Sino-Forest, Chinese Bureaucratic Entrepreneurship And Forestry Corruption

Sino-Forest (TRE-T ) is drowning in the allegation of fraud by Muddy Waters at the moment. However, It was North America’s biggest private forestry company long before that. When we look into Sino-Forest’s past glory, we see a typical success story of Chinese bureaucratic entrepreneurship. We come to appreciate the reason that Guanxi is the fifth and maybe the most important factor of production in China.

 Sino-Forest’s most powerful leverage to profit is its strong connections with Chinese Forestry Bureaus. Its CEO Allen Chan was a failed Hong Kong businessman before he met Jiajie Pan—former Guangdong provincial forestry official. From Pan, Allan knew in advance China would open its plantation industry to foreign investments to faster its commercialization. So together Allan and Pan founded Sino-Wood Partners Ltd in Hong Kong, which changed its name to Sino-forest when later listed in Canada. Sino-Forest’s business took off with the huge support of Heyuan Forestry Bureau in Guangdong.

 To expand its holding of plantation, Sino-Forest likes to acquire stakes in many forestry companies, which have good Guanxi with local governments since the majority of plantation lands in China are owned by the State. Acquiring Mandra Forestry in Anhui province is an example of that.

Sino-Forest’s business model is also unsustainable because according to its report, its majority of timber supply comes from trees purchased from its proxy agents such as Mandra Forestry rather than planted trees. Many of those proxy agents only harvest the natural forest to profit but rarely plant trees to maintain the environment.

Sino-Forest’s low purchase cost of trees pertains to the fact that its collusion with officials has substantially fooled and ripped off the farmers to help its profit growth. Therefore, its profits are unethical and unsustainable. According to Yongfeng Feng—a journalist from an influential Chinese newspaper Guangmin Daily, the typical purchase cost of trees goes like this: annual rent 12.8 yuan per Mu for the land usage plus 111 yuan per ton for the harvested trees. Meanwhile, in the first six months of 2010, the average selling price is $15,866 per hectare accord to Sino-Forest’s report. The huge profit implicates the difficulty Sino-Forest must have to elaborate its relationships with the AIs [authorised intermediaries] and its network of proxy agents, because such elaboration will expose much of Sino-Forest’s efforts to conceal its anti-environmental practices and methods to channel some of the proceeds to corrupt officials.

Whether or not Sino-Forest is a fraud as Muddy Water claims, it will have its work cut out to clear its name, because Sino-Forest’s nature of business is really muddy in China. While trying to save itself, Sino-Forest must find the intricate balance between telling the necessary truth and ruining its Guanxi by attract too much attention to Chinese Forestry corruption.  

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