This is China! blog

Today I had a great couple hour long lunch with Dan Harris and Steve Dickson of the China Law Blog, and Andrew Hupert, adjunct professor at New York University (Shanghai), author of the China Solved blog and a columnist for the China Economic Review. Dan had spent the last couple weeks in Southeast Asia, as had Steve. Lucky stars aligned and we all managed to get together at a pricey Japanese restaurant at the Shanghai Center on Nanjing Road West.

It was a pleasant holiday afternoon spent discussing (and solving) China’s overwhelming issues, including:

• it’s currency valuation (China’s backed itself into a corner and doesn’t know how to get out);
• escalating inflation (currency revaluation is only part of the issue);
• a highly stressed middle class (many hope to emigrate to the West before the pollution kills them);
• blog-writing techniques (Dan is the Master in  my book. LOL!);
• China’s bull market one day turning bearish (watch as the bull-writers one-by-one turn into bulls);
• China’s Peak Coal problem (Steve put his finger on the issue before most even heard of the phrase);
• China’s sinking water tables (no solutions there);
• Why Vietnam is cool and Cambodia still traumatized (can you spell Khmer?);
• Why writing books is so much more difficult than blogging (gotta draw a line in the sand with books);
• Why the cost of living in China is so much more than in other southeast Asian countries (Singapore excluded);
• Confucius as the architect of China’s current success (yeah, right);
• and more.

I’ll let each of these guys in turn blog on their respective inputs. These guys are great and stimulating thinkers, perceptive and clear-minded – and just plain good fun.

Incidentally, it’s that time of year when The China Law Blog needs your votes to be the best of the 2010 American Bar Association Journal Blawg 100. Go here to register http://lnkd.in/v_CzG3 and then go here to vote: http://lnkd.in/iE4M5E.

A Chinese neighbor recently came to our flat bearing a Christmas gift she thought was rather cute. She showed my wife and I a thick plastic bag, transparent with red markings. It was collapsed, and so wrinkled it was difficult to tell what was inside. She pushed through the front door and searched around for an electrical outlet. Satisfied she’d found one – and in a little nook next to the dining table – she drew out a chord from the plastic sack with great care, as though it was a baby’s umbilical chord. She plugged the heap into the electrical socket.

A great whir emanated from the sack, which began to twitch and shudder. A light blinked on inside the over-sized embryo. The noise set my teeth on edge and I wanted desperately to tell her to turn it off. However, she had been filled with such joy at her discovery and in the sharing I couldn’t bear to play the part of the Ugly American. Gradually, it became clear to me what mysterious seed lay inside the husk. I began laughing; at first, in a controlled way. But then, I could no longer hold back a guffaw that terrified my neighbor when released.

The gift was actually a Santa Claus standing in a wind-swept field, snow blowing – literally – around him. The Santa in the bubble stood nearly knee-high when inflated. The whirring sound was the small motor at the base of the plastic sphere sucking air to inflate the bubble and animate the plastic snow flakes. A bright light twinkled over the Santa’s head.

“Oh dear,” I stuttered through my hand. I was finding it difficult to control my laughter, and tears began to squeeze through my eyes. I turned around to compose myself. My wife and my neighbor just watched me, unsure why I was laughing.

I turned back to them. “Um, where’d you get that?” I asked, still aborting chuckles.

“At the neighborhood center – one of the shops,” the neighbor answered, mystified. She said, “But it wasn’t so loud when they plugged it in in the shop.” She studied the contraption in wonder.

I cleared my eyes of tears and said sweetly, “Actually, that’s what we Americans put in our front yards at Christmas. It’s not meant to be put indoors.”

“It’s not?” both my wife and the neighbor said. I shook my head.

“It’s an export item. They make it here in China and then ship to America. I guess this one fell off the truck on the way to the port.” Most people in China who live in cities live in high rises. “How much did you pay?” The neighbor held up five fingers.

“Five Hundred RMB?” I said, incredulous. About US$75.

“No, fifty RMB.”  A little less than US$7.50. I relaxed at the adjustment.

