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Back Issues
| Crying over spilt milk | | Print | |
| Nov/Dec 2008 | |||
 After the momentous Olympic and Paralympic Games, the recent milk scandal in China has left a sour taste in everybody’s mouths writes Rowan Callick.Beijing’s leaders were confronted in the first half of this year with a succession of traumas – the snowstorms, the Tibet riots, the global protests during the Olympic torch relay, and the Sichuan earthquake. Then, at last, came a palpable success, and with it, welcome respite. The leaders naturally hoped that the organizational triumph of the Olympic Games would carry them through serenely to the next big positive event in the calendar. That event is the 30th anniversary, in early December, of the Communist Party Central Committee meeting at which Deng Xiaoping launched China’s gloriously successful “kai fang” – open-door – policy. The leadership team of Hu Jintao and Wen Jiabao had enjoyed a comparatively smooth first five-year term in office, for which their cautious, collegiate management style seemed appropriate. But since they started their second term in 2008, they have been tested by waves of troubles. The Paralympic Games were in many ways even more successful, in terms of the Olympic aim of building human connectedness and spirit, than the earlier, full-scale Olympics. But as soon as its flame was extinguished, the first stories began to emerge of babies struck down with kidney stones. It was later revealed, that the tragedy had been in train for months, but had been concealed in part because of a party edict preventing the media from publishing negative news – including, specifically, about food dangers – during the Olympic period. At least four babies were killed and more than 50,000 hospitalised, as a result of a chemical product, melamine, being added to dairy products – most dangerously, to infant milk powder – to boost their apparent protein content. The government capped dairy prices at the start of 2008 as part of its campaign against inflation, and one of the results had been that farmers and milk dealers – their profit margins contracting fast – diluted their products. Milk is mostly tested in China just for fat and protein content, and the dilution was detected in falling protein amounts. Adding nitrogen-rich melamine, sold as “protein powder,” was the answer. This episode threw up big questions about business in China that many people believed had been settled positively years before: Can we trust Chinese products? Does China’s regulatory structure function effectively? Does the inevitable mixing in China of local politics and business also inevitably open the door to corruption? And the involvement of New Zealand dairy giant Fonterra – which has A$2 billion investments in Australia – as the 43 percent owner of Sanlu, the company whose products contained the greatest concentrations of melamine, raised further questions about joint ventures in China: To whom does the foreign partner owe its prime allegiance – to its Chinese partner, or to the Chinese public? How can a joint venturer ensure that its international reputation is not put at risk by its Chinese partner? Alistair Nicholas, the Australian principal of Beijing based corporate public relations firm AC Capital, says about the role of investors like Fonterra: “Chinese consumers are going to expect some sort of transfer of corporate social responsibility and business ethics across from foreigners in future – not just money.” There’s a challenge. The lesson from the string of troubles over Chinese products, then, is not to withdraw, but to commit greater resources – maybe to focus on sectors where it is now possible to operate as a wholly foreign owned enterprise. And to consign to history the old saw of Chinese “exceptionalism,” and ensure that the foreign company operates in China with the same standards as it does at home. The melamine scandal eroded especially, of course, the confidence of Chinese consumers in domestic products – just as the government wanted to see local demand soar. For as a wave of arrests and sackings and new rules finally started to squeeze the melamine out of the dairy sector, the whole financial world started to fall apart. Although some of China’s often nationalistic “netizens” gloated online about the USA’s economic crisis, the leadership was worried that the inevitable slowdown in demand for Chinese exports would hurt the manufacturing sector which provides so many jobs. China gave every indication that it would continue to buy US Treasury bonds – even more crucial once Washington gained congressional approval to inject US$700 billion into the economy. Asian savers – with China leading the way – are needed to provide much of that money. The Chinese government has wanted all year to broaden the country’s economic base, shifting the focus from investment and exports to domestic demand and the embryonic services sector. With the best grains harvest for 15 years pushing prices further down, and with other commodity prices declining, the conditions are right for such a shift. Building effective social security and health systems would provide the ideal way to underwrite increased consumer demand. This would also give Hu Jintao a great base from which to praise, in December, the Deng reform drive. But the government, with its focus on control, is better at grappling with inflation – chiefly by imposing price caps – than dealing with deflation, the new threat, by encouragement, building the confidence to consume. After the party plenum in mid-October, it released a statement pledging to “maintain social stability and push the country’s economy toward sound and fast development,” in part through measures aimed at doubling rural incomes by 2020, to help farmers cut the yawning wealth gap with city dwellers. Even after such an “annus horribilis,” the Olympics honourably excepted, there’s still much work to do in Beijing. ■ * Rowan Callick is the Beijing-based China correspondent of The Australian
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