by Constantine von Hoffman

More Trouble for China: Congress Exposes Corruption at Huawei, ZTE

Oct 09, 20123 mins

Capitalism isn't just about taking advantage of someone to make money. It's about taking advantage of someone within an enforceable set of rules and regulations. China's refusal to accept this could be its undoing, writes blogger Constantine von Hoffman.

The U.S. House Intelligence Committee says that Chinese telecommunication firms Huawei and ZTE pose a national-security threat and that the government and private companies shouldn’t do business with them.

Does this come as a surprise to anyone?

Yeah, I didn’t think so. It is still nice to have it on the record, though.

The committee’s report is remarkably straight-forward and lucid:

Despite hours of interviews, extensive and repeated document requests, a review of open-source information, and an open hearing with witnesses from both companies, the Committee remains unsatisfied with the level of cooperation and candor provided by each company. Neither company was willing to provide sufficient evidence to ameliorate the Committee’s concerns. Neither company was forthcoming with detailed information about its formal relationships or regulatory interaction with Chinese authorities. Neither company provided specific details about the precise role of each company’s Chinese Communist Party Committee. Furthermore, neither company provided detailed information about its operations in the United States. Huawei, in particular, failed to provide thorough information about its corporate structure, history, ownership, operations, financial arrangements, or management. Most importantly, neither company provided sufficient internal documentation or other evidence to support the limited answers they did provide to Committee investigators.

This is just the latest setback for Chinese businesses in the U.S. Many companies have been leaving because government regulators want to examine their books just like they do those of any other company doing business here. The Feds are particularly interested because there are many indications of insider trading.

All of this underscores what is possibly the biggest threat to China today: Beijing’s refusal to accept or understand some of the basic tenets of capitalism.

The most important is that capitalism isn’t just about taking advantage of someone to make money. It’s about taking advantage of someone (along with other business practices) within a set of rules and regulations.

There has to be a certain level of trust in order for this whole arrangement to work. Usually not the deep goodwill type of trust but trust built around the fact that you will get in trouble if you cheat me in ways that aren’t already approved by law. Trust built around the knowledge that there are consequences for your cheating. Things like the government coming after you and/or I will sue you to the fullest extent possible.

This isn’t just a problem for Chinese companies do business abroad, though. It is why the nation’s economy is in very real danger of taking the long march off a steep cliff.  If you care to look, it is easy to find scores of news stories about the swindles going on at all levels in China and there is no redress for the victims. Many of these swindles have had fatal results. Children killed when their schools collapsed because contractors saved money through shoddy work; the high speed bullet train crash that the government initially tried to cover up; massive environmental and product pollution. It is no wonder that the people are rioting more than ever.

Modern commerce is based on contract law. In order for contract law to work you need to have some semblance of an independent judiciary and a functioning legal system. China has none of this. Government whim and capriciousness are the rule – when there are any rules at all.