This is China! blog

Government officials from a local Suzhou district economic development zone recently visited our office. The three of them – though only one talked – wanted to fill us in on the happenings in their Zone and to encourage us to point foreign investors to their area. Seems foreign investment in their area has slowed down considerably. The district is about 30% Western investment; the rest is Chinese – Hong Kong and Taiwanese, mostly.

They have a couple dozen newly built factory spaces, single-floor, two-floor and three-floor that are going unused. And open land for greenfield projects, to boot.

They told me they recently visited every Western company in their district as a self-promotion exercise and to gauge investor sentiment in the area. Most companies, they said, are looking forward to a decline in business going into 2009, but are expecting by the autumn of next year to begin to see a recovery. Most of the Western companies in their area are selling into the China market, B2B.

By comparison, local gossip has it that Asian exporters like Asus is laying off 10,000 staff, a sixth of its operation; Sony 1,000 employees, while another Asian operator is rumoured to be mulling its own local downsizing. A Western exporter decreased operating hours to three days a week, without laying anyone off.

Winter has arrived in Suzhou.

“We’re re-negotiating with suppliers before we start production with this new line,” a General Manager friend told me the beginning of November. “With the rate at which inputs are dropping, something of that twenty-percent rise across-the-board suppliers were demanding eight months ago has to be cut.”

Indeed, an article in last week’s Financial Times cited:
“The options market is pricing in a growing likelihood that oil prices could sink as low as $40-$45 a barrel before the end of the year, with the cost of insuring against such an event jumping more than 90 per cent overnight…

“Base metals extended their retreat, with copper breaking the $3,500 level to touch a three-year low of $3,430 a tonne, before recovering to $3,467 a tonne, down 3.6 per cent on the day…

“Aluminium shed 4.7 per cent to $1,78 a tonne, under pressure from a surge in LME stocks, up 20,850 tonnes.

“Lead dropped 3.5 per cent to $1,187 a tonne. One of China’s lead producers, Xinling Refining Company, said it was mothballing 60 per cent of its 100,000 tonne capacity.

“Zinc was 0.4 per cent lower at $1,175 a tonne and nickel lost 4.3 per cent to $10,000 a tonne.”

These drops in the cost of raw materials come as a pleasant shock to many of us who believed the price of inputs was only going to go up. I recall a conversation with a Western production manager four years ago who complained about how much more expensive copper and aluminium had become at the time, doubling and trebling in cost within a year.

And with salaries of Chinese nationals moderating in and around Shanghai, rippling outward into Jiangsu Province, the cost of production may actually return to levels that haven’t been seen for five years. Of course, issues such as exchange rates and VAT rebates will have to be thrashed out for exporters; however, there is something to look forward to in the near future.

Manufacturers that are able to successfully ride out the global economic downturn over the next year-and-a-half — both domestic players and exporters — will contribute to a new boom in China’s GDP growth in 2010, something comparable to 2003, just after SARS.

There is indeed light at the end of the tunnel. If you squint hard enough.

The Monday, 24 November 2008 edition of The Shanghai Daily reported:

“A Shandong Provincial Federation of Trade Unions official said employees with enterprises and institutions in urban areas totaled 9.14 million by late September, a year-on-year decrease of 38,000 workers.”

Qingdao, of course, is the center of fermentation chemistry for Shandong Province (thank the Germans a hundred years ago for that contribution), textile manufactures, and has been an up-and-coming services outsourcing hub. It is also the home of the beer of the same name.

Several things that come to mind with the statistics are: of course the numbers do not include migrant workers, the phantom labor force without formal permission to reside in the cities in which they build the high-rises and roads that take the migrant maids and nannies to middle class homes; even the official statistics forsaw and downturn in the economy overall before the global economic downturn; and local officials of the small towns and cities from which the migrants come had best be prepared for a bit of discontent, as more jobs dry up along the coast.

But then again, don’t think that just because workers are gravitating back to their hometowns the east coast cities will see less social pressure:

“Qingdao, for instance, has dealt with 7,897 cases of labor disputes since the beginning of the year, up 141.6 percent from last year.

“Half of those disputed cases were about labor reward and another 30 percent involved social insurance and welfare.”

The Wind Industry includes manufactures and services that convert wind power into electricity that can power entire cities. In Europe, Holland and Denmark are big users of wind energy, with Germany also weighing in.

