Investing news out of China these days is troubling, to say the least. In the first week of this year, a group of 100 foreign creditors, including
, were stiffed by a debt-ridden ($4.3 billion) Chinese investment trust company,
Guangdong International Trust and Investment Company
, or GITIC.
GITIC was formed almost two decades ago as the principal fund raiser for the province of Guangzhou, one of China's most economically fertile areas. It is now China's second-largest investment trust company, and can be compared to an American municipal or public finance agency.
The default was startling -- but not an aberration.
The news from GITIC was followed two days later by a statement from
Dalian International Trust and Investment
, or DITIC, that it would delay payments. Then, in the third week of January, Japanese bankers said that DITIC's foreign-borrowing arm had defaulted on millions of dollars in loans. (Dalian, known as the "Hong Kong of the North" is one of China's busiest port cities.) Since then, eight more defaults have followed.
This was all unexpected. The debts had been registered with the government, which, in the past, meant that China would guarantee them. Not now.
Why is China suddenly reneging on these commitments and risking becoming a pariah in international trade? The nation did not appear to be in financial trouble; last December, the government raised $1 billion in global bond offerings, doubling the size of the issue at the last minute because investor interest was so high.
Perhaps the answer lies in the past, in the jumble of two centuries of contradictory efforts by Americans to alternately open, save, punish and reform China.
China's civilization is nearly 4,000 years old. Until the current century, it was a feudal society, ruled for more than 40 centuries by just 18 dynasties.
The U.S. has always sought to do business with China. Indeed, barely three months after the last British soldier left New York City in 1783, a re-commissioned privateer, the
Empress of China
, was dispatched to China by a combination of private and government interests, "in the adventurous pursuit of commerce," as Robert Morris, the principal backer of the expedition, is quoted as saying.
It was a difficult mission. China's distinct trading philosophy, established in 1720 by the Manchu emperor
, was based on two fundamental tenets. First, China did not
to trade with anyone; its self-sufficiency was assumed. Secondly, all foreigners were considered "barbarians," inferior in every way to the Chinese and their culture. Indeed, the owners of the Empress were not sure what commodities to bring the Chinese to induce them into trade. There was little that China wanted from the West. In the end, the owners sent ginseng, a root the Chinese believed to have the medicinal value of restoring virility. It must have had some appeal because the Empress exchanged its cargo of the root for 400,000 pounds of green and black tea, chinaware, silk and spices. The trade earned a 25% profit on the owners' investment of $120,000.
During the next half century, the U.S. increased its trade with China as a junior member of an established European league, which was headed by Great Britain. What to exchange with China, however, remained a problem. Chinese demand for ginseng and other exotic imports, like sea otter skins and sandalwood, had waned. In 1827, Great Britain introduced opium, for which there was already a demand in China.
Chinese authorities soon objected to the narcotic enslavement of its people, but the cannons of the British Men of War quickly ended its protest. A series of trade agreements were forced upon the Chinese, opening much of the country to foreign trade and granting foreigners extraterritorial status. This status granted foreigners rights unavailable to the Chinese themselves, such as better housing in self-governed enclaves. While a noncombatant in the opium war, the U.S. shared in the war's success, shipping opium into China and making sure American traders received the same special treatment as the British did.
Some in the U.S. had interests in China that went beyond profits. They sought to save the souls of the Chinese. Starting in 1840, thousands of American missionaries arrived in China, converting many to Christianity. However, by the end of the century, resentment directed at the "foreign devils" who had usurped Chinese culture and commerce swept China.
In 1899, the
Society of Righteous Fists
, nicknamed the
, revolted, brutally slaying nearly 300 Catholic and Protestant missionaries and more than 30,000 converts. An international relief force, including 2,500 American soldiers, quelled the Boxer Rebellion. The empress dowager of the
dynasty, who sympathized with the Boxers, fled, and the missionaries returned.
The 20th century has witnessed three distinctly different forms of government in China: the Qing dynasty, which was overthrown in 1911; the
National Republic of China
, a government the U.S. hoped in vain would be democratic and capitalistic; and the present
People's Republic of China
, which, under
in 1949, banished the nationalist government to Taiwan. Under communism, foreigners were expelled, and China retreated into itself. In 1972, President Nixon tried to open it up commercially to the U.S., and, during the quarter century since, the Chinese have experimented with limited capitalism.
President Clinton renewed the effort in 1997, emphasizing, however, that trade with the U.S. should bring an improvement of China's human-rights record. Lately, however, there has been renewed repression of the rights of Chinese citizens, and the economic disappointments of the new year, like GITIC, threaten further investment in China.
So, what does China's recent conduct mean?
Does the nation have economic problems deeper than most believe? That is a real possibility that ought to make investors interested in China grimace. Earlier this month,
abandoned an attempt to raise $285 million for a Chinese power company because of "the recent highly volatile market conditions," according to a
New York Times
Or are these defaults a gambit in the ongoing political match between East and West? Tensions do seem to be building on both sides.
Or is it simply the reappearance of the philosophy of Emperor K'ang-hsi -- that China is at the center of the universe, that it does not need to trade with foreigners (except for forbidden military and computer technologies) and that all non-Chinese peoples and cultures are inferior to its own?
Maybe it's a combination of all three. In any event, the U.S. and China have never had a normal commercial relationship, so it's probably not wise to expect one now.
Richard B. Marrin is a senior partner in the Wall Street law firm of Ford Marrin Esposito Witmeyer & Gleser. A litigator for almost 30 years, he has been involved in numerous large securities actions, from Equity Funding and Franklin National in the 1970s to the bank failures and write-offs in Texas and California of the 1980s. More recently, his work has involved the calamities afflicting Pacific Rim investors. Marrin is also the author of several books on American history of the 18th and 19th centuries.