“Well, what do I do with it?” the neighbor asked. She unplugged the thing and the motor thankfully wound down. The apartment was quiet again.

“I guess you just wait for an American with a front yard who’s looking for an inflatable Santa,” I suggested. She didn’t look hopeful.

“Well, Merry Christmas, anyway. And thanks for the thought.”

After all, that’s what counts the most.

My wife recently told me a story she’d overheard between two Chinese at a local hairdressers in Suzhou. The first woman told her hairdresser she planned to travel to Japan soon for holiday. I’ll name the first woman Clueless. A second woman – whom I’ll call The Tourist – told Clueless she’d just returned from a Japanese excursion. The Tourist raised her voice in remembered fury. Those Japanese were so rude to us Japanese,” she told Bewildered. “Our group went to a purse store. We were looking around the shop when the Japanese attendant called for our attention.

“She held up a sign that read in Chinese, ‘No speaking loudly, please.” The listeners’ eyes grew wide in disbelief.

The Tourist continued, “She lowered that sign and held up another that read, ‘No spitting, please.’”

“Impossible!,” The Tourist’s audience remarked with indignation.

“She put that sign down and held up another sign that read, “No littering, please.”

“How rude!” Clueless said angrily.

The Tourist continued, “And do you know what? There were other customers in there at the time. Some Taiwanese people. They didn’t show those signs to the Taiwanese. And they were so much more helpful to the Taiwanese. It was just too much to accept!”

Of course, when my wife told me the story, I laughed, which didn’t help her mollify her own indignation, and managed to get me in a bit of “foreigner trouble” at home.

Still, with China’s outward bound tourist industry growing in leaps in bounds, it looks like Japan’s – and most probably other countries’ – sign businesses will see healthy growth in the years to come.

image credit: garysblog.spaces.live.com

I recently received an issue of the Economist Magazine in the mail. It was the December 4 – 10 issue, with the cover story “The Dangers of a Rising China”. The cover has a Chinese soldier dressed in camouflage, squinting through the eye piece of a rifle, taking aim.

I’m used to the issues coming a week or two late; they come by way of Singapore, after all, and have to pass through a gauntlet of Chinese institutions, I’m sure, before they arrive at my doorstep in Suzhou. I’m always excited to peek through the clear plastic covering at the next titillating topic the magazine has chosen to zero in on. My address and subscription information are printed on a piece of white paper inside the plastic envelope, covering the back page.

This issue, however, had no clear plastic covering and no address information attached to it. It lay, still pristine, at the bottom of my mail box, face down.

It was a considerate gesture, and I do appreciate receiving what is turning out to be a stimulating read. I’ll have to invite the postman out sometime and see what he thinks about the magazine’s take on China’s rise. And I’ll sometime have to thank the powers that be for passing the issue on to me, fully intact.

A good American friend of mine who has been living in Shanghai for eight years has been hiding out to finish writing his book in a small town of 40,000 in Zhejiang province called Wukang, near Moganshan. He recently told me over cups of coffee  in Shanghai that the local government in Wukang has finished its mission: its infrastructure projects are all but complete and they’ve moved most if not all the people from the surrounding countryside into flats in the city. Now, the city is populated with unemployed and unemployable country folk. Which brings me to a very nicely done white paper sent me by the Economist Intelligence Unit about the urbanization trend in China (about which I write in chapter 3 of my book, China Inside Out) and the market opportunities in what the report calls China’s Champs – the up-and-coming x-tier cities.

Some of the surprises (for me) in the report included:

• Hefei ranked first as an up-and-coming potential money-maker for companies invested in the city;
• Baotou (in Inner Mongolia) and Shenyang ranked second and third, respectively
• Wuhu (no,. 7) ranked above lovely Xiamen (14th);
• Anshan, in Liaoning Province, (no. 18) made it on the list at all (the city’s only redeeming feature is the great jade Buddha – recommended).

