This is China! blog

Whilst all eyes are gravitating toward the Copenhagen Summit on Climate Change, and China’s contribution to reducing carbon emissions that are changing the earth’s ecosystem, little is being said about the huge disruption to life and society in North China due to dramatic water shortages. Northern China makes up 19% of China’s water resources, with a little less than half all China’s population. What with Beijing sinking at 8mm per year because its sucked dry its own underground aquifers, and the farmers and fishermen of surrounding provinces stomping around on cracked, dessicated soil that was once farmland and fishing holes, rationing of water is becoming more commonplace.

China has just one-quarter the amount of water per person compared with the world average, and uses 65% of its water irrigating farmland that only yields 15% of the countries GDP. Yet, US$.31 per cubic meter, the cost of water in China is amongst the lowest in the world, at less than half the cost of the United States, and a tenth that of Germany. The cost of agricultural use of water in 2000 in China was a mere US$.01, compared to US$.15 for city dwellers and US$.16 for industrial use. The agricultural sector in the US uses water at US$.23 – still considered cheap by international standards. Cheap water has only encouraged farmers in the north to use water in abundance – and to waste accordingly: only 45% of this water allocation ever reaches the farm plots. Farmers waste nearly three-quarters of the water they use to irrigate their farms.

So, though, efforts to raise water prices will help somewhat with conservation, sustainable models of agriculture need to be developed and implemented. Quickly. Piping water from the south to north will simply buy the north some time – but not much, given the wasteful ways of northern farmers – and the climate catastrophe to its west.

The glaciers that provide the water to China’s greatest rivers are melting at an alarming rate. Indian and Chinese scientists estimate China (and India, as well) have merely 20 to 30 years more their societies can rely on melts from ice sheets. They are working together to see what can be done to stem the glacial recession. The Dalai Lama mid-November implored the Chinese government to set political differences aside to tend to the issue. According to Reuters, he said, ”
“A political solution (for Tibet) may take time, but that’s okay, we can wait.”

Much of the success of a sustainable model of water usage is in educating farmers on how to use the water, appropriate amounts and kinds of fertilizer and the kinds of crops that are appropriate to a geography that is rapidly changing.

Water – or rather, the lack thereof – is rapidly becoming the Chinese leadership’s greatest challenge. Not energy. Not even carbon emissions. Try to float your boat on that priority.

Further reading: Reuters, Daily Reckoning, WSJ, Green Leap Forward

A friend of mine that runs a local office recently lost some of his hair. Actually, he pulled much of it out. Just last week. The IT company that used to service his company took a day to install Windows 7on his new computer; three days to install a new email server; and a half-a-day not to configure his Outlook software application.

Outlook was always my IT outsourcing group’s weak spot, as well. After several hours of screwing around with it, they would merely re-install all the Windows products on my laptop – only to charge over-time because the poor, incompetent technician had to work a couple hours after 5:30 in the evening. I refused to pay it. Of course, I’d then spend a man-day spread over a week re-configuring features the way I’d had them before my “little” problem – some productivity booster; their revenge, I suppose.

A British engineering manager friend that works at a local Fortune 500 manufacturing plant harumphed a couple days ago as he took a sip of beer and told us he had to arrange further training for his engineers in testing methodologies. The approach requires the diagnostician to collect data on systems problems, formulate hypotheses for errors, isolate and test and deduce the causes for error. One of his engineers, instead, was simply sticking his gauge inside a component, willy-nilly, based on not much more than his interpretation of randomness, no data at hand.

I asked the engineering manager what he thought China’s prospects were for becoming an innovation nation, like a South Korea or Japan. He merely shook his, looked pained at the memory of his engineer poking around componentry, baffled, and took another sip of beer. End of discussion.

A Chinese friend surprisingly told me she hates Chinese doctors (surprisingly, because I thought she was going to get all defensive during our conversation about health care systems around the world): they are impatient, talk down to patients, do not treat patients as customers, and charge additional money to tell the patient the diagnosis, after they’ve poked and prodded the victim. And then, of course, there’s the medicines, which doctors (in China and the West) are notorious for prescribing so they can get the commissions to supplement their salaries.

