Apr 05, 2013

I’m now working with a lady who lives in China who will occasionally provide articles for the Global Trade Blog. She will provide us with insights from the inside of China and give you their perspective, some of which isn’t always on the radar.

China’s Milk Crisis, and Real Estate Taxes
By Heidi W.

A regulation restricting milk powder purchases in Hong Kong took effect on March 1st. People leaving Hong Kong can only carry two cans of milk powder. No kidding. 45 people were arrested in Hong Kong on Friday and Saturday. They will be on charges of trying to smuggle baby milk powder into China. They could be in jail for two years because of that.

Actually you can see this kind of news headlines not only in Hong Kong, but all over the world. Such as “Dutch Infant Formula Bought Out by Chinese”, “China’s new appetite for milk forces price rise in Germany” etc. You may wonder what happened. Why is it that the world’s manufacturer cannot produce milk powder to feed their babies? After all, China can make virtually everything in theory, including Noah’s Ark.

When we look back on the 2008 Chinese milk scandal, more than 300,000 victims were reported, with more than 50,000 babies hospitalized. Problems were exposed in almost all of China’s milk factories that were inspected, yet no high ranking official lost his job despite the misery that was caused. Very few enterprises were actually punished. After the loss of faith by the general public, the whole industry had to face a fatal blow – Chinese customers could never trust Chinese milk factories; they have to buy milk powders from overseas sources. They will choose foreign brands as far as they can afford.

From the milk powder crisis, we can easily see how important the creditability is when doing business. No trade can be made in the absence of it. But Chinese society doesn’t always realize this. This sad fact makes some Chinese enterprises stand as a mansion built upon the sand.

The milk powder could be the second hottest topic in China recently. What’s the hottest? In this “country of the real estate boom”, it is the shocking sudden 20 per cent capital gains tax on home sales. Discouraged by sky-high real estate prices, the public applauded this new policy. Due to high inflation and the slow rise in income, Chinese politics are trending to the left. Because the remains of the old planned economy are still in people’s minds, they still take it for granted that the government will take care of everything. Few people will ask why the government can raise the tax so easily. The government doesn’t need to ask for your permission; they just tax you when they feel needed.

Some economists boasted that China can have another 30 years of fast growth as it had before. I am afraid it could not be achieved unless we can establish business creditability in every sector of China manufacturing base, and a good political system.