The thrust of the presentation was that current and future investors in manufacturing in China need to be aware that if they are coming to China exclusively to supply the Western customers that are already in China, their days will be numbered. Chinese manufacturers – across a broad swathe of industries – are quickly catching up to Western levels of quality, while maintaining price levels that are HALF of the price at which European producers sell their wares. Western companies that believe they can compete in the China market against Chinese suppliers by merely cutting prices 10% or even 20% will soon learn the price levels are still too high to fend off the hordes of Chinese suppliers in their industry who are galloping up the quality curve.

Even large Western buyers in China are buying with greater frequency from Chinese suppliers who have internalized quality standards and processes. Western buyers are feeling the squeeze on their own sales both in the Chinese market and in international markets, where there are fewer buyers than even a year ago. The Western buyers eschew the partnerships with the Western suppliers who have followed the buyers to China in favor of dramatic cost reductions.

The conclusion to draw from all this is that if your company is planning to come to China in these more competitive times, you must have the patrons, plans, policies and processes in place to sell your product at least at half the price you sell it in the West, at the same quality or better quality levels at which you currently offer the product.

Are you ready for the challenge?

One of my Chinese staff recently told me she has heard that some of the South Korean and Japanese plants in Suzhou with thousands of assemblers each have been laying off people since the beginning of October. The news put me in mind of a Financial Times op ed piece that irritated me a bit, since it seemed to echo the same sort of nonsense current President Bush encouraged Americans to do when the dot-com bubble burst in 2001: consume.

Editors of the Financial Times implored China to spur slowing economic activity in the country by encouraging consumption. The Chinese government’s announcement of a half-trillion dollar stimulus package for the economy was the cause for the piece. I disagree, though, with the Paper’s assertion that – to paraphrase President George W Bush just after 9/11 – people should go to the Mall and spend. Instead, the Chinese government needs to begin building the sort of Social Security institutions and creating WPA (Works Progress Administration) -style programs for the people that are losing their jobs through the latest economic re-strucuturing: a movement away from low-margin export manufacturing to more capital-intensive production and services. It was just such government investments that put America back on track eighty years ago as an economic superpower during the Great Depression.

“Having cut interest rates three times within the past month, the Chinese State Council has now taken the advice of the IMF and the World Bank, and authorized $586bn of stimulus spending over the next two years. Housing, utilities, disaster relief and transport are expected to be the main beneficiaries.”

Another FT article cites: Arthur Kroeber, managing director of Dragonomics in Beijing, said the actual extra investment as a result of the fiscal package might be as little as one third of the headline figure, at around Rmb 1,300bn. That is still around 2 per cent of GDP each year, but much less than initial reports suggested, largely because a lot of the likely investment in roads, rail, health, education and rural areas had already been announced.”

Though the Chinese government’s opaque plan for stimulating its economy seems to be going more toward fixed asset investment, there is still little sense that it has the will to begin building the sort of social institutions that will give individuals and families a sense of financial safety and security that will see them open their purses and wallets wider in order to spend. Beyond social security institutions and work programs are efforts that involve the development of a truly independent judiciary and greater liberalization of industry – especially at the local level, where corruption is endemic.
The Financial Times Op Ed piece goes on to say:

“The Chinese government recognises that it must build domestic consumer demand, but it is time for the leadership to put its money where its mouth is. Alas, the planned stimulus does not attempt to boost public and private consumption. It aims, instead, to keep the economy ticking over until it can start exporting again. This will not work. This is the golden opportunity to redirect the pattern of growth towards consumption and away from the previous massive reliance on exports and investment.”
If people do not have jobs and feel insecure about government institutions – whether the government is with them or against them, in a manner of speaking – the people will not simply go out and spend – especially when the indications are that other countries are suffering economically and that at any time in changeable China policies might change that punish the very behaviours that had at first been encouraged. A push toward consumption when so much of China’s infrastructure and industry is immature is rash.

Indeed, the same article points out:
“In the absence of a domestic safety net, Chinese household savings have been as high as a quarter of disposable income.”

It was Paul Krugman’s piece in the International Herald Tribune meant to influence incoming President Obama’s economic stimulus plan for the States that inspired me to apply the same thinking to China’s own situation. Indeed, China’s current demographic reflects America’s of the 1920′s more than that of the America of today: then America was in the grip of a demographic shift from the countryside to the city and a movement from an agricultural base to an industrial one, all underpinned by rampant speculation.

