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As China takes steps to clean up its business culture, it is having to deal with knock-on effects, says Paul French
Spend enough time in China and you’ll start to think you’ve seen everything – soupy air, traffic chaos, teeming crowds beyond belief. But, just when you think it can’t get any crazier, it does.
For example, earlier this year 16,000 dead and diseased pig carcases floated down the Huangpu river headed for Shanghai. An internet storm immediately ensued – the foreign media was bemused, even the official Chinese media demanded answers and the local blogosphere erupted in shock, disgust and amusement.
A joke did the rounds. Beijing used to be the best city to live in China – open the window and get a free smoke! Now Shanghai is the number one city to reside in – turn on the tap and get free pork soup!
This was the law of unintended consequences in action in China. The government did a good thing, demanding that farmers properly dispose of and incinerate diseased hog carcases to stop the spread of blue-ear disease. A good idea, but expensive for the farmers.
Enterprising gangs offered to dispose of the carcasses less expensively and the farmers snapped up the offer. The gangs dumped the carcases in the river, causing a health alert, a massive clean-up operation, further serious dents to China’s food safety and environmental image and not a little public outrage at Beijing.
This kind of thing is happening a lot in China these days. The government wants to boost domestic consumption to rebalance the economy and so, to encourage spending, it tells the banks to issue more credit cards so folk can swipe the plastic and shop. Retail sales continue to boom but there’s a jump in personal debt. The law of unintended consequences again.
Similarly Beijing wants to crack down on corruption, and the poor perception of government officials feeding at the public trough, so they ban taxpayer-funded banquets for cadres. The public likes the crackdown but baijiu (white spirit) distributors go bankrupt and restaurants catering to large official banquets shed staff as reservations fall. More unintended consequences.
The GSK affair
And then there’s the ongoing GSK scandal. One of the largest pharmaceutical companies in the world with massive exposure to the China market finds itself embroiled in a major corruption scandal, its consultants and employees under arrest and investigation. GSK’s chief executive, Sir Andrew Witty, has been left floundering in the face of questions from journalists and investors, having seemingly no idea what’s been going on.
That scandal, with GSK accused of bribing Chinese officials and doctors to boost prices of its medicines, comes at a time of greater demand by Beijing for regulation of industry and the crackdown on corruption. It’s been well covered in the media, but where does the law of unintended consequences come in?
Here’s where, and it requires some plain speaking. For more than two decades now Big Pharma has paid “commissions” to doctors and hospitals for prescribing drugs. Legal or not – and it’s fair to say that up to now its been a highly “grey” area – one thing is for sure. It has been a regular and hitherto accepted part of the drugs business in China. The “commissions” may be cash, gifts or (as has become apparent) fully paid junkets for doctors and hospital administrators to, for example, Hawaii.
The system arose because Beijing wouldn’t pay its doctors. They get a relatively small salary and feel hard done by. On top of their official salary doctors have topped up their earnings from “hongbao” (the so-called red envelopes that patients give doctors under the table for services rendered) and commissions from the drug firms.
The total is not a bad income, and without these extras many doctors would leave the state healthcare system for the nascent private one or seek other careers at home or abroad.
So now Beijing has cracked down on these payments and GSK is the first of what will probably be many Big Pharma companies to feel the squeeze. But the government has not raised doctors’ salaries to compensate. The signs are that many feel aggrieved, disgruntled, out of pocket and ready to walk. The law of unintended consequences.
Diseased pig incineration, consumer credit, reining in profligacy in public spending, regulating the pharmaceutical industry – all positive moves as China becomes a more sophisticated economy. But Beijing had better be ready to deal with the consequences if it doesn’t want mass public protest or the disappearance of many western companies and investors.
Based in Shanghai, Paul French is an independent China analyst and writer.busines culture China China column China globalisation cluture Paul French