ANALYSIS-China's complex regulatory system under fire
By Kirby Chien
BEIJING, July 12 (Reuters) - After a string of embarrassing health scandals, China has acted swiftly with rapid-fire steps that included executing a former head of its drug watchdog, but the moves ignore the systemic nature of the problem.
China's regulatory maze is legendary -- businessmen and officials alike are often bewildered by overlapping and sometimes conflicting regulations -- but the core problem is Beijing's inability to keep provincial and local officials in line.
"China suffers from a too small and too weak central government," said Eliot Cutler, the partner in charge of law firm Akin Gump Strauss Hauer & Feld LLP in Beijing.
"They have to increase the reach of the regulations and the government into the provinces," he said.
But that is much easier said than done, as the problems range from unchecked industrial pollution to exploding cell phone batteries and dynamite stored in residential areas.
China's single-minded focus on development over the past 20 years has produced the world's fourth largest economy and one of its fastest growing, but also created a generation of bureaucrats more interested in growth than safety.
"Local officials have been rewarded or punished for the speed of economic growth," said Steven Xu, director of advisory services at the Economist Intelligence Unit.
"It will take a long time to change their thinking," he said.
Zheng Xiaoyu, former head of the State Food and Drug Administration (SFDA), was executed this week for taking bribes, an unusually swift punishment the Communist Party said was aimed at detering other wayward officials.
BLAME GAME
During Zheng's tenure, dozens died in China from fake or bad drugs and foods. Beijing unveiled this week tightened rules for drug registration as officials acknowledged regulatory loopholes.
But analysts say more fundamental changes are needed and could come out of the Communist Party's 17th Congress later this year.
"Punishment of a few officials will change nothing," said Cutler. "There has to be significant reform of institutions in the way governments in China react and respond to each other."
While greedy traders and officials can be blamed for allowing tainted toothpaste, unsafe toys and mislabelled ingredients on to the market, the central government's tendency to over-regulate can sometimes leave business executives scratching their heads.
"There is no indication that SAIC concurs with the Guidelines, and it may in fact have different criteria," law firm Heller Ehrman wrote in a recent report about merger guidelines.
The guidelines were issued by the Ministry of Commerce, which shares jurisdiction, in this instance, with the State Administration for Industry and Commerce.
The lack of consistent and stable regulations enforced evenly throughout the vast country opens the door for unethical executives looking to cut costs and improve margins.
"There is product substitution, poor manufacturing methods, poor storage and a myriad of other problems that can result," said Kent Kedl, the Shanghai head of Technomic Asia.
Kedl's company is a consultancy that helps firms such as chemical maker DuPont (DD.N: Quote, Profile, Research, Stock Buzz) and Sara Lee (SLE.N: Quote, Profile, Research, Stock Buzz) to import into and source from China.
New Chinese companies pop up literally overnight, trying to take advantage of new opportunities, but often lack proper supervision.
"Last year they were planting soy beans, and this year they are doing chemical processing," said Kedl.
"They can get loans and backing quickly but don't have the proper level of expertise and sophistication," he said.
BAD TIMING
China is aware it has a crisis on its hands, saying social unrest could ensue from more health scandals, and in June Beijing named a Paris-trained and non-Party scientist to be health minister.
But U.S. politics has also played a role. The two leading Democratic contenders this month joined a push to punish countries that undervalue their currencies as legislators seek to turn up the heat over China's currency and surging trade surplus.
"The problem is people trying to find an excuse that feeds into a willingness to see the bad side of China's exports," said Paul Cavey, an economist with Macquarie based in Hong Kong.
"It's playing to a very receptive audience, and that is definitely very unfortunate for China," he said.
China's trade surplus with the United States hit a record $233 billion in 2006 and its June trade surplus with the world was a record $26.9 billion.
While many analysts say China is genuinely trying to soften the human impact from its runaway economy, those eager to buy its avalanche of cheap clothes, home appliances and foodstuffs must also take some responsibility.
"It is the foreign buyers' responsibility to check all the way down the supply chain," said Technomic Asia's Kedl.
"It's not cheap, but companies must realise that is a part of the cost of doing business in China," he said.