What struck me most about the list was that many of the cities are highly polluted (Hefei is terrible from automobile exhaust; Baotou is coal mining town; Shenyang is unpleasant, especially during the dust storms; and Changchun is simply toxic).

Now, that’s not to say the cities on the list do not have market potential; however, the report seemed more bullish to me than the average Economist output. The report estimates that urbanization and related wealth creation in the Champs cities will continue into 2035. The biggest obstacle the report suggested was perpetuation of the hukou, which essentially segregates country folk and city folk.

The report creatively identifies market opportunities in up-and-coming cities across eight categories: economy, consumer markets, IT connectivity, education, average wages, health care and industrial pollution. Suzhou ranked first for its output per head (yeah!), maturity of the economy and openness to trade, above Hangzhou, which ranked 10th for the same measure (in the never-ending battle between the two cities for who indeed has the most beautiful women – among other things).

In general, the white paper is a good read, and a good indicator of China’s boom towns over the next five to ten years. At least, it should get some armchair industrialists back out into the field. I am not as confident as the EIU, however, in the viability of the local economies over the next thirty years, based on my visits to many of these smoke-stack cities, and based on the fact that many of these cities are up-and-coming precisely because of local government economic gerrymandering, much like Wukang.Then again, Chinese cities across the board are increasingly finding their environmental sins catching up to them economically.

The report does not give weight to very real concerns that have the possibility over the next thirty years of putting the breaks on the micro-economies of these towns as well as China overall: the effects on GDP of pollution; of the loss of local ecologies and the cost of maintenance from the standpoint of livability – or of clean up; the costs to the local healthcare systems of pollution (with air pollution already killing an estimated 700,000 people per year throughout the country, and counting); the extent to which water is heavily subsidized and how rapidly dropping water tables in many of the regions in which the cities are located will have their water bills increased and perhaps water rationed from the near term on; and of the energy requirements of these cities (at least doubled over the next ten years; and only God knows the multiplier over the next twenty five years), and the extent to which the environment is able to continue supporting the opening of (by some accounts) as many as three new coal-fired power generation plants each week in China – with, of course, attendant pollution costs. Though, of course, there are business opportunities in the clean up itself, it would be naive to think local governments will slow down economic activity to give ready access to industrial “spoilers”, or that the revenue created through the clean-up would offset the costs already incurred to local health care and pension systems.

Finally, there’s what I call the Wukang effect, in which expensive, polluted cities are predominantly inhabited by an under-educated, under-employed majority that’s been moved into the cities from the countryside that makes substantially less money than the elite who live in high rises above the smog of the cities. Also, university graduates, despite the booming economy, are finding the job market practically nonexistent, with many bright young things making the same amount of money as migrant workers. In other words, come twenty-five years from now, there may not be the wealth at the level the report discusses; if, that is, consumers live long enough to spend all that supposed disposable income.

To get a copy of the EIU report, contact:  Martha.McCubbin@grayling.com. Also, you’ll find a very nice infographic of China’s Champs here.

Further reading:

China’s Golden Cities – Newsweek

World Bank City Rankings: An Explanation — china.org.cn

China Is Set to Lose 2% of GDP Cleaning Up Pollution

Last month the China Economic Review cited that university grads in China were making about the same amount in salary as migrant workers. Today’s New York Times takes the story a bit further by citing that its the lucky grads that find a job at all nowadays. Disillusioned, exhausted and flat broke, new university graduates don’t even have the ubiquitous McDonald’s jobs to kick off their post-grad careers. (Me, I started out shuffling bagels). From the NYT article: “College essentially provided them with nothing,” said Zhang Ming, a political scientist and vocal critic of China’s education system. “For many young graduates, it’s all about survival. If there was ever an economic crisis, they could be a source of instability.”

Related posts:

China’s Jobless Recovery

image credit: verytranslation.com

My mama used to say, “If you don’t have anything nice to say, then don’t say anything at all.”

Shame the Confucian Analects make no mention of this homespun wisdom. A fifth of the world would look a lot wiser about now in the eyes of (most) of the international community, otherwise.

