This is China! blog

The latest Pew poll that sees 44% of Americans believing China is the predominant world economic power puts me in mind of similar American sentiments back in 1989, when many Americans believed Japan was buying up America. Remember when Japanese investors bought Rockefeller Center for US$2 billion? The following year, of course, Japan’s bubble economy burst and the Japanese economy was in the doldrums for nearly fifteen years afterward.

Makes one wonder if Main Street may be an accurate – albeit contrarian – barometer for national over-reach, in the same vein as the buy/sell cycle on Wall Street: the average guy buying when he should be selling, and selling when he should be buying. As James Fallows so graphically points out in his blog entry about the poll, China has a long ways to go before it can afford to live life as Americans do. Americans, though, perceive China as already having the world economy in its rice bowl.

Of course, those that live in China know American perceptions as expressed in the poll are overblown. Unfortunately, State-side, CEOs, their VPs and the Boards of Directors don’t much look past polls (and that includes our own President of the United States), and will overreact to the peception that the balance of power is now China’s. Business decision makers will err  either on the side of pandering to Chinese business interests who are only too happy to perpetrate the illusion; or they’ll fortify the walls of Bunker America and push for protectionist measures from Congress.

Either way, politicians, economists and even journalists back in the States are clearly not providing the public a clear view of what’s happening in the world. That means there are a lot of opportunities America will simply not see through the myopia of its own polls.

Further reading: The Atlantic.com, People’s Press, Shanghaiist

It seems everywhere I turn I see an article (usually American) about the China threat posed by the country’s outward bound investment. However, China faces three challenges to world conquest: a lack of management talent; a lack of financing; and a lack of information about international markets. Analysts have been saying for the last five years as Chinese companies have increasingly been looking abroad to invest that the greatest drag to their overseas development is the lack of management talent that can integrate the investments in foreign climes. “China’s reform and opening up has occurred only in the last 30 years,” Touchroad Chairman He Liehui told the Wall Street Journal recently. Touchroad and affiliate Daheng Holding Group are a Chinese private equity group with holdings in textile manufacturing, foodstuff and textile trading, and resources development.“The history of companies – private companies – going abroad to invest likely doesn’t exceed a decade.” With that short a history, nursing talent “with cross-border, international operational abilities is pretty difficult,” he said.

Another challenge He sites is a common one even with domestic private companies in China: lack of access to capital. Despite Wen Jiaobao pledging US$1 billion to SMEs in Africa over the next three years, companies have little information about when and how to access the loans. And then it seems most of the information and analyses about markets goes to theState-owned Enterprises (SOEs).

Look for the growth rate of Chinese ODI to plateau in coming years as investors come to grips with the gravity well of its history, culture and its development structure.

More reading: FT

The average Chinese I talk with could care less about carbon emissions caps; that is, unless they figure it’s yet another Western plot to spoil China’s ascent. The bill before Congress placing tariffs on imports based on their carbon emissions is fundamentally a good idea that needs to be equally applied to imports and domestically produced goods. The bill essentially penalizes imports that were made with “dirty” technologies or that have “dirty” components.It would certainly spur China to actually put its policy where its mouth is in terms of forcing its heavily polluting (and wasteful) industries to meet the stricter carbon requirements the central government continues to tout. After all, if its second largest customer (after the European Union) says it wants to change its buying habits, well … the customer is (nearly) always right.

On the other hand, for the United States government to hand free emissions credits to its own dirty industries does smack of protectionism as well as gives the finger to global efforts at reducing carbonemissions – hardly the sort of trend-setting actions the rest of the world looks to the United States for. Instead of encouraging industries that need to clean their collective acts up, congressional efforts should be encouraging industries that want to clean the Earth up. The consumer backlash consumer advocatespredict is, well, predicatable.Let’s face it, though:, don’t Americans have enough stuff?

Tackling climate change is going to require big changes in habits that in a mere 65 years have become a part of national American mythology that has also become embedded in the national psyches of othercountries: that is, that this earth is ours to do with as we please.

