Inside the Red Dragon—Part 1

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This begins Part 1 of my interview series with Jeremy Hurewitz, Head of Business Intelligence for Nardello & Co., an international corporate investigations firm based in New York.  Mr. Hurewitz is an expert on Chinese affairs, and he offers keen insights into the political and economic developments there and what they mean for the United States and the rest of the world. James R. Gorrie, Managing Editor, Absolute Wealth.

James: Jeremy, how are you doing?

Jeremy: I’m doing well, James. Thanks.

James: Great. Jeremy, could you give us your background, what you do and what exactly “Business Intelligence” is? Tell me a little bit about what your world is all about.

Jeremy:  Sure. Well, stepping back I was a journalist overseas for almost a  decade based in Eastern Europe and in the Far East. I’ve continued to work on China matters since I relocated back to New York, where I’m from.

At Nardello & Co, I manage the business intelligence practice.  A lot of our work is reacting to challenges our clients are facing, meaning we do a lot of litigation support and reputational due diligence. I get involved in all of that but business intelligence is a little bit more unconventional in that I provide clients with outside-the-box thinking in a variety of circumstances.

There’s kind of an information gap very frequently with say, a strategic investor, where they hear about something, an opportunity perhaps, or there’s something that looks a little bit fishy to them. We provide context and information for the client to help them make a more informed decision.

James: Terrific. So you’re heavily involved with what’s going on in China. Is that mainland China or Hong Kong? Or it is it both?

Jeremy: Well, our firm operates all around the world, and I support on projects in many emerging markets. But because of my background, I get involved in China quite a bit.  We opened an office recently in Hong Kong, and I work closely with a team there, but our work is very much in mainland China as well as in Hong Kong, and wherever our clients take us.

James: What is your view on China, speaking broadly, for a moment? How do you view China in terms of direction and stability, because obviously, there’s a lot of talk of China becoming the next superpower and challenging the United States, the international system, and so forth?   What do you see in China that would either justify that [viewpoint] or perhaps not justify it?

Jeremy: Well, there’s a lot to take in there. I’ll hold off for a moment in terms of questions on whether China is going to be a superpower, but we can come back to that later.

In terms of what I think about China and where it’s going, I think observing its development remains fascinating. I’ve tended to have a bit more of a bearish view than others on China. I don’t think their model as it currently stands supports 10% growth rates indefinitely.

The story with China is an extraordinary story of success, pulling hundreds of millions of people out of poverty after decades and decades of warfare and crazy political endeavors, such as the Cultural Revolution and the Great Leap Forward. So really, the last several decades for China have just been incredible in terms of its development and recovery.

I think that one of the key things about China is the real sense of optimism among its people. The Chinese feel like they’re assuming their historical place as one of the world’s great nations and moving past a century of chaos and war, so at the moment there’s a sense of destiny.

China is a special case in that its model of state capitalism has frustrated those in the West who thought that greater engagement, politically and economically, would lead towards political reforms.  We just haven’t seen that and I don’t know if we’re going to see that in the near term.

The Chinese Communist Party has permeated basically every level of society and the notion of what is private enterprise to Western minds is really just not the same in China. Even businesses in China that appear private will have internal Party committees where they work with political officials and others to keep the Communist Party informed about what’s going on. So, our notion of what capitalism is differs strongly from theirs.

James: That’s very informative regarding the state capitalism model [and the deep involvement of the Communist Party].

You mentioned 10% growth rates. Talk about that growth rate for a little bit if you would and how China works in terms of its reporting, in terms of real numbers, in terms of its corruption levels and so forth, because if you have a Party presence in every sector of the economy-- let’s talk about what happens there--and perhaps key performance indicators, if you would.

Jeremy:  I think corruption is going to come up over and over again in this conversation, but let’s talk about the numbers. There have been people who have been skeptical about figures coming out of China for years with many accusing the Chinese of massaging the numbers to trying to trumpet their success, and with good reason.

Figures like their unemployment rate are highly unreliable, and people have been skeptical about the economic growth rate figures for a while. There’s no doubt that China has been growing in the range of 8%-11% for all these years. But many experts have doubts about the exact figures the government puts out.

I think it's interesting now that in recent years economists were worried about an over-heating of the Chinese economy. They’ve called for a kind of a “soft landing,” and that’s a little bit of what we’re seeing here, but as that soft landing takes place, there’s a sense of panic because many have been hoping that China could be an engine for global growth during these tough times.  Right now, it doesn’t look like that will be the case.

We can talk about some reasons why—in particular why they’ve failed to ascend that the value chain and diversify their economy from export driven growth--but in terms of facts and figures coming out of China, some people think that the growth rates slow down that we’re seeing is actually a bit worse than what’s being reported; that provincial officials have a lot of pressure on them right now to keep the numbers at least steady, rather than reporting a slow down.

So if there’s a net slow down, let’s say in electricity production, they’re being forced to say that there’s been no change. Part of this has to do with pressure on officials to keep the positive news going in light of the [leadership] changes that are going to happen in the Party in the Fall. Some of these provincial officials are hoping to move up the [Party] chain, so they don’t want to report any bad news.

So there’s been a lot of skepticism regarding energy consumption and growth rates figures, and I think people have reason to be suspicious. You know, corruption permeates every aspect of the Chinese society.  It goes against the grain in China for these officials to try to stick to their guns and report figures as they are, no matter what.

Many people feel that if you’re trying to be an honest political official in China you’re going to struggle because everybody is on the take there. The Chinese government has taken steps to combat corruption, but can they be effective? Can a one-party state effectively reform itself?

There is a lot to discuss regarding corruption and -- maybe towards the back end of this conversation -- about how my firm helps support businesses dealing with corruption.

This ends Part 1 of my interview with Jeremy Hurewitz, Head of Business Intelligence for Nardello & Co.,an international corporate investigations firm based in New York.  Read Part 2 in next week’s Friday edition of Absolute Wealth.  JRG

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