However, Krugman points out a little known fact about government fiscal policy during the Great Depression in the States:

“This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we Americans drive on WPA-built roads and send our children to WPA-built schools.

Didn’t all these public works amount to a major fiscal stimulus?

Actually, it turns out FDR was TOO conservative in priming the infrastructure pump of the would-be superpower to get the people to feel secure enough to begin spending again:

“And FDR wasn’t just reluctant to pursue an all-out fiscal expansion – he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.”

In other words, FDR steered the American economy back into a deep recession – some would even say another trough of the Great Depression – by doing TOO LITTLE, not too much to put people back to work. The frightening revelation is the sort of fiscal stimulus that got America working again, gave it the boost of confidence it had lost for more than a decade, and created the basis for an economy that has just finally imploded with the latest debacle:

“What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.”

Let’s hope China errs on the side of too much fiscal stimulus.

As is my wont, I like to chat with friends and acquaintances over cups of espresso and glasses of beer about the latest goings-on in our lives in China. This latest thread, occurring over several days and many libations, seemed to disconcertingly center on China’s growing car culture and expat mishaps therein.

Frozen Assets
Starting 2009 expats will have their China assets frozen and their passport confiscated should there be any question of responsibility in the event of a traffic fatality.  “It’s really more aimed at the Asian expats that get piss-drunk after a night out at KTV then drive home,” a British drinking buddy noted. They can hit someone in an accident then be on the plane back to Japan or South Korea or even Taiwan within hours.”

“What about the Chinese?” I asked, glum at the idea of driving at all in China with my newly-won driver’s license. “Do they get their bank accounts frozen, too?”

“They’ve always had this law applied to them,” the Brit said. “In fact, whatever the size of the accident, the drivers are supposed to call the police.”

“Even with a small bump?”

“They’re supposed to call the police,” an Irishman with a large, ruddy face chimed in. “But just because they don’t most of the time, doesn’t mean they’re not supposed to.” Most Chinese incidents end up in shouting matches with several hundred RMB exchanging hands in the end.

Call the police? Tai mafan. Too much trouble. Especially if there’s a buck to be made.

Taxi Fanfare
“I’ve never heard that before,” a young Irishman with fair skin and perpetually cheerfully red cheeks said. “Just walk away?” He had lived in China less than a year.

“Aye,” said one of the old timers at the table, and took a drag from his cigarette. “If the taxi gets in an accident – especially if they’ve hit someone – just drop the fare on the front seat and walk away.”

“End of transaction,” I said with finality. “Problem is, Chinese taxi drivers have been known to hold the expat passenger responsible for the accident. The argument I’ve heard told goes, ‘if you hadn’t asked me to drive there, I wouldn’t have had this accident.’”

“That’s insane!” the young Irishman said.

“Well, when my daughter was in that taxi that had the accident the driver didn’t make her pay anything.” Nick (not his real name) has a twenty-year old daughter that visited him during the summer. The accident resulted in a nasty concussion that took her days to recover from.

“That’s because she’s not a Big White Guy,” I chided. “They know she doesn’t have any money.”

Nick continued, “I once wanted to get into a taxi. I pulled the door handle and it came off in me [sic] hand. When I got out of the taxi, at Tom’s Bar, the driver didn’t say anything. He followed me into the bar, though, and told me he wanted me to pay for the handle. I told him to piss off. The bar manager showed him the door.”

Whoever says it’s not easy to get a handle on China?

New District Punch-up
I hadn’t seen Frank (not his real name) in some time. The soft-spoken Brit had put on some weight, so I didn’t recognize him at first. More unusual, though, he had a black eye and his face around the mouth was scratched up. I just assumed he’d had a scooter accident.

Friends told me later that the week before Jim had wanted to drive out the gate of the compound in which he and his Chinese family lives. A sedan entering the gate from the wrong direction blocked the exit. After a fair amount of honking and swearing at the driver to back out, Frank got out of his SUV to talk to the driver. As Frank approached the car it was clear to him it was a company car: a Chinese manager – or perhaps even the owner himself – sat in the back seat. Jeff knocked on the window to address the driver. The driver rolled down the window, and punched Jeff in the face.