In 2006 a single average hospital admission at a state hospital cost 12, 650 yuan (US$1846 in 2009), nearly 90% of the average Chinese family’s wealth. Nearly half of the country’s population of 1.3 billion had no insurance coverage at all. China ranks among the lowest of industrialized countries in terms of public financing of health care, with an individual responsible for paying more than half their salary for hospital care, and the government picking up less than twenty percent of the tab; company-based social insurance benefits contributed nearly the remainder of the bill. Ninety percent of China’s 18,000 hospitals are state-run, with prescription drugs bringing in about half their income, all of the expense of which is picked up by the hapless patient. Healthc are costs have exploded. Despite a GDP per capita increasing nearly 30-fold, total health expenditures per capita increased 40-times. Out-of-pocket spending on health care,though, exploded more than a hundred-fold!

Makes you want to eat that apple a day.

ChinaSmack has a couple of insightful posts that present just what a challenge it is for Chinese citizens to get proper, affordable medical care: Chinese Hospital Rushed by Patients; Waiting All Night Outside a Hospital to See a Doctor

Reference: “Taking care: China’s health reform and policy dynamics,” by Gordon G. Liu, BusinessForum China, Nov-Dec 2008.

Matthew Engel recently wrote a piece in the Financial Times I found quite funny in light of the way we in China live compared with the expectations for quality of life in the United States. It seems a woman in a small town in Pennsylvania has been told twice by city fathers her neighbors are upset with her hanging her clothes to dry in her yard – including her bloomers. Americans figure its weird, if not a bit distasteful, to be hanging your (albeit clean) laundry out to dry. Of course, when I was growing up in the sixties and seventies, that’s pretty much anyone ever did in the neighborhoods in which I was raised. In the Asian neighborhood in which I lived as a kid in Hawaii, there was even a public clothes line upon which all the neighbors in the block hung their underpants to dry.

Now, though, nearly every American has a dryer to do the job wind power once performed; ironically, on properties that on average are far larger than they were in the sixties and seventies. A battle of seemingly religious proportions has broken out Stateside, with non-electric drying types accusing electric-drying types that electric-dryers claim 6% of electricity usage in the USA.

Of course, in China, which has a smaller energy footprint per capita than the States, it would be odd to look at a bank of apartment buildings anywhere in China and NOT see rows of wet clothes saluting drivers and pedestrians alike. Including my own. It makes me think that if the U.S. really wants to gain a role as a world leader in a global green movement, it may find itself one day forced to air its laundry – clean, hopefully.

Get this answer right and you may qualify to replace the world leaders who cannot seem to come to grips with the dramatic rate of global climate change. In particular, the Obama administration has not been able to meet a deadline for coming to agreement with the Chinese on emissions goals; actually, the Chinese have dropped the ball, too. So, instead of announcing at the Copenhagen Summit on Climate Change a summary policy, the two greatest contributors to climate change in the world will declare victory by mumbling something about agreeing to a staged approach to tackling what has now become consensus: human industrialization of the world has created momentous adjustments to our ecosystem.

It seems the United States government right now is most concerned about the Chinese making an announcement about emissions targets for 2020 before the States can take the spotlight. It’s thought the Chinese will propose they look for reductions of 40% to 45% relative to economic growth by 2020. And since Hu Jintao in 2007 already made it a national goal for China to double the size of its economy by 2020, today’s reduction goals may leave the net effect at zero or less ten years from now.

Oh, well, there’s a good chance the raw materials the Chinese economy needs in order to grow will have become so expensive by that time that a slowing Chinese economy will be pumping less pollution into the environment as a matter of necessity. Not choice.

Read more: Guardian

With America shaking off the buying binge of the mid-2000s with the worst financial crisis since the Great Depression, the trade surplus is beginning to expand again with China. Trade figures during the summer had actually narrowed as American buyers simply took a rest from all that consumption – even imports of oil took a dive, as Americans used their cars less, while some traded over to less gas-guzzling models.

Paul Krugman writes in his New York Times Op Ed piece that now that China’s yuan valuation policy is artificially holding down the prices of its export sector. In other words, China is trying to export its way out of the global economic downturn by making keeping the price of its goods artificially low. The strategy will only aggravate its relations with America and Europe, as the Western countries still have preternaturally high unemployment rates. Unvalued goods that flood the Western markets will in no way help the Western countries get people back to work by allowing their own export sectors to recover from the trade melee.

The Chinese strategy will backfire by further straining relations with trade partners. Domestically, China’s approach to keeping its export sector from imploding the same way it had during the winter of 2008 will result in a lower ceiling of consumption in Western countries, as the unemployed are the least likely to go out and buy more stuff until they’ve in found jobs. Further, in the long run, Chinese policy is not doing exporters any favors: Chinese manufacturing is still amongst the most wasteful and – from an operations point of view – least productive in the world. Only when trade policies come in line with international norms will Chinese factories improve productivity and the less competitive simply fall away, as market principals would dictate.

Chinese trade policy makers need to realize international trade policy is not like driving a car in China, in which the first to blink loses the right of way.

Further reading: NYT

Indonesia’s forests made the news this week because of Greenpeace activists that disrupted logging activities in a peatland forest. Every year loggers mow down a swathe of Indonesian forest the size of Switzerland to sell on to buyers in China, Japan and the United States, mostly. China has become a primary buyer, with nearly half its timber imports illegally brought into the country. In 1998 Chinese authorities oficially barred domestic logging of its own trees, though that ban has only been loosely enforced. In Yichun, in Heilongjiang Province, an entire forest has been lost to unmanaged logging by local factories making toothpicks and paper. The Guardian reported that factories were capable of processing one tree every minute. Now, the lack of trees have led to erosion, sand storms and, without trees to hold the water, flash floods. The city has been designated one of twelve “resource-depleted cities.” So the central government has turned what’s left of the forest into a preserve a la Yosemite National Park, in the USA, to develop a tourism economy. All that’s left to see though, are granite formations.

Further reading: earth stream, Guardian, China Post

A couple weeks ago the IMF figured Japan’s annualized growth rate for 2010 at about 1.7 percent, way ahead of 2.6 percent estimate of a survey of economists. With the latest news that Japan just announced an annualized growth rate of 4.8 percent for this year, it looks like the IMF low-balled the figure. Apparently, Japan’s growth came from rebuilding depleted inventories, growth in consumer activity, and export sales to China.

It was China’s roaring growth in the early 2000′s that lifted Japan out of the doldrums after more than a decade of stagnant activity. Now, it looks like China – or rather, the Chinese consumer – just may do the same for Japan again.

The IMF may be wrong again about the growth figures for other Asian countries: as China’s economy gets its legs back under it exports of raw materials from its neighbors – ranging from wood through copper – will pick up the entire neighborhood for the foreseeable future.

Further reading:

IMF sharply improves Asia economic forecast:

Japan grows at fastest pace in over two years:

Asia Pacific regional economic outlook

Mainland China might be the home to the largest number of self-styled entrepreneurs in the world; however, as companies gain in size and influence government’s requirement to have a piece of the action tends to create a gravity-well of leadership that spoils corporate plans for penetration into global markets. The Dragonomics blog has an excellent case study of TCL, once one of the largest TV manufacturers in the world, whose acquisitions of TV makers in Europe and America went badly wrong. TCL has not only had to shrink from the international stage, but it’s misreading of the flat panel TV market as well as government diktat have left it a shrunken image of its past self. The article analyzes the four vectors of the trajectory of companies with government involvement and how China will be hard put in future to create truly private, world-beating multinationals.

In the early 2000′s the Chinese government established corporations that bought the bad loans (called NPLs, or Non-performing Loans) of its Big 4 banks that had been trying to float the State Owned Enterprises (SOEs) during the 1990s. The AMCs bought the loans through a combination of cash and 10-year bonds, according to the Dragonomics blog. With ten years to recoup as much of the losses as possible, the loans only made up 4% of the government’s annual budget instead of the 20% that had been the case when the AMCs were created. The Chinese government will likely take the same approach to make up for losses from the RMB 2,200billion in loans to be dolled out during the 2008-2010 period that mark the most dramatic effects of the global economic downturn.

Dragonomics argues that the government will not be able to dole out such large sums again after 2020 as demographic pressures (the 1-2-4 problem) and a slowing GDP make rapid recovery of bad loans a third time around systemically hazardous to the country’s health. Serious reforms of the producitivity and governance of SOEs is paramount to stem the financing requirements of the SOEs a third time, as well as rationalization and transparency brought to the stock markets.

However, with an almost-certain global industrial boom by 2015 that will see an attendant spikes in the prices of oil, minerals and possibly even food, and deflationary pressure on property prices as China realizes it’s over-built (especially on the high-end residential and commercial markets), the government may find itself with an economy slowing sooner than the Dragonomics 2020 estimate. Likely, though, nepotism and unemployment concerns will reign, and the government will play the NPL card again without supporting reforms, and cross its fingers. 14 Nov 2009