The earth, though, has greater considerations.

Further reading: China Briefing

One of the charms of modernization that has caught hold of China is internet addiction. A recent FT article tells the story of a 17-year old boy who poisoned his parents for keeping him from the local internet cafe. Internet cafes are a major location for socializing and plugging into cyberspace – no matter if it is China’s internet is increasingly curving in on itself. McKinseyconsultant Yuval Atsmon, based in Shanghai, attributes the hold the internet is gaining on China’s youth to overnight, full-on access to instant messaging, video streaming, online gaming and interactive media. Fully 34% of China’s more than 330 million netizens are under the ageof 19 years, according to China Internet Network Information Centre. They don’t have much disposable income, and internet cafe’s costs pennies for hours of ir-reality.

But are Chinese youths necessarily more susceptible to the endorphin rush of internet addiction than those of other countries? Yes and No. “Internet Addiction in Asia: Reality or Myth,” a paper by Ma. Regina M. Hechanova and Jennifer Czincz International Research Development Center indicates that on average Chinese youths are less prone than their Asian neighbors to internet addiction. Hong Kong kids have very serious addiction rates, according to their survey of surveys.

chart from “Internet Addiction in Asia: Reality or Myth”

Meanwhile, a paper in the Journal of Cyberpsychology and Behavior cites Chinese youth as more addicted to the internet than American youths, with 14% of the study’s sampling of Chinese heavily addicted compared with 4% of American youths.

Nevertheless, internet addiction is a phenomenon that afflicts every wired nation.

Further reading: FT, “A Comparative Study of Internet Addiction between China and the United States”

Chinese have wracked up over US$1 billion in credit card in the first six months of the year. The banks, used to giving out loans to State-owned Enterprises (SOEs) and local governments without much hope of getting repaid – seem to be accelerating their credit card offers to consumers. Beijing, though, is not impressed, and recently reminded the Banks they are businesses, after all. Perhaps the Banks believe they are too big to fail; after all, the government bailed them out of the Non-Performing Loan (NPL) mess they’d gotten themselves into at the turn of the new century; and with the trillions of RMB the Banks have lent out during the first three quarters of this year, perhaps they feel the credit card debt is just a drop in the bucket. Looks like an entire society has a lot to learn about the pitfalls of credit cards – or at least of not paying down the debt they incur.

Further reading: CER

Every morning at 6am I awaken to the clanging of steel against steel at the construction site nearby. Actually, all of China is and will be a construction site over the next decade, so iron ore producers in Australia and Brazil will do well. The construction industry and infrastructure sector in China next year will continue to power ahead with central government’s blessing, as policy makers have said they will continue fiscal stimulus until they are confident the economic engine has been sufficiently primed to run on its own. Though there is a glut of steel products like rebar in Chinese warehouses for export to countries like Vietnam; they still need to purchase ore for import to produce the higher quality stuff for building construction. So, the Chinese central government is actively trying to close down small steel producers, while at the same time its larger producers are running down their stocks of higher-grade steel, setting the expectation that ore prices may rise to double-digits next year on the back of accelerated demand in China.

Looks like I’ll have to steel myself for more construction to come.

Further reading: Bloomberg (Nov 17, 2009), Bloomberg (Nov 19, 2009), CER (Dec 4, 2009), CER Daily Briefing (Dec 4, 2009)

When one of the country’s leading property developers says the property market is distorted, ought to start listening. “Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,” Ms Zhang Xin said. Zhang Xin is chief executive of Soho China, one of the country’s most successful privately owned property developers. She’s built her fortune in China’s explosive real estate market.

“In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers,” she said recently in an FT interview. “If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.”

The central government’s recent re-introduction of a real estate tax on properties in which people have no intention to live in will slow some speculation; however, this action has no effect on the just as frothy commercial real estate sector. Also, hard core residential real estate flippers need simply go to the next province over to avoid onerous scrutiny and taxes on additional investments. In other words, expect to see little if any deceleration in the inflation rate of China’s property market any time soon.

