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In China, cutthroat capitalism, often means cutting corners

Published on 4 June, 2007, Last updated at 16:06 GMT
By David Barboza

WUDI, China: They might be called China's renegade business people: small entrepreneurs who are experts at counterfeiting and willing to go to extraordinary lengths to make a profit. But just how far out of the Chinese mainstream are they?

Here in Wudi in eastern China, a few companies tried to save money by slipping the industrial chemical melamine into pet food ingredients as a cheap protein enhancer, helping set off one of the largest pet food recalls ever.

In Taixing, a city far to the south, a small business cheated the system by substituting a cheap toxic chemical for food-grade syrup, triggering a mass poisoning in Panama. And in the eastern province of Anhui, a group of entrepreneurs concocted a fake formula for baby milk that killed dozens of rural children.

The incidents are the latest indications that cutting corners and producing fake goods is not just a legacy of China's initial surge toward the free market three decades ago but is still woven into the fabric of the thriving Chinese industrial economy. It is driven by entrepreneurs who are taking advantage of a weak legal system, lax regulations and a business culture where bribery and corruption are rampant.

"This is cutthroat market capitalism," said Wenran Jiang, a specialist in China who teaches at the University of Alberta. "But the question has to be asked: Is this uniquely Chinese or is there simply a lack of regulation in the market?"

Counterfeiting, of course, is not new to China. Since economic reforms began to take root in China in the 1980s, businesses have engineered countless ways to produce everything from fake car parts, cosmetics and brand name bags to counterfeit electrical cables and phony Viagra.

Counterfeiting rings are broken nearly every week, but the government seems to be waging a losing battle.

Dozens of Chinese cities have risen to prominence over the past two decades by first specializing in fake goods. Among them are Wenzhou, which was once known for selling counterfeit Procter & Gamble products, and Kaihua in Zhejiang Province, which specialized in fake Philips light bulbs.

For a time, people derided the entire province of Henan as the capital of substandard or fake goods, like medicines that supposedly could make you miraculously grow taller.

But the exposing of dangerous ingredients in foods and drugs has raised more serious questions.

One such operation is centered here in the city of Wudi, about five hours southeast of Beijing. This is where the trail of the American pet food recall leads.

Regulators came to Wudi in early May and shut down one of the biggest feed exporters in the region, the Binzhou Futian Biology Technology Company. They also detained its manager, Tian Feng, after American officials identified Binzhou Futian as one of two Chinese companies responsible for shipping contaminated pet food ingredients to the United States.


China said Binzhou Futian and a company in bordering Jiangsu Province had intentionally doctored feed ingredients to generate bigger profits. Regulators called the doctoring an isolated incident.

But agricultural workers and experts in this region tell a different story. They say the practice of doctoring animal and fish feed with melamine and other ingredients is widespread in China. And Wudi, they say, has long been known as a center for such activity.

"Wudi became famous for fake fish powder almost 10 years ago," said Chen Baojiang, a professor of animal nutrition at the Agricultural University of Hebei. "All kinds of fillers have been used. At the beginning it was vegetable protein, then urea. Now it's feather powder."

In small village workshops on the outskirts of Wudi, residents say hundreds of workers make animal feed doctored with fish scraps and cheap ingredients that are then packaged for sale to unsuspecting farmers and fish farms.

Much of the fish scrap comes from the nearby Bohai Bay area or is imported from Peru and then blended with cheap fillers to increase profits.

"About 90 percent of the fish powder on the market is fake," said Xue Min, who works at the Feed Research Institute, a division of the China Academy of Agricultural Sciences in Beijing. "When it reaches the customer, he doesn't know how many kinds of filler have been added."

But recently, residents say, more buyers have turned skeptical about Wudi's fish powder. And that has forced some local manufacturers to switch to vegetable protein and to search for new buyers.

"Customers are now suspicious about fish powder," says Sun Hong Qiang, who operates a fish scrap supplier in Wudi. "Everyone knows there's some fake fish powder out there."

Binzhou Futian was run by Tian Feng, a small town entrepreneur who started out producing fish powder but later moved into vegetable protein, according to local residents.

Tian's company shared a building with the county government's cereal and grains bureau, an indication of its close ties to the government.

"Futian didn't have any actual factory here," said a guard who works at the Binzhou headquarters. "They hung a banner here because they wanted to look good in front of visitors. They had countless suppliers from the countryside."

A spokesman for the county cereal bureau, however, denied having any relationship with Binzhou Futian and Tian, who has been detained by authorities.

And while the government said it had not found any other companies exporting melamine-tainted goods overseas, regulators shut dozens of fish feed producers near Wudi.

Investigators say Tian's company engaged in fraud: It mislabeled its feed exports as non-feed goods, possibly to avoid food inspection; it also exported tons of pet food ingredients labeled as corn gluten and rice protein concentrate. Actually, they say, it was low-protein wheat powder.

Analysts say the case of Binzhou is not unusual. This is how the counterfeiting system often evolves, they say.

For decades, small entrepreneurs have started out counterfeiting in emerging industries in China, seeking an early advantage and their first pot of gold. Often, they try to get around regulations, or simply believe small-time cheating that involves adding cheap substitutes or low-grade ingredients will not cause much harm.

"Basically, for entrepreneurs if something is not explicitly banned - it's not banned," said Dali Yang, who teaches the University of Chicago and has studied China's food safety regulations. "As long as people are not sick or dying it's O.K."

Experts say counterfeiters are now moving to outlying areas of the country, where it is easier to evade regulation. They are also moving into food and agriculture, which are difficult to monitor because it involves small farmers and entrepreneurs.

"We have to bear in mind they probably don't think about the consequences at all," said Steve Tsang, a China specialist who teaches at Oxford University. "They're probably only thinking of making a fast buck."


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