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Turbo-Capitalism In Shanghai - Part II

I’m sitting at a restaurant in Shanghai staring with great reservation at the creature on the plate in front of me. It looks very much like the biggest slug you’ve ever seen, except slugs are in your garden, not bathed in a orange-brown sauce and waiting for you to eat them. It’s a Sea Cucumber, the kind of expensive dish served up at Chinese banquets to honor and flatter the guests, and 8 of these little creatures have been sacrificed tonight on the altar of turbo-capitalism that my Chinese friends Selena and Peter have invited me to worship at tonight.

I’ve known Selena and Peter since 2001, when I came back to China after a hiatus to source silk for my business. They’ve followed a common course in the new China: coming from humble backgrounds, they excelled in school and went to elite universities in Beijing. Afterwards they went abroad to pursue MBAs in Australia, then worked there until they saved up enough money to launch a business back in China. After a careful study of the market, they chose silk and dove in.

By my standards they are wildly successful. After a few years they bought their own factory, then expanded, and built a new, much bigger factory. They have their own wholesaling arm in the United States. They make real money even by American standards, and in China, where the per capita income is around $2000, they are in a very elite class indeed.

Last year my friends stood ready to cement their future. They had patented a new kind of industrial machinery that gave them a significant competitive advantage in their field. Their idea was to open a factory spinning silk, and vertically integrate their business. At the time I visited they were talking to various foreign and domestic venture capital companies (VC) to get funding for their new factory.

My friends are fairly sunny people. They’d seen an entire generation blighted by Maoism, and they’re grateful to be able to strive for something different, even if it means working 80 hours a week. On my last visit, though, I detected a note of dissatisfaction about what they called “New Money.” I was puzzled: wasn’t it all new money? Not at all. “Old money,” Selena explained, was fortunes that had been made in the past twenty years. “New money” was fortunes that had been made in the past two or three years. What was irritating is that these new money people made millions as if out of thin air, by promoting an idea and then cashing in on it, rather than plodding along in a real business.

What they were hearing from the Venture Capitalists and other businessmen from Wall Street, Singapore, Hong Kong and China, was that their plan for a steady logical expansion of their business fell short. “They’re not interested in opening a factory that makes 20 million a year,” Selena explained in her airy voice. “That’s nothing. They want to make 40 or 50 times their money in a few years. They have a better game than just running a business.”

After a year of rejection and advice, they had figured out that better game.

Rather than open a spinning factory, they would instead sell the machines. Not that they were going into the spinning-machine business. The machines were simply the basis of another much larger play that worked like this: They would sign an agreement to sell the machines exclusively to one large company, at the same time load up on stock in that company. With the significant competitive advantage offered by the machine, that stock would increase significantly, and my friends would profit off both the stock and the machine sales. A few years down the line, when the exclusive agreement expired, my friends would go public, cashing in on machine sales all over China and on the sudden influx of riches from their IPO. They would brand their yarns and make money on license fees. Then, they would do it all over again in India.

Which brings me back to our banquet, and the bowls of shark fin soup that arrived at the table shortly after the sea cucumber. Shark fin soup is even more extravagant than sea cucumber, costing anywhere from $40 to $100 for a small bowl, and there were eight of us at the table. In the highly ceremonial Chinese banquet universe, Shark’s Fin soup is the heavy hitter, the equivalent of a long, deep bow, or maybe of throwing oneself face first on the floor in obeisance to one’s guests. And the guests that night were very important and honorable guests indeed. Two of the men there were renowned textile engineers, in a position to write extremely helpful letters attesting to the efficacy of the machines. Another was the editor of the Chinese textile industry newspaper, and a fourth young lady was a journalist for that newspaper, people who might lavish the attention necessary to boost a stock price. Seated in the chair facing the door, the place of honor, was the well-connected official who had set the meeting up. All five of them had a part to play in my friends’ intricate business plan, and I was witnessing one of the little landmarks on, hopefully, their march to vast wealth. Toasts were drunk, cashmere sweaters were handed around as gifts. The renowned textile engineer agreed to test their machines and write a letter on his findings.