Frank is a short fellow, but stocky. He’s a brawler as well, known to have had his share of bar fights. He immediately hauled the Chinese driver out the window of the car, and slammed him onto the ground. According to my friends, he proceeded to – - beat the hell out of the driver.

Frank turned his attention to the company man in the back seat. The man apologized profusely for his driver’s behaviour. I get the impression the driver was in no condition to back his boss’es car out, so I’m assuming the boss did it himself.

In future I think the driver will be sure to wear his seat belt the next time he drives. Or at least to buckle up before he punches someone from the driver’s seat.

Zhejiang Jamboree
An American named Dave (not his real name) and his family were driving back from Yuyao (Zhejiang province) to their home in Suzhou. They had just attended the wedding of an American friend that had recently married a local girl. Dave took a wrong turn while looking for the exit onto the Hangzhou Bay Bridge. He found himself going down a one way road in the wrong direction.

He hadn’t gone down too far though, so began backing up the road to get back onto the correct side of the thoroughfare. Suddenly he felt a bump behind him, a light thump. He and another car that was also traveling in the wrong direction had collided.

Dave got out of the car to survey the damage, though he was confident it was slight. The Chinese driver also got out and began shouting at Dave. Dave checked the point of impact – there wasn’t even a scratch on the car. Before Dave knew what was happeneing, the Chinese driver ran away from the scene over a knoll.

Dave thought the fellow had gone to get the police, which was fine with him. He wasn’t, however, prepared for the Chinese driver returning with four other guys who were all shouting and gesticulating in Dave’s direction.

Now Dave is a very big guy. He figured he could take down the local mob, but also considered he had his Chinese wife, their two-year old daughter, and another couple in the van as well. The moment the Chinese driver arrived back at the scene with his homeboys Dave shoved 200 RMB into the man’s hand.

Without further hesitation Dave climbed into his car and drove over the median to get back onto the stretch of highway he was on before he made the turn into Hell.

So much for local hospitality.

This past Halloween night some friends and I checked out the scene on Suzhou’s Bar Street, Guanqian Jie. Pulp Fiction, an expat bar, was offering discount beers to the guys and ghouls bold enough to dress up in costume. The crowd that spilled out the door across the sidewalk and slopped along the bicycle lane was a motley assembly of gallant gladiators, delicate damsels, comely catwomen and tentative teenagers.

My award for most creative costuming goes to the foursome that dressed as The Ghostbusters, replete with drab-gray jumpsuits and heavy packs with extrusions that included blinking computer hard drives. My favorite character was the bloke that played the black guy from the movie series: the tall European had an afro [wig] five times the size of anything I ever dared wear twenty-five years ago, a fake mustache and – yes, Whoopee – black face. It was funny as hell (remember, This is China!).

An American friend of mine dressed as an old Chinese beggar draped in an old Mao jacket a Chinese acquaintance lent him, Greek cap, black baggy pants and black-cloth shoes. He carried around an old tin cup from his workplace. He said he had already collected eight RMB from the crowd. The Chinese friend I was with thought he was cute. Which he was.

The following day my Chinese friend told me she overheard a number of Chinese passersby uttering how insulting it was to them that a foreigner would be dressing as an old poor Chinese man. Clearly, they’re not clear on the concept of Halloween; or of irony or of Fun!

I explained to my Chinese friend the origins of Halloween: essentially, it started a couple thousand years ago to mark the co-incidence between the world of the living and the dead – the material and the spirit. People would wear costumes of the various spirits that would either bewitch them or protect them. In many Western countries All-Hallows-Eve became a time of mischief-making and identity theft, in a manner of speaking. Today, of course, costumes can be pretty much anything that strikes the wearer’s fancy: ghosts, of course, are big with the little ones, as are masks that squirt blood, super-hero costumes and fairy princesses. Dead and living presidents of the United States are popular, too.

So I asked my Chinese friend if she could ever envision a Chinese at Halloween wearing a mask of Hu Jintao. “Of course not!” she replied without hesitation.

“Mao?”

“The police would come and put him in jail.”

“And that is a major difference between Chinese and Western societies,” I proffered. “We don’t take our jokers-in-office as seriously as Chinese people do. That’s part of our social system: we make fun of them when they’re doing a bad job and throw them out when they’re doing an awful job.”

After all, we’re all just wearing masks.