This is China! blog

I’ve been reading Thomas Friedman’s book Hot, Flat and Crowded. He cites a passage from Jared Diamond New York Times Op Ed piece in 2008 that the industrialized societies have a consumption factor of “32″. Analysts observed that in general most of the developed world consumes 32 times more materials and expels 32 times more waste than do countries in the developing world. So, the United States through its meat-heavy diet, its car culture, its relatively large abodes that require all manner of heating and lighting, use about 32 times more resources than the Bushmen of the Kalahari in Africa. That used to be the case in the ratio between the Western, developed countries and China, at least up until the mid-1990s, when China’s economy kicked into high gear. Diamond cited China in 2007 at 11 on the consumption/waste scale, and rising. The Chinese government and its citizens have their sights set on achieving as American as possible levels of the “good life”, as quickly as they can. And there seems little in the way of lessons learned from the economic rise of the Western nations – environmental and social costs, mostly – that are being observed or are deterring China’s march to realizing its goal of a “universal middle class”.

“”China’s catching up alone would roughly double world consumption rates. Oil consumption would increase by 106 percent, for instance, and world metal consumption by 94 percent.”

Diamond makes the point that if the developing countries were to match the American levels of consumption that it would be like the world supporting 79 billion people; not the 6.5 billion there are today. That stark reality seems in no way to slow the Chinese economic juggernaught (and it seems to have not impinged on American consciousness, either). Since China says all its doing is following the “American Model”, maybe it will follow the leader if the leader acts to dramatically change its consumption habits.

Global producers of wind turbines, electric cars, mobile phones and a host of other electronics goods have been nervous of late because of China’s publicized restrictions on the rare earth minerals it’s been sitting on for nearly twenty years. China essentially cornered the market on rare earth minerals through cutting corners on health and safety issues in the 1990s, and the rest of the world blithely followed along. Now, with China itself a major user of these metals, the domestic industry wants to make sure its got a lock on its own precious supply. China now consumes over 60 per cent of the world’s rare earth metals, up from just over 30 per cent in 2001, and exports the rest, according to the Dragonbeat blog.

Dragonbeat makes the point that the downturn in the global economy has meant that stockpiles of rare metals have not been touched. So, though there may be a speculative spike in the near term, countries have enough of the stuff to get through China’s stinginess until old mines in the States and Australia are brought back online, and new deposits exploited, which should be around 2012.

So, though there may be enough of the stuff over the next five years, an enlarged middle class in China and India, and the increased use of miniaturized, “leap-frog” technologies in Africa, Bangladesh, and rural India – like mobile phones and net books – will still mean increasing demand on rare earth inventories. So, though China may not corner the market, the stuff will become rarer – and dearer – still.

An indication of just how new the Chinese leadership is on the world stage is how sensitive they are to world opinion. Governments and NGOs around the world have been accusing the Chinese government and Chinese companies of neo-colonialism, mercenary tactics in taking oil and other natural resources out of African countries and not giving much back except deep holes and richer African dictators. Recently, Wen Jiaobao pledged US$10 billion in concessional loans to African countries to help finance infrastructure projects; that, after a U$5 billion handout three years ago to alleviate debts of some of the African countries. Though China can certainly be accused of “Dancing with Dictators” (to take a page from the book about the questionable relationships between American administrations and dictatorships around the world), it could be argued that Chinese money is getting into African societies more quickly and effectively than all the money NGOs have ever provided since the 1960s. However, one tricks the Chinese donor-ship can learn from the best NGOs that would reduce international criticism is transparency of operations and of governance. But then, I heard said that leopards really can change their spots.

Read more: BBC, FT

The border disputes between China and India have become more vocal of late, the volume of which has apparently been ratcheted up by the irrepressible Indian press. Most contentious right now is a slice of land through the Indian state of Arunachal Pradesh, which the Chinese call South Tibet. The protests in Tibet last year brought the region back onto the radar for the Chinese. The colorful and insightful language of the Indian press – with official Chinese articles and unofficial Chinese blogs lobbing insults back – have made discussions as emotionally charged as any since the countries went to war over the disputed territory in 1962. British colonial gerrymandering and the grand mythologies of both countries have blurred the issues to no end.

The melting glaciers in the Himalayas and the source to the greatest rivers in India and China will only serve to ratchet tensions over the next decade. The glaciers may disappear completely by 2035, due to global warming. Hydroelectric projects from both countries may prove flash points as the countries argue about which countries “own” the glaciers and their life-giving run-off. Look for tensions between the rising economies and their competing middle classes to get worse before they get better.

Further reading: CNN, BBC (Video report)

Lee Guan Yew, the architect of modern Singapore, slipped into the White House before President Obama could make his Grand Tour of Asia starting next week (h/t Shanghaiist). Lee lectured Obama on the shifting center of gravity in geopolitics from West to East, insisting that “The 21st century will be a contest for supremacy in the Pacific because that’s where the growth will be…If you do not hold your ground in the Pacific you cannot be a world leader.”

And yet it rather seems the United States is humbling itself as a debtor that has been wrong-footed with its main creditor. On contentious issues from trade, through the environment through human rights through freedom of religious practice, the State Department would prefer to remain mute. With an impending healthcare bill America will have to pay for (threatening an additional debt load of US$1 trillion over the next ten years), the U.S. government is feeling a bitas sheepish as a university student who has maxed out the limit on the credit card his parents gave him and now has to buy new school books.