What are some other homespun homilies that would be appropriate to the moment?

China has set fire to the coal market at home and abroad. The National Development and Reform Commission (NDRC) recently commanded provinces to stop restricting shipments of coal to other regions to ensure stable supplies for the country, according to the Associated Press. The Ministry of Commerce, seeing a bubble in the making, has been attempting to stem speculation and outright scalping by ordering local authorities to press hard on companies and organizations hoarding coal, gas and other fuels. Profiteers attempt to manipulate auctions on the spot market to drive prices even higher than they are now for buyers, including steel mills and power generation plants. Of course, local governments that themselves have interests in local mining concerns may even sometimes thwart central government’s intent to keep the playing field somewhat level…

Read more of my China Economic Review column for this week …

Further reading: After Burning for 50 Years, Chinese Coal Fires May Finally Be Extinguished

image credit: treehugger.com

Apparently people from Hubei have fallen to the bottom of the list of desirable candidates for hire in China. Hubei is a province directly west of Shanghai, its snout nestled between Anhui province and Jianxi province, directly east of it. Wuhan is the capital of the province. According to the young Chinese who told me this, Hubei people like to bring their brethren into the companies into which they’ve been hired, which sounds all well and good. Apparently, though, if a Hubei employee becomes distressed at the company, he’ll round up his buddies to beat company bosses to a pulp. I asked the Chinese where in China this was happening. Everywhere, she said without missing a beat. “In Jiangsu province, too.” Suzhou is located in Jiangsu, a stone’s throw to Shanghai. “Some companies even have signs in front of their companies that say, “Hubei people need not apply.”

So much for equal opportunity employment in China.

image credit: edrugsearch.com

The Romanian online news site Hotnews.ro recently interviewed me about social, economic and political issues relevant to China’s current condition and future direction. Bet you think my Romanian is pretty good, huh? Actually, the interview was emailed me in English, the same language I used to answer the questions. The reporter, Adrian Novac, asked some pretty pointed questions, the answers to which you can find – translated into Romanian – in the article entitled Ascensiunea Chinei.

Or, you can read the English answers below:

1. What exactly is China today: an aggressive Communist power bent on intimidation and domination, an emerging giant, a superpower? Is China an opportunity or a threat? You frame the question in a very Manichean way: good v evil; heaven v hell; master v slave; conqueror v conquered. China is a heavily populated country that has finally gotten its act together after 600 years of insularity and decay to take advantage of the technologies that abound in the world today and of the West’s profligate spending and extreme financial over-leveraging. It’s a challenge if you haven’t figured out where the opportunities lay.

2. Has China’s rise been good or bad for US and the world? No better no worse than the rise of the Spanish, the French, the English, the Americans, the Soviets. And before that the Moors, the Ottomans, the Romans, the Greeks.

3. How do the Chinese themselves see this impressive growing especially considering that various indicators suggest elites are cashing in quickly, while ordinary Chinese are falling behind and the country is also the scene of rampant corruption? What you are saying about China is also true today about America and Russia and the UK, most African countries, certainly the OPEC countries and, perhaps, even Romania (according to a British friend who did business there for the past two years. He finds his return to China to work refreshing after dealing with the government and workers in Romania).

4. Some are cheering the extraordinary boom of Chinese economy. For example, according to the Conference Board, a highly respected economic research association, China will overtake the US as the world’s biggest economy by 2012.  Others have argued continuously that the Chinese economy is in a delicate state. Is China going to have the kind of economic growth in the future that it has had over the past 30 years? In about 15 years the economy’s development will begin to slow as most of the cities have been built, as well as the highways and railways and airports; the population en masse will be aging with about 30% of the population over the age of 60 (by 2050, 60% will be over the age of 60). The social security system will begin to falter because the one child policy did not permit the creation of enough young people to pay into the retirement funds. China’s already desperate water problem will become extraordinarily difficult, with the occasional rationing we see today becoming a part of normal life. And China will never seem to have enough energy, as most of its population in 2025 will be in the middle class living in cities with cars and TVs and Iphone-25s.