My friends had transitioned from business-people merely making something into people working an intricate scheme, and I had mixed feelings. I wanted my friends to succeed, of course, and I couldn’t help trying to figure out how I could cash in on their success. The lure of easy money is like neon on a dark highway. But as they explained the mindset of the venture capitalists they had been learning from, I felt somehow diminished. These VC people didn’t want to run a business, my friends told me. They wanted to massive profits in a short time and get out, and let someone else trudge along making things or selling things. They didn’t look down on people who did things the old-fashioned way: it was just that they had a better game.

I had always been proud of my small business: it took me all over the world and introduced me to a lot of interesting people. What had always seemed like a great adventure, though, suddenly felt silly and flat. “But you’re a writer!” Serena reassured me. “We have MBA’s! This is our chance!” And I understood that. If you’re a businessperson and you have the chance to go Big, of course you have to grasp it.

In the steady progression of China in the last twenty years, this abstract form of turbo-Capitalism has finally come into its own, at almost the same exact time that it has overshot the mark on Wall Street and very nearly brought the house down. I imagine that the bankers bundling mortgages and selling them off for a cut had an even more abstract view of business, since they weren’t even dealing with spinning machines, but rather with derivatives that were far removed from making or doing anything. That abstract way of thinking became the biggest game in history, where thousands made millions from churning money which had no purpose other than giving other people the opportunity to churn money.

For now, China is still firmly attached to making and doing things. It remains to be seen whether they repeat our mistakes.

Novelist Stuart Archer Cohen [stuart@stuartarchercohen.com] is the author of The Army of the Republic (Saint Martin's Press), a novel about an American insurgency. His previous novels have been translated into 10 languages. Visit his website at http://stuartarchercohen.com/.



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Couple of questions for you

.
How *was* the sea cucumber? I don't think I could eat it.

I might fare better with the shark fin soup, but probably not. My girlfriend is from Shanghai and she's a great cook. So far, it's been seafood or chicken. (We live on an island in the Pacific).

But if we go to Shanghai, I dread going out to dinner with her relatatives and being oblidged to eat food I don't like.

So... how was it?

"hey didn’t look down on

"hey didn’t look down on people who did things the old-fashioned way: it was just that they had a better game."

I dont believe that, I know your just trying to easy people with that. If your making more money from just paper work, your damn right you look down on doing the "inferior" method and those that have to use it from you perch.

sacohen's picture

Not looking down

The Army of the Republic

I guess I'm giving them the benefit of the doubt, since I haven't met them myself. I think my suppliers themselves were ambivalent about those people's attitudes, since they have talked with many different people.

Also, I think individuals have mixed feelings: a whiff of contempt one minute, a sudden rush of gratitude and fellow-feeling when some tow-truck driver pulls your car out of a ditch. I think people are often kaleidoscopic, rather than static. Ironically, you get people who work 60 hours a week fleecing the public, but think of themselves as great champions of the public good. I tried to show that corporate personality type in my last book. He's a nice guy, but he hires death squads.

China's economy has been

China's economy has been slammed hard by the current global downturn. I'm not sure there is a lot of room for the kind of speculation you described in your piece anymore.
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Talk to someone new every day. You'll be surprised what you learn.

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"The main thing that I learned about conspiracy theory is that conspiracy theorists actually believe in a conspiracy because that is more comforting. The truth of the world is that it is chaotic..." —Alan Moore

sacohen's picture

The Army of the

The Army of the Republic

This conversation was in mid-November. At that time the Chinese govt. was projecting a growth rate of "only" 7.5%, for what it's worth. You probably know they've been re-trenching economically the past year or two to rely less on low-tech exports and more on the domestic service economy and high-tech. So, their expanding domestic economy is still buoying them, and I don't expect that people are going to stop wearing clothes, though the market for overpriced name brands is taking a hit. Even if clothing sales were to drop 5%, it's still a massive amount of money.

My friends have been hit in their core business (clothing) but they are still dealing with a technology that offers a competitive advantage, so even if things move more slowly, I suspect they'll still pull it off in one form or another.

Thanks for posting.

Stuart