(US$=7.60 yuan)
BEIJING, July 12 (Reuters) - After a string of embarrassing health scandals, China has acted swiftly with rapid-fire steps that included executing a former head of its drug watchdog, but the moves ignore the systemic nature of the problem.
China's regulatory maze is legendary -- businessmen and officials alike are often bewildered by overlapping and sometimes conflicting regulations -- but the core problem is Beijing's inability to keep provincial and local officials in line.
"China suffers from a too small and too weak central government," said Eliot Cutler, the partner in charge of law firm Akin Gump Strauss Hauer & Feld LLP in Beijing.
"They have to increase the reach of the regulations and the government into the provinces," he said.
But that is much easier said than done, as the problems range from unchecked industrial pollution to exploding cell phone batteries and dynamite stored in residential areas.
China's single-minded focus on development over the past 20 years has produced the world's fourth largest economy and one of its fastest growing, but also created a generation of bureaucrats more interested in growth than safety.
"Local officials have been rewarded or punished for the speed of economic growth," said Steven Xu, director of advisory services at the Economist Intelligence Unit.
"It will take a long time to change their thinking," he said.
Zheng Xiaoyu, former head of the State Food and Drug Administration (SFDA), was executed this week for taking bribes, an unusually swift punishment the Communist Party said was aimed at detering other wayward officials.
BLAME GAME
During Zheng's tenure, dozens died in China from fake or bad drugs and foods. Beijing unveiled this week tightened rules for drug registration as officials acknowledged regulatory loopholes.
But analysts say more fundamental changes are needed and could come out of the Communist Party's 17th Congress later this year.
"Punishment of a few officials will change nothing," said Cutler. "There has to be significant reform of institutions in the way governments in China react and respond to each other."
While greedy traders and officials can be blamed for allowing tainted toothpaste, unsafe toys and mislabelled ingredients on to the market, the central government's tendency to over-regulate can sometimes leave business executives scratching their heads.
"There is no indication that SAIC concurs with the Guidelines, and it may in fact have different criteria," law firm Heller Ehrman wrote in a recent report about merger guidelines.
The guidelines were issued by the Ministry of Commerce, which shares jurisdiction, in this instance, with the State Administration for Industry and Commerce.
The lack of consistent and stable regulations enforced evenly throughout the vast country opens the door for unethical executives looking to cut costs and improve margins.
"There is product substitution, poor manufacturing methods, poor storage and a myriad of other problems that can result," said Kent Kedl, the Shanghai head of Technomic Asia.
Kedl's company is a consultancy that helps firms such as chemical maker DuPont (DD.N: Quote, Profile, Research, Stock Buzz) and Sara Lee (SLE.N: Quote, Profile, Research, Stock Buzz) to import into and source from China.
New Chinese companies pop up literally overnight, trying to take advantage of new opportunities, but often lack proper supervision.
"Last year they were planting soy beans, and this year they are doing chemical processing," said Kedl.
"They can get loans and backing quickly but don't have the proper level of expertise and sophistication," he said.
BAD TIMING
China is aware it has a crisis on its hands, saying social unrest could ensue from more health scandals, and in June Beijing named a Paris-trained and non-Party scientist to be health minister.
But U.S. politics has also played a role. The two leading Democratic contenders this month joined a push to punish countries that undervalue their currencies as legislators seek to turn up the heat over China's currency and surging trade surplus.
"The problem is people trying to find an excuse that feeds into a willingness to see the bad side of China's exports," said Paul Cavey, an economist with Macquarie based in Hong Kong.
"It's playing to a very receptive audience, and that is definitely very unfortunate for China," he said.
China's trade surplus with the United States hit a record $233 billion in 2006 and its June trade surplus with the world was a record $26.9 billion.
While many analysts say China is genuinely trying to soften the human impact from its runaway economy, those eager to buy its avalanche of cheap clothes, home appliances and foodstuffs must also take some responsibility.
"It is the foreign buyers' responsibility to check all the way down the supply chain," said Technomic Asia's Kedl.
"It's not cheap, but companies must realise that is a part of the cost of doing business in China," he said.
(US$=7.60 yuan)
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