5. Is China using capitalism to advance the cause of communism? How come the world’s biggest communist country ever created the most freewheeling market in world history? Communism in China died with Mao Zedong in 1976. The country was backward and bankrupt, without foreign currency to continue running the society. It could either follow North Korea, or it could follow its cousin, Taiwan. Now, it’s form of government – whatever the name – is much closer to that of its Asian neighbors than ever before, with countries that have had one-party rule for decades, with an occassional pause.

6. Many commentators argue that China’s growing economic might has yet to translate into the self-confidence needed to spur much-needed political reforms. China’s next generation of leaders are to take power in 2012. Should we expect after this date to see the democratic changes the world is waiting to happen in Beijing?  China’s leadership has made changes in its governance approach to the society far more dramatic than either Western Europe or even America. China thirty years ago was totalitarian; now, it is merely authoritarian. In some ways, local government officials are far more accountable to the people than in Russia or even Japan. China must and will evolve into a government structure that balances power somehow; the most effective is a judiciary that is not a slave to the Party. Whether or not Chinese people want or feel they even need the vote will be up to them.

7. Some say there are heavy social costs to such pushes: China is the biggest emitter of greenhouse gases, it has a vast waste and the physical environment is a disaster. Can’t they find the adequate solutions to stop the negative impact on the environment?  The government is applying itself to environmental issues; however, as has been and still is the case in the West, economic development always trumps environmentalism. China at least has a national policy and subsidies to support a grand push to the development and implementation of alternative energy sources; neither the European Union nor America does.

8. Everything made in China is cheaper than made in the USA and the rest of the world. Why? A surplus of young people born after the Cultural Revolution supplied labor to the factories at a time when the West wanted a lot of stuff made cheaply. Its government also held down wages to keep the export sector super-charged. That is changing dramatically this year, with companies increasing salaries as much as 50%. The last thirty years of China’s success and development have happened because of some very special trends that came into confluence. China will have to work harder the next thirty years to continue the same level of economic growth and sense of sacrifice on the part of its citizens.

9. Some say China’s success is “Made In The U.S.A” and that the American consumer has, in large part, financed the strengthening of the Chinese state through their purchases of cheap products made in China, which, in turn, has helped to destroy US’s manufacturing sector and the jobs. Are these commentators right? The US dollar is both a foreign currency exchange and a foreign reserve. That made interest rates the American government and its citizens took out on loans cheaper than it should have been if, for instance, gold had remained the reserve. Americans, still clinging to post-World War II sensibilities about its economic preeminence dismantled the regulations and oversight that would moderate how it financed asset purchases. Americans, in other words, began spending money they did not really have on quantities of goods the world had never seen before. China was at the right place at the right time to take advantage of American and European excesses. China, however, did not destroy manufacturing sectors in America the Americans had already decided were not worth supporting. The American economy in the 1970s was already shifting toward a services economy, and is now 70% based in services – not manufacturing. China entrance onto the trade stage merely facilitated a shift that was already happening – first to Mexico and Japan. Now, China is seeing a similar flight of manufacturing to India, Vietnam and Bangladesh. China is gradually becoming uncompetitive in some manufacturing industries through the same processes.

10. How do you think the United States has responded to the Chinese growing? What have the Americans done right and what have they done wrong? America effectively misspent the funds that became available through China’s suppressing the interest rates on American T-bills through its extensive purchase program of the American bonds. Americans over-leveraged their homes, bought a lot of stuff they didn’t really need because it was cheap, and created a debt load future generations will still be responsible for decades to come. Blaming China for American economic woes merely obscures the fact that the international economy is undergoing a dramatic rebalancing and that America needs to restructure its own economy to meet upcoming challenges.