Further reading:

FT (Nov 18, 2009), FT (Nov18, 2009), FT (Dec 10, 2009)

The Bubble Cometh

If it Looks Like a Bubble and It Smells Like a Bubble…

The Mother of All Bubbles

Just days before, He Yafei, China’s vice-foreign minister, had accused Todd Stern, the US special envoy on climate change, of a “lack of common sense” and said the developed world’s attitude towards China’s footing its own bill for climate change initiatives in its own backyard was “extremely irresponsible”. Of course, this rather undiplomatic outburst is singularly unhelpful in developing a global response to climate change. However, with China having blurred the lined between what constitutes a developing country vs a developed country (see previous post), new thinking will have to come to pass to qualify who pays and who gets money from richer nations.

Though China seems to have changed tack and is no longer pushing to have developing countries bankroll its emissions reductions implementation, the CCP still continues to play that “poor pitiful us, look what those rapacious Western countries did to us (and are still doing to us),” card. Unless, of course, Mr He is simply a devoted viewer of the pap CCTV and local Chinese TV stations insist on airing in China about how victimized the Chinese have been over a century and a half (with, of course, blind spots to their own self-inflicted social disasters large enough to push an Olympics stadium through).

China wants to have its industry and eat its pollution, too. One day, however, as a modernized and – in gross terms, at least – increasingly wealthy country, it will one day soon find itself clearly on the “developed” side of the line. What then will it tell its poor relations when they come cap in hand?

Further reading:

FT (Dec 11, 2009), FT (Dec 14, 2009)

New Prescription Needed: Blurring a Bi-polar World

James Kynge, author of China Shakes the World, writes an illuminating analysis of just how China is blurring the Western definition of “developed” and “developing” countries (FT). In addition to a lot of “firsts”, including displacing Japan as the second largest economy in the world, and China’s own A-share market coming in just behind New York’s in capitalization, as well as overcoming Germany as the world’s largest exporter. Of course, China also now has the dubious distinction of supplanting America as the world’s largest emitter of carbon emissions. All this, while having a per capita income of US$3,200, a bit more than Iraq’s.

Where China is really making waves, though, is in its commitment to develop Africa – albeit for its mineral resources; however, China has done more to jump-start African economies than all the Western aid that poured into Africa from 1983 to 2000. Brazil, Russia and India are in on the act, as well, underscoring the point that the world economy is now increasingly powered by countries Anglo-American and Western European countries condemned to what I call “donor-economics”, a sort of global voodoo economics. Interestingly, if the African nations continue to realize their own value to the global trading system and continue to assert their rights in the negotiation and enforcement of contracts with, especially, the Chinese, African nations within the next decade could be well on their way to per capita incomes higher than they could ever have imagined before. So while the West licks wounds self-inflicted through unbridled greed – both in the markets and the regulators who were supposed to be moderating them – the “developing” is becoming the Developer.

Andrew Galbraith writes in The Editor’s Journal of the China Economic Review that he’d been diagnosed with the H1N1 virus after he had arrived in Shanghai after an overseas flight. His story of how China’s medical bureaucracy has reverted to its old ways a la SARS is disconcerting. The doctor who diagnoses him tells him not to go to the official clinic as Galbraith would almost certainly be quarantined, suggests his patient go home and self-quarantine, and, if asked, tell no one in authority he had ever been to the clinic. It’s exactly that sort of behavior in 2003 that saw Beijing (city and central authority) so roundly criticized about its handling of SARS. It was also the cause of a complete shutdown of the country’s commercial activities, from the largest assembly plant to the smallest street kiosk. That sort of endemic legerdemain also cost foreign invested companies billions of dollars in downtime and repatriation of staff during the SARS episode.

Previous Posts:

The Black Swans of China

Thar Be Black Dragons in China

Managing Black Dragons