However, if America would like to maintain its credibility in the Asia-Pacific region, it is going to have to separate principal from finance, and act on the sorts of priorities the Mr. Lee alluded to in his grandfatherly advice to the President of the United States. Otherwise, the U.S. risks getting pushed off the realpolitik see-saw by China.

Further Reading: FT

When your acupuncturist tells you the housing market is wildly inflated, it’s best to listen (lest you be stuck in painful and inappropriate places). Still, a recent Financial Times article all but signaled China’s economy is officially out of the doldrums as a combination of fiscal stimulus, export sector revivification and consumer activity spurs the statistics onward and upward. My favorite bear Andy Xie wrote in the FT just a couple weeks before the report:

The day of reckoning will come when the high economic growth rate finally falters. This could happen either when the favourable demographic trend worsens or urbanisation ends. When either or both occurs, liquidity or savings do not grow any more. At that point, the stock market cannot be subsidised any more.

China’s final day of reckoning is probably 10 years away.

In other words, sometime in the following decade it won’t take more than an acupuncturist’s needle to prick that bubble.

The November issue of Eurobiz Magazine has an excellent article on the state of the software development industry in China. Essentially, the Chinese government is encouraging an insular business culture whose engineers are not learning international standards for writing, testing and implementing code to become more ingrown. Most of the software development companies in China are job shops of between a dozen and a hundred people, for whom small, low-margin projects are the norm – which suits low-margin service- and manufacturing-clients who have little experience with software projects just fine. The “good-enough” approach fits in just fine with centra-l and provincial-government requirements to control the growth and direction of industries, and to restrict the flow of information. Governments dole out huge subsidies in a short-sighted strategy to grow an industry that is already stunted and will remain fragmented as long as it remains protected.

The Green Dam software is a perfect case in point: the Chinese government had insisted during the summer of 2009 that all computers sold in China have the internet-filtering software on them. Green Dam, though ostensibly private, was heavily subsidized by the central government. A couple graduate students in the States posted an investigation of the software that showed Green Dam was full of security holes and could actually be used to turn the computers that hosted the software into slaves. The American company Solid Oak accused Green Dam of copying programming code from Solid Oak’s own software – and copying it badly, to boot.

China’s trend toward software industry insularity does not bode well for foreign companies invested in China who will have to go the extra expense of using Western branded software with Western-level customization, development, testing, implementation and training costs. The trend also implies a services outsourcing industry that will remain far behind India’s for the coming decade in terms of technical prowess and customer service levels.

Further reading: FT

Last year Hong Kong lobbyists dislodged the largest foreign joint venture in China, a US$5 billion oil refinery that would have the capacity to process 300,000 barrels of oil a day. Sinopec and Kuwait gave in to environmental concerns about pollutants that would make their way to Hong Kong, as well as the destruction of unique wetlands from which the residents had already been relocated (Guardian). The provincial government had also given its go-ahead for the project, but backtracked because the investment flew in the face of Guangdong’s attempt to upgrade its investment environment from sneaker manufacturer to software outsourcing base. According to the Shanghai Business Review, the project has found a new home on an island off the coast of Guangdong called Donghai, and will now cost US$9 billion. The project should start construction in 2010. The move certainly gives China some credibility that some of its interests lay in preserving its environment.

photo from Ricardo's blog

The worst Chinese food I’ve ever had was on the border between Mexico and Texas, at a maquiladora. It was Chinese food “with Mexican characteristics”. Now, Golden Dragon, a Chinese copper tube manufacturer, has invested in a USD100m pipe plant in Mexico. The 200,000 sq meter plant should bring about 900 jobs to the Mexican town of Coahuila. The move is similar to the American manufacturer that had disassembled its maquiladora back in the Americas to re-assemble it in Suzhou three years ago, only to re-disassemble the China operation to re-establish its place back in Mexico during the trough of the global economic downturn. Rising labor, materials and transportation costs had made the China-investment uneconomical. The Chinese investment, though, is proactive; not reactive, like the American project. The Chinese plan puts its operation within striking distance of the U.S. and Central American markets in a commoditized industry in which it can compete on market share, not profits. I can only hope the Chinese investors improve their new home’s Chinese culinary offerings.

The Financial Times cited last week that the international body that regulates internet addresses will support countries that want to use their own letters and characters in internet addresses. That means that internet users in China’s countryside will gain access to a whole new world without having to struggle with an unfamilar English alphabet. Small Chinese companies will become more accessible to native Chinese language users who do not know English characters, since the small businesses are typically outbid in the English-keyword search results lists the larger domestic companies buy out. The new standard also means the central government will have to be more creative in plugging the holes in the GFW that will appear due to the richness and flexibility of the Chinese language, holes dissidents love to poke. And then there is the sheer number of new Chinese users that will no longer feel hindered exploring cyberspace that censors will feel incumbent to control.

In 2010 – when the new standard comes in use – expect an inflection point in the number of new users in China that log on. And expect an inflection point in the blood pressure of Chinese censors, too.