China: Counterfeiting, the Government and the Global Economic Crisis

STRATFOR sources and the Chinese press have confirmed that counterfeiting has been officially sanctioned, at least in southern China. Counterfeiting — of money, software and branded products — is nothing new in China; it is a problem that every foreign business entering into the Chinese market has to take into account and plan to cope with. Nevertheless, most foreign companies are surprised by its prevalence — and now by its official acceptance, especially as the global financial crisis has begun pushing Chinese companies into crisis mode. Examples of counterfeiting in China are ubiquitous. Prior to the Lunar New Year celebrations that began Jan. 26, a rash of reports of counterfeit 100-yuan notes being dumped on the market emerged. According to some media reports, the vast majority of all software used in China is pirated; even licensed software retailers often provide cheaper counterfeit products by default unless customers specifically ask for the more-expensive genuine product (and even then, the software is not necessarily guaranteed to be authentic). Knockoff Gucci and Prada handbags, Nike and Adidas shoes, and other counterfeit clothing and accessories can be purchased easily in legitimate shops in tourist hot spots. Counterfeit Viagra is the most profitable Chinese imitation, and can be found almost anywhere in the country. Even little-known brand names fall victim to counterfeiting. For example, one STRATFOR source investigating counterfeiting has a client who works for an air-conditioning and refrigeration company without a highly recognizable name, but still has a major issue with the counterfeiting of compressors, filter driers and thermostats purchased by commercial users. Counterfeiting is ingrained in Chinese culture. In Confucianism, the notion of the ownership of ideas is nonexistent, while the imitation of what is desired, be it morals or Viagra, is seen as good. And Beijing has unofficially tolerated counterfeiting to a large extent, despite international rules and regulations against intellectual property infringement. The government and military and security bureaus often counterfeit used software and other products for themselves. It is also quite common to see shops selling pirated DVDs sitting adjacent to government offices or to see uniformed police officers shuffling through racks of counterfeit DVDs. In the wake of the 2008 scandal involving adulterated milk products that led to the deaths of a number of infants, Beijing at least paid lip service to cooperation with the international community on shutting down any products — counterfeit or otherwise — seen as harmful to the public. But these efforts clearly have had only limited reach. And now, sources are telling STRATFOR that the government has begun openly permitting counterfeiting, and is protecting counterfeiters from prosecution. A source who works on anti-counterfeiting operations (but who does not work for the Chinese government) has told STRATFOR about a recent failed anti-counterfeiting raid on persons allegedly involved with an unspecified product that posed a safety risk to users. The product, a mechanism used to test common consumer goods, is exported to commercial users in the United States and Europe. If the testing mechanism does not yield accurate results, consumers could wind up purchasing items without proper warning labels, creating a safety risk. The individuals under investigation also were believed to be engaged in the illicit cross-border trade of patented design technology, which had been under investigation by the FBI. The raid was to take place in coordination with the city-level Public Security Bureau in an important southern Chinese city. As the date of the raid approached, however, the local security authorities decided not to participate, reportedly because of a directive issued by the provincial government forbidding them from taking further action. Intriguingly, a recent article in the Guangzhou Daily outlined a new government policy of leniency for "ordinary crimes." A translation of a portion of the article states that those engaged in "light" criminal actions should be treated leniently, and that authorities should exercise caution in undertaking the "closure, seizure and freezing of assets" of such criminal enterprises, "especially those facing difficulties." The aforementioned anti-counterfeiting source believes the thwarted raid was canceled as a direct result of this announcement. Southern China, where the thwarted raid occurred, is the country's most prosperous region, both for legitimate export companies and for illegitimate counterfeiting rings. As a result of the global economic downturn, however, it also has seen the most unrest as migrants have lost their jobs and factories have closed literally overnight. Both the local and central governments have pumped money into the region to try to stave off not only an economic crisis, but also a political and social crisis. These governments appear to be prepared to purchase stability at almost any price, including the institutionalization of counterfeiting. Beijing is also waging a major anti-corruption public relations campaign to rein in rogue local officials and to ensure accountability and transparency as large amounts of stimulus money are pumped into the economy. But as gross domestic product growth dips down into the single digits, rising unemployment is one of Beijing's biggest fears because of the potential for social unrest and destabilization. The current nationwide figure for unemployed migrants is between 40 million and 50 million and is expected to rise. Despite periodic crackdowns on corruption, counterfeiting offers an important source of jobs. During an economic downturn, the central government is not likely to crack down on such an important source of employment. Beijing's conundrum is that the need to encourage consumption and investment by ensuring a strong and transparent economy clashes with the need to maximize employment by providing some leniency for criminal activity. Now more than ever, the government is thus willing to overlook economic crimes if doing so helps to manage a looming unemployment crisis that potentially threatens the authority of the central government, whose legitimacy rests in part on a thriving economy. Foreign companies operating in China have had to face problems with counterfeiting from the start, but the government previously at least made a show of compliance with anti-counterfeiting and intellectual property rights rules and regulations when multinational companies turned on the heat. Now, businesses — especially those operating in the export sector in Guangdong province — will have to compete internationally with counterfeiters licensed to operate, and apparently lack recourse at any level.