11. Many see Beijing as a potential threat to Washington’s once unrivaled dominance of the Pacific. But is China influence limited only to the Pacific? Because it seems to me that the reach of the People’s Republic is far and wide, extending from the Far East to Africa to Latin America. The question mixes trade and national security. China’s trade reach certainly extends to Africa and Latin America; its national security sphere does not. It defense posture has developed to the extent that America is no longer the big fish in the Pacific Ocean. And with the development of a naval base on the coast of Burma, Chinese vessels will be able to ply the same seas as the Indians. This has made the Indians and the Americans insecure.

12. Besides its economic grow, China has also adopted a more assertive military stance, expanding its naval reach with new ships and submarines in what Beijing says is a purely defensive move. Can this growing military buildup hide aggressive intentions? China is not shy about displaying aggressive intent in its own neighborhood: the recent spat with Japan over the Senkaku islands is one example, as well as the continued build-up of forces along the border of the disputed territory of Arunachal Pradesh, which the Indians hold dear. China is no longer holding to the philosophy/slogan it promoted the past ten years of a “peaceful rise”. Further abroad, China has no interest in conquering foreign lands; only of preserving its national sovereignty and preserving its energy independence.

13. Many say U.S.-China relationship shifts toward deep mistrust in the last year. Chinese leaders became infuriated when president Barack Obama met with the Dalai Lama and when Washington announced plans to sell sophisticated weapons to Taiwan.U.S. officials tried in vain to get China’s leaders in May to condemn its ally North Korea for the sinking of a South Korean warship and then became alarmed at Beijing’s bellicose response to a September incident involving a Chinese fishing boat and a Japanese patrol ship. How do you see US-China relations now? The Chinese leadership sees the American leadership as uncertain, splintered and at cross-interests with itself: on the one hand encouraging tariffs while United States governors host trade missions to China for their local companies; discussing closer military ties while selling billions of dollars of armaments to neighbors Taiwan, Japan and South Korea; of preaching fiscal responsibility to China while America continues to spiral into greater debt without additional job creation. China is very much like the teenager who is feeling more certain about himself while laughing at the middle-aged “adults” whose power is waning.

14. The new generation of Chinese military, much more than the country’s military elders, view the United States as the enemy. Chinese military’s hostility toward the U.S. is not new, just more open. But is China capable of flexing its military muscle towards the US? Do they have the military capabilities to confront US? China does not have the capability to confront the US in a sustained, full-frontal confrontation. No one does [without the threat of Mutually Assured Destruction – MAD]. The only way for China to win is as it always has through history: through the sheer weight of numbers of its people; guerrilla tactics and attrition – that is, simply wearing the opponent down. China’s approach to the world in trade and defense is one of asymmetry; they always see themselves as having the disadvantage – and so do not meet engagements square-on, where they always believe they cannot win in a fair fight.

15.  President Hu Jintao will visit Washington in January. Could this trip help reset the relationship with China? Because China seems disappointed by the Obama administration and Beijing thinks he has no essential difference from other previous US presidents. The trip will have no substantive results. Hu Jintao has already set his stamp on his Presidency; he is now setting the stage for the handover of power in 2012, which pretty much means more of the same discussions on the currency come Jaunary. China – and much of the world – see President Obama as a lame duck, likely to change come 2013, after the November elections of 2012.

16. The foreign ministers of China, India and Russia pledged recently to step up cooperation in trade, energy and geopolitical affairs including climate change, international and regional issues. Should US and UE be afraid of the cooperation of these developing giants? No. Cooperation is good; and the more there is between these three strong personalities, the better. The US and EU embrace this sort of exchange.

17. China’s rapid rise is taking place at the exact same time that the U.S. is losing its global economic dominance. It is possible to substitute soon “The American Dream” with “The Chinese Dream? Should we all start learning Chinese? If you are going to do business in China, it’s nice to learn a bit of the language; however, Romanians have nothing to fear that their language will be replaced with Chinese. Frankly, it is the Chinese who have in place national policies to increase the number of its citizens who speak English language, and with greater fluency. China has no intent to rule the world; however, it is intent on maintaining its regional hegemony and energy security. The world is simply a source of raw materials and cash for China. It prefers to eat at home.

image credit: the-romanian-women.blogspot.com