A BIG CRISIS OF CONFIDENCE

 

If headlines in the international media determined corporate performance, then China’s exporters would be facing a disaster by now.

For the past six months, there have been almost weekly stories about the recall or banning of Chinese products because of safety concerns. It started with poisonous pet food and has moved on to toothpaste laced with an industrial chemical, tyres that lacked an important safety feature, seafood covered in toxic bacteria and toys coated in lead paint.

From China, the news has been equally disquieting. In June, Zheng Xiaoyu, the former head of the State Food and Drugs Agency, was executed for taking bribes from drugs companies to get their medicines on to the market without going through the proper approvals process. The agency announced that it was reviewing the licences of 170,000 different medicines approved during Mr Zheng’s tenure.

The cumulative effect of all these problems has been to create a crisis of confidence in the Made in China label – just at a time when China is trying to introduce more sophist icated and branded products to world markets. Faced with mounting criticism, the Chinese government has launched an energetic defence of its export record. Beijing points out that 99.2 per cent of food imports from China inspected by US officials were declared to be safe last year, while the equivalent figure in the EU was 99.8 per cent. In Japan, where food safety standards and inspections are unusually rigorous, the acceptance rate was 99.4 per cent. Government officials acknowledge that there have been some problems with toy exports, but they also argue that the majority of toy recalls in the US have been the result of design flaws – for instance, toys with small pieces that can be accidentally swallowed – rather than sloppy manufacturing.

William Fung, managing director of Li & Fung, the export sourcing group, says that the quality of Chinese exports has improved considerably in recent years.

"China has the best toy factories in the world," he says.

For all the furore, the safety problems appear to have had little impact so far on overall export performance.

Exports have grown by 34 per cent so far this year, although a lot of the increase has come from heavy industry products, such as steel, that are not affected by consumer backlashes.

The much bigger problem remains with goods sold within China. Government studies have shown that 500,000 people a year are affected by pesticide poisoning from vegetables they have eaten, while the government’s quality watchdog has admitted that nearly 20 per cent of products it inspected failed to meet quality and safety standards.

The scandals have shed a light on one of the drawbacks of China’s rapid development: while small food and drugs producers have been established at a dramatic rate, the institutions of the state needed to monitor these companies have been much slower in adapting.

The government estimates that China now has 450,000 food processing companies, about 80 per cent of which have fewer than 10 employees.

On top of that, there are 200m small family farms potentially selling produce into the supply chain, which adds further complexity to the regulatory problems – especially in distant rural areas.

The drugs industry is similarly fragmented. Partly as a result of strong local support from city and provincial governments, there are an estimated 5,000 drug manufacturers.

Before the recent wave of scandals overseas, the government was already attempting to beef up its regulatory apparatus and has pledged to spend $1.1bn on food and drug safety by 2010.

In recent weeks, it has accelerated the overhaul.

Wu Yi, the vice premier who is often used as the government’s main troubleshooter, has been called in to co-ordinate the different parts of the bureaucracy – a sure sign that Beijing realises there is a significant problem to be resolved.

A recall system for dangerous food has been set up and a system for monitoring adverse drug reactions is now in place. Shao Mingli, commissioner of the SFDA, says that regulatory bodies for food and drugs now cover 85 per cent of rural areas.

The big question is whether this classic Beijingled, top-down government response will be sufficient to address the issue. Indeed, some observers believe that the problems with unsafe products are a reflection of deeper problems in the political system.

"It is impossible to guarantee quality without broader political reform," says Minxin Pei, director of the China programme at the Carnegie Endowment in Washington.

Information disclosure is one of the key issues. In some of the well-known product safety cases, journalists have been free to report the problems, but in other cases they have been urged to back off by the government.

Mr Shao says journalists can report such issues – as long as they have a "very positive perspective". Several whistleblowers who revealed that their employers were producing fake products have been prosecuted by local officials in what appear to be acts of revenge. Reforms to the legal system could also help the cause of product safety.

Consumer activists such as Wang Hai have begun to help people sue the manufacturers of shoddy goods. But he acknowledges that it is almost impossible to win a lawsuit against a stateowned company.

"Establishing the rule of law would raise the odds that local officials would enforce the over 1,800 national food safety standards already on the books," says Andy Rothman, an economist with CLSA, an investment bank. China’s product safety crisis will not derail the country’s exporters but it will be a big test of the country’s one-party system.