in the international context for China comes from its understanding of its issues as being uniquely Chinese and from its attempts to control the conversation – the flow of knowledge, rumor and opinion through tools such as its Golden Shield Project (its Great Firewall) – and at a time and in a context in which hundreds of millions of Chinese citizens have cell phones and internet access, and when it has proven increasingly difficult and even impossible to control that flood of conversation and information sharing. Now it comes out that Bo Xilai and his provincial and local Party and Government apparatus were using surreptitious approaches to bug phone lines and spy upon other Party and Government officials. And in fact one of the reasons why this scandal first erupted as being so problematical was that this was being used upon national Party and Government leadership. And with this I turn to the core issues that I would address in this posting.

I have stated several times in this series that:

• I would propose taking a more business-like operational and hands-on practical approach and look at China and its challenges much as if nations were businesses. What are the policies taken and what are their practical implications and consequences?
• I would argue and with much less general disagreement perhaps, that there are more universally applicable business best practices and that decisions made and actions taken can have predictable consequences and results – in a business setting and even across industries and marketplaces.
• The same applies here, and certainly where a country – here China, is developing and enforcing socioeconomic and business policies.

First and foremost I would argue that while China is unique as a country and people, it and its people are also a part of the larger global community and experience. That is becoming increasingly necessary to acknowledge – and because of the way we are all becoming interdependent and real-time interconnected and both economically and culturally, and in the way that we are so increasingly and ubiquitously communicating about that and everything else as well. Every nation and I add every business has and holds confidential and proprietary information and knowledge and this must be held in confidence and protected as such. But nations and businesses alike need to be built and run from a foundation of process transparency and accountability. And ultimately, no nation faces entirely unique problems or challenges – and both because others face the same types of problems and challenges, and because problems and challenges that arise in one place do not respect or stay confined within any single nation’s borders.

• I have written about China’s developing population demographics time bomb (see for example my supplemental posting The China Conundrum and its Implications for International Cyber-Security – 17.5.) The implications and impact of this will be felt globally as China is closely integrated into the world community and our overall global economy.
• I have written about China’s environmental challenges, citing gray and black market rare earth mineral mining with their chemical and radioactive waste products (see for example The China Conundrum and its Implications for International Cyber-Security – 15, and the postings I cite there that also successively discussed this story.) Environmental pollution crosses borders. And for an issue such as rare earth minerals and their sales – these are considered strategic minerals by many countries, essential for key manufacturing industries and for national defense and China is the primary producer for most of them.

So what happens in China directly affects the global economy, and in every corner of the world. What happens in China is not just happening in or impacting upon China. If China’s current leadership is struggling with the internal-to-China scandal of Bo Xilai, and I add the other “China sourced” issues I write of – every one of them washes across all national boundaries and borders and problems initiating outside of China flow into China too.

Transparency and accountability have to be the first, initial steps for making any nation, or any business work more effectively and both internally and as they participate in larger contexts.

I am going to continue this discussion in my next series installment, considering Bo Xilai and the actions he is accused of as a potential watershed event – depending on how this is understood and resolved in China. And as a foretaste of that I ask a question:

• Will Bo Xilai and his group be treated as an exception and as a rogue group, or as more symptomatic of a widespread problem, and if the later what lessons will be learned and by whom, and what fundamental changes will be enacted to limit if not prevent a recurrence?

This is a situation that could develop into an easily forgotten show trial that would simply reinforce business as usual, or it could become a springboard for change and more according to the example that Deng Xiaoping offered both China and the world.

You can find this and related postings at Macroeconomics and Business and also see Ubiquitous Computing and Communications – everywhere all the time.