LAWYERS WEEKLY: June 2002
Michael Wang, or Wang Hui, has something in common with early Western venture capitalists who sent explorers on risky but potentially lucrative journeys to the Far East. Wang made a similar journey, although in the opposite direction, in search of the riches of knowledge to develop China’s market economy.
Wang recently completed a year as a visiting scholar at the University of Toronto’s Faculty of Law where he studied small business finance, focusing on our venture capital system. Wang is from Nanjing, the capital of prosperous Jiangsu province, where he is a vice-director of the officious-sounding Research Centre for Economic System Reform. The Centre is part of a powerful national committee that is trying to ensure a smooth transition to a market economy. Wang’s four university degrees, which include a master of law in financial market reform, equipped him well for his job — and the expedition.
If Wang’s credentials make him sound like a serious fellow it has not kept him from developing a nose for more practical information. When we meet at Tim Horton’s he orders a chocolate donut and coffee “double-double”. He has also found substitutes for the varied Chinese cuisine of home. “I eat ice cream twice each day, once for lunch and once for dinner”, he confesses with a bit of embarrassment.
Wang’s initial hurdle in getting to Canada was not dietary, but traditional. In China a son is expected to stay close to home if his parents are alive. Fortunately, Wang’s parents had an eye on his future and encouraged him to seize the moment. Still, the encouragement didn’t make it easier to leave behind his wife, herself an entrepreneur in farm and electrical products.
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But if Wang was inclined to feel homesick on his first excursion abroad, his assignment gave him ample distraction.
His first adjustment was to the classroom. He explains that in China classroom time is devoted to the professor’s lectures. “The professor wants to teach you everything, so the students are quite passive.” He believes his Toronto classmates are much more active, which helps to build strong analytical skills.
Once graduated, Chinese lawyers remain far behind their Western counterparts in status and pay, although Wang thinks the gap is narrowing, partly because of stricter tests for students wanting to qualify as lawyers or judges. But Wang, who is not a practicing lawyer in his government post, is not likely to see a monetary windfall any time soon. His annual salary would barely pay half of U of T’s law school tuition for this past year.
On the other hand, if Wang’s advice on reforming China’s venture capital system is ultimately followed there should be a more consistent flow of money from the growing number of people who have it to those with the ideas. Wang understands that saying you have a market system doesn’t make it so (as the Russians learned in their graceless transition). He explains that, “The market does not automatically create an environment in which venture capital thrives and develops.” Work is needed to put in place laws and regulations that will protect both the prospective investor, in this case the venture capitalist, and the entrepreneur.
Wang together with Paul Nash, a performance analyst at the Toronto investment firm, Glusken Sheff + Associates, recently completed a paper on the ways China’s venture capital system can be improved. They begin by describing China’s first attempt in 1985 to establish a venture capital market as a “dismal failure” because the country simply turned to the old way of doing things — government provided the funds and supervision. It was a valuable lesson, albeit not yet fully learned. They explain that although there are officially over 200 registered venture capital firms in China with more than U.S. $3.5 billion of outstanding funds, the government remains excessively involved, providing nearly half of the funds.
For starters, the Chinese Company Law does not allow for Limited Partnerships, a set-up that accounts for most of venture capital investment in North America. Here, such partnerships act as useful intermediaries on issues like selection, management and the eventual liquidation of private-equity investments.
Secondly, Chinese company and securities laws do not provide for stock option grants or the types of share classes that would reward and attract managerial talent. China does have Venture Capital Corporations but their mandated system of fines and bonuses for managers are not the answer.
Thirdly, the legal system does not facilitate initial and later rounds of venture capital financing, partly because Chinese authorities still distrust the securities market. Wang says Chinese securities and company laws seem more geared to helping the transition of State-owned enterprises to private businesses, (a thriving activity at the moment), than to facilitating a properly operating capital market.
Finally, it is tough to get money out at the end of an investment, partly because of the absence of ready and easy access to the stock market through initial public offerings, mergers or acquisitions.
Wang, who worked as an editor and journalist in a previous career, knows that it is not only the legal issues, which make reform difficult. “Here you can always criticize,” he says. “It is your right but in our society we cannot overly criticize the government. We need balance between social stability and criticism”.
But Wang’s superiors need not worry about his allegiance. Yes, he praises Canada as a great country and marvels at Toronto’s “fresh air” and friendly citizens — “if you ask for help, everyone wants to help you”, he says — but when I prod him about whether he would like to stay he tells me simply: “my country needs me.”
Indeed in looking for new ways for China, Wang is as likely to look at his own country’s rich heritage as to the West. Before his law degree, Wang did a doctoral thesis in management philosophy that focused on Lao Zi the founder of Taoism, born two and half millennia ago.
In a recent China Daily article, Wang wrote that the Taoist idea of Wu Wei or “do nothing” was translated in the mid-18th century by a French thinker as laissez-faire. This concept influenced Adam Smith when he was writing The Wealth of Nations. Now the thinking of Lao Zi is completing a full circle as market economics comes to China.
Wang explains that Wu Wei is more accurately translated as “to act without purposive action”. In the context of management it means interfering minimally with your employee who, valued as an integral part of the enterprise, feels free to contribute his or her talents. In a country of 1.3 billion people, it can’t hurt to better use human resources.
Interestingly, when the China Daily article was first posted on the inter-net the words Wang Hui, Michael’s Chinese name, were erroneously substituted for the Taoist concept of Wu Wei. Thus, the article spoke of Taoism’s Wang Hui. To be recognized in such a way by the ancient philosopher may have been flattering for Wang but it did not reflect his humble bearing. “We have so much to learn from you”, he tells me.
Yet, Wang is not in awe of the West — not beyond the critical analysis that is essential to real learning. He knows there are things to be learned from the West, but also things to be relearned from history. Wang is willing to wait for, indeed contribute to, a brighter future for his country, not because he is wedded to the ways of the recent past, but because he understands that change must be built on a firm foundation — and sound